<PAGE>
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, 1999
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from to
---------------------- ----------------------
Commission file number
0-20017
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CNL Income Fund IX, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3004138
- --------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- --------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
-----------------------------------
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
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<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 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Part II
Other Information 17-18
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CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $1,821,941 and
$1,711,187, in 1999 and 1998, respectively, and
allowance for loss on building of $249,368
for 1999 and 1998 $ 14,773,120 $ 15,066,178
Net investment in direct financing leases, less
allowance for impairment in carrying value of
$65,407 for 1998 5,335,689 5,905,995
Investment in joint ventures 6,357,146 6,473,381
Cash and cash equivalents 1,912,299 1,287,379
Receivables, less allowance for doubtful accounts
of $98,820 and $206,052, in 1999 and 1998,
respectively 37,731 93,569
Prepaid expenses 19,609 3,185
Lease costs, less accumulated amortization of
$2,702 and $1,577, in 1999 and 1998, respectively 12,298 13,423
Accrued rental income 1,176,862 1,255,968
------------------- -------------------
$ 29,624,754 $ 30,099,078
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 140,388 $ 1,103
Escrowed real estate taxes payable 12,134 9,022
Distributions payable 787,501 787,501
Due to related parties 11,034 24,187
Rents paid in advance and deposits 79,882 63,347
------------------- -------------------
Total liabilities 1,030,939 885,160
Commitments and Contingencies (Note 5)
Partners' capital 28,593,815 29,213,918
------------------- -------------------
$ 29,624,754 $ 30,099,078
=================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
1
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CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 437,107 $ 456,754 $1,202,009 $1,351,234
Adjustments to accrued rental income -- (4,600) -- (272,200)
Earned income from direct financing leases 170,369 209,650 583,953 551,913
Interest and other income 3,035 11,871 61,696 39,539
------------ ------------ ------------ ------------
610,511 673,675 1,847,658 1,670,486
------------ ------------ ------------ ------------
Expenses:
General operating and administrative 33,278 41,132 117,913 112,211
Bad debt expense -- 4,148 -- 9,281
Professional services 12,853 6,141 38,794 20,883
Real estate taxes 4,494 -- 12,885 --
State and other taxes -- -- 24,884 14,337
Depreciation and amortization 80,779 71,113 237,469 197,603
Transaction costs 63,902 -- 185,528 --
------------ ------------ ------------ ------------
195,306 122,534 617,473 354,315
------------ ------------ ------------ ------------
Income Before Equity in Earnings of Joint Ventures
and Gain on Sale of Land and Building 415,205 551,141 1,230,185 1,316,171
Equity in Earnings of Joint Ventures 152,161 155,940 436,218 432,608
Gain on Sale of Land and Building -- -- 75,997 --
------------ ------------ ------------ ------------
Net Income $ 567,366 $ 707,081 $1,742,400 $1,748,779
============ ============ ============ ============
Allocation of Net Income:
General partners $ 5,673 $ 7,071 $ 17,227 $ 17,488
Limited partners 561,693 700,010 1,725,173 1,731,291
------------ ------------ ------------ ------------
$ 567,366 $ 707,081 $1,742,400 $1,748,779
============ ============ ============ ============
Net Income Per Limited Partner Unit $ 0.16 $ 0.20 $ 0.49 $ 0.49
============ ============ ============ ============
Weighted Average Number of Limited Partner
Units Outstanding 3,500,000 3,500,000 3,500,000 3,500,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
2
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CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
--------------------------- ----------------------
<S> <C> <C>
General partners:
Beginning balance $ 214,763 $ 190,772
Net income 17,227 23,991
----------------- ------------------
231,990 214,763
----------------- ------------------
Limited partners:
Beginning balance 28,999,155 29,956,452
Net income 1,725,173 2,262,707
Distributions ($0.68 and $0.92 per
limited partner unit, respectively) (2,362,503) (3,220,004)
----------------- ------------------
28,361,825 28,999,155
----------------- ------------------
Total partners' capital $ 28,593,815 $ 29,213,918
================= ==================
</TABLE>
See accompanying notes to condensed financial statements.
3
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CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 2,228,634 $ 2,461,641
---------------- ----------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 2,400,000 --
Additions to land and building under operating
leases (1,641,211) --
---------------- ----------------
Net cash provided by investing activities 758,789 --
---------------- ----------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,362,503) (2,432,503)
---------------- ----------------
Net cash used in financing activities (2,362,503) (2,432,503)
---------------- ----------------
Net Increase in Cash and Cash Equivalents 624,920 29,138
Cash and Cash Equivalents at Beginning of Period 1,287,379 1,250,388
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 1,912,299 $ 1,279,526
================ ================
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period $ 787,501 $ 787,501
================ ================
</TABLE>
See accompanying notes to condensed financial statements.
4
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CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
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, 1999, may not be
indicative of the results that may be expected for the year ending
December 31, 1999. Amounts as of December 31, 1998, 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 IX, Ltd. (the "Partnership") for the year ended December
31, 1998.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Land and Buildings on Operating Leases:
---------------------------------------
During February and March 1999, the Partnership sold its properties in
Corpus Christi, Texas and Rochester, New York, respectively, and
received net sales proceeds of $1,350,000 and $1,050,000, respectively,
resulting in a gain of $56,369 and $19,628, respectively, for financial
reporting purposes (see Note 3). These properties were originally
acquired by the Partnership in 1991 and 1992 and had a total cost of
approximately $2,288,800, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the properties
for a total of approximately $111,200 in excess of their original
purchase prices. In March 1999, the Partnership reinvested a portion of
these net sales proceeds in a Golden Corral property located in Albany,
Georgia, at an approximate cost of $1,641,200.
3. Net Investment in Direct Financing Leases:
------------------------------------------
At December 31, 1998, the Partnership had recorded an allowance of
$65,407 for impairment in the carrying value of the Property in
Rochester, New York, due to the tenant filing for bankruptcy. The
allowance represented the difference between the carrying value of the
property at December 31, 1998 and the estimated net realizable value
for this property. In March 1999, the Partnership sold this property
and received net sales proceeds of $1,050,000 and recorded a gain of
$19,628 for financial reporting
5
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CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
3. Net Investment in Direct Financing Leases - Continued:
------------------------------------------------------
purposes, resulting in a total net loss of approximately $45,800. The
building portion of this property had been classified as a direct
financing lease. In connection therewith, the gross investment (minimum
lease payments receivable and the estimated residual value), unearned
income and the allowance for impairment in carrying value relating to
the building, were removed from the accounts and the gain from the sale
of the property was reflected in income (see Note 2.)
4. Related Party Transactions:
---------------------------
On September 1, 1999, CNL American Properties Fund, Inc. ("APF"), an
affiliate of the general partners, acquired CNL Fund Advisors, Inc.
("CFA"), an affiliate who provides certain services relating to
management of the Partnership and its properties pursuant to a
management agreement with the Partnership. As a result of this
acquisition, CFA became a wholly owned subsidiary of APF; however, the
terms of the management agreement between the Partnership and CFA
remain unchanged and in effect.
5. Commitments and Contingencies:
------------------------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 1,850,049 shares of its common stock, par value $0.01 per share
(the "APF Shares"). In order to assist the general partners in
evaluating the proposed merger consideration, the general partners
retained Valuation Associates, a nationally recognized real estate
appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the fair value of
the Partnership's property portfolio and other assets was $36,414,830
as of December 31, 1998. The APF Shares are expected to be listed for
trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at
the option of the former limited partners. At a special meeting of the
partners that is expected to be held in the first quarter of 2000,
limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior
to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and
other assets of the Partnership. The general partners intend to
recommend that the limited partners of the Partnership approve the
Merger. In connection with their recommendation, the general partners
will solicit the consent of the limited partners at the special
meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the
percentage of "For" votes and the general partners will bear the
6
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
5. Commitments and Contingencies - Continued:
------------------------------------------
portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates in
connection with the proposed Merger. On September 23, 1999, the judge
assigned to the two lawsuits entered an order consolidating the two
cases. Pursuant to this order, the plaintiffs in these cases filed a
consolidated and amended complaint on November 8, 1999. The various
defendants, including the general partners, have 45 days to respond to
that consolidated complaint. The general partners and APF believe that
the lawsuits are without merit and intend to defend vigorously against
the claims. See Part II - Item 1. Legal Proceedings.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund IX, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on April 16, 1990, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, as well as land upon which restaurants were to be
constructed (the "Properties"), which are leased primarily to operators of
national and regional fast-food and family-style restaurant chains. The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of September 30,
1999, the Partnership owned 40 Properties, which included interests in 13
Properties owned by joint ventures in which the Partnership is a co-venturer and
one Property owned with an affiliate of the general partners as
tenants-in-common.
Capital Resources
- -----------------
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) during the nine months ended
September 30, 1999 and 1998, of $2,228,634 and $2,461,641, respectively. The
decrease in cash from operations for the nine months ended September 30, 1999,
as compared to the nine months ended September 30, 1998, was 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, 1999.
During February and March 1999, the Partnership sold its Properties in
Corpus Christi, Texas and Rochester, New York, respectively, and received sales
proceeds of $1,350,000 and $1,050,000, respectively, resulting in gains of
$56,369 and $19,628, respectively, for financial reporting purposes. These
Properties were originally acquired by the Partnership in 1991 and 1992 and had
a total cost of approximately $2,288,800, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
Properties for approximately $111,200 in excess of their original purchase
prices. In March 1999, the Partnership reinvested a majority of the net sales
proceeds in a Golden Corral Property located in Albany, Georgia, at an
approximate cost of $1,641,200. The Partnership intends to reinvest the
remaining net sales proceeds in additional Properties.
Currently, rental income from the Partnership's Properties and any net
sales proceeds held by the Partnership pending reinvestment in additional
Properties are invested in money market accounts or other short-term, highly
liquid investments such as demand deposits in commercial banks, certificates of
deposit, 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 and, for net sales proceeds, to reinvest in
additional Properties. At September 30, 1999, the Partnership had $1,912,299
invested in such short-term investments, as compared to $1,287,379 at December
31, 1998. The increase in cash and cash equivalents for the nine months ended
September 30, 1999, was primarily attributable to the Partnership receiving net
sales proceeds relating to the Property sales described above, pending
reinvestment in additional Properties. The funds remaining at September 30,
1999, after payment of
8
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distributions and other liabilities, will be used to invest in additional
Properties 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'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.
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 operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, and for the nine
months ended September 30, 1998, accumulated excess operating reserves, the
Partnership declared distributions to the limited partners of $2,362,503 and
$2,432,503 for the nine months ended September 30, 1999 and 1998, respectively
($787,501 for each of the quarters ended September 30, 1999 and 1998). This
represents distributions for the nine months ended September 30, 1999 and 1998
of $0.68 and $0.70 per unit, respectively ($0.23 per unit for each of the
quarters ended September 30, 1999 and 1998). No distributions were made to the
general partners for quarter and the nine months ended September 30, 1999 and
1998. No amounts distributed to the limited partners for the nine months ended
September 30, 1999 and 1998, 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.
Total liabilities of the Partnership, including distributions payable,
increased to $1,030,939 at September 30, 1999, from $885,160 at December 31,
1998, primarily as a result of the Partnership accruing transaction costs
relating to the proposed merger with CNL American Properties Fund, Inc. ("APF"),
as described below. 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 the nine months ended September 30, 1998, the Partnership owned
and leased 27 wholly owned Properties, and during the nine months ended
September 30, 1999, the Partnership owned and leased 28 wholly owned Properties
(which included two Properties which were sold during 1999), to operators of
fast-food and family-style restaurant chains. In connection with
9
<PAGE>
these Properties, during the nine months ended September 30, 1999 and 1998, the
Partnership earned $1,785,962 and $1,630,947, respectively, in rental income
from operating leases (net of adjustments to accrued rental income) and earned
income from direct financing leases, $607,476 and $661,804 of which was earned
during the quarters ended September 30, 1999 and 1998, respectively. Rental and
earned income were higher for the nine months ended September 30, 1999, as
compared to the nine months ended September 30, 1998, due to the fact that in
May 1998, the tenant of the Properties in Williamsville and Rochester, New York
filed for bankruptcy. As a result of the bankruptcies, during the quarter and
nine months ended September 30, 1998, the Partnership wrote off approximately
$272,200 of accrued rental income (non-cash accounting adjustments relating to
the straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles) relating to both
Properties. No such amounts were written-off during the nine months ended
September 30, 1999. Rental and earned income were also higher during the nine
months ended September 30, 1999, due to the fact that during the nine months
ended September 30, 1998, the Partnership increased the allowance for doubtful
accounts for past due rental amounts for these Properties in the amount of
approximately $172,600, due to financial difficulties the tenants were
experiencing. No such allowance was established during the nine months ended
September 30, 1999.
The increase in rental and earned income during the nine months ended
September 30, 1999 was partially offset by, and the decrease during the quarter
ended September 30, 1999, was partially attributable to, a decrease in rental
and earned income of approximately $29,500 and $104,400 for the quarter and nine
months ended September 30, 1999, respectively, due to the fact that the tenant
of the Property in Williamsville, New York rejected the lease relating to the
Property and ceased making rental payments in October 1998. The lost revenues
resulting from this Property could have an adverse effect on the results of
operations of the Partnership if the Partnership is unable to re-lease the
Property in a timely manner. The Partnership will not recognize rental income
relating to this Property until a new tenant is located or until the Property is
sold and the proceeds from such sale are reinvested in an additional Property.
The increase in rental and earned income during the nine months ended
September 30, 1999, was also offset by, and the decrease during the quarter
ended September 30, 1999, was partially attributable to, a decrease of
approximately $20,900 and $170,400 during the quarter and nine months ended
September 30, 1999, respectively, due to the fact that the Partnership sold the
Property located in Rochester, New York, as described above in "Capital
Resources." The increase in rental and earned income during the nine months
ended September 30, 1999, was also partially offset by, and the decrease during
the quarter ended September 30, 1999, was partially attributable to, a decrease
of approximately $40,200 and $102,400 during the quarter and nine months ended
September 30, 1999, respectively, as a result of the sale of the Property in
Corpus Christi, Texas, as described above in "Capital Resources." In March 1999,
the Partnership reinvested a portion of these net sales proceeds in a Property
in Albany, Georgia, as described above in "Capital Resources," which resulted in
an increase in rental and earned income of approximately $44,100 and $93,000
during the quarter and nine months ended September 30, 1999, respectively.
10
<PAGE>
Rental and earned income was also higher during the nine months ended
September 30, 1999 due to the fact that during the nine months ended September
30, 1998, the Partnership established an allowance for doubtful accounts of
approximately $43,900 relating to past due rental amounts for the Property in
Grand Prairie, Texas, in accordance with the Partnership's collection policy. No
such allowance was established during the nine months ended September 30, 1999.
In addition, the increase in rental and earned income during the nine
months ended September 30, 1999, was partially offset by, and the decrease
during the quarter ended September 30, 1999, was partially attributable to, a
decrease of approximately $9,900 and $69,800 for the quarter and nine months
ended September 30, 1999, respectively, due to the fact that the leases relating
to the Burger King Properties in Shelby, North Carolina; Maple Heights, Ohio;
Watertown, New York and Carrboro, North Carolina were amended to provide for
rent reductions from August 1998 through the end of the lease terms. Rental and
earned income relating to these Properties are expected to remain at reduced
amounts as a result of these amendments.
The increase in rental and earned income during the nine months ended
September 30, 1999, was partially attributable to, and the decrease during the
quarter ended September 30, 1999, was partially offset by, an increase of
approximately $25,700 and $45,000 for the quarter and nine months ended
September 30, 1999, respectively, for rental amounts relating to the Properties
in Blufton, Alliance and North Baltimore, Ohio, as a result of amendments to the
leases for these Properties in 1998.
For the nine months ended September 30, 1999 and 1998, the Partnership
also owned and leased 13 Properties indirectly through joint venture
arrangements and one Property with an affiliate of the general partners as
tenants-in-common. In connection therewith, during the nine months ended
September 30, 1999 and 1998, the Partnership earned $436,218 and $432,608,
respectively, attributable to net income earned by these joint ventures,
$152,161 and $155,940 of which was earned during the quarters ended September
30, 1999 and 1998, respectively.
Operating expenses, including depreciation and amortization expense,
were $617,473 and $354,315 for the nine months ended September 30, 1999 and
1998, respectively, of which $195,306 and $122,534 were incurred for the
quarters ended September 30, 1999 and 1998, respectively. The increase in
operating expenses for the quarter and nine months ended September 30, 1999, as
compared to the quarter and nine months ended September 30, 1998, was partially
due to the fact that the Partnership incurred $63,902 and $185,528 during the
quarter and nine months ended September 30, 1999, respectively, in transaction
costs related to the general partners retaining financial and legal advisors to
assist them in evaluating and negotiating the proposed merger with APF, as
described below. If the limited partners reject the merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of "For"
votes and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
The increase in operating expenses during the quarter and nine months
ended September 30, 1999, was also partially due to an increase in depreciation
expense as a result of the lease amendments causing the reclassification of two
of the four leases, one Property in Carrboro, North Carolina and one Property in
Shelby, North Carolina, from direct financing leases to
11
<PAGE>
operating leases during 1998, and the additional depreciation expense relating
to the Property acquired in March 1999.
Operating expenses also increased during the quarter and nine months
ended September 30, 1999, due to an increase in legal fees and real estate tax
expense incurred in connection with the fact that the tenant of the Property in
Williamsville, New York filed for bankruptcy, rejected the lease, and ceased
making rental payments. The Partnership will continue to incur these types of
expenses until a replacement tenant or purchaser is located.
As a result of the sales of the Properties in Corpus Christi, Texas and
Rochester, New York, as described above in "Capital Resources," the Partnership
recognized a total gain of $75,997 for financial reporting purposes during the
nine months ended September 30, 1999. No Properties were sold during the quarter
and nine months ended September 30, 1998.
Proposed Merger
- ---------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF
has agreed to issue 1,850,049 shares of its common stock, par value $0.01 per
share (the "APF Shares"). In order to assist the general partners in evaluating
the proposed merger consideration, the general partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $36,414,830 as of December 31, 1998. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the first quarter of 2000, limited partners holding in
excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to
add three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. On September 23, 1999, the
judge assigned to the two lawsuits entered an order consolidating the two cases.
Pursuant to this order, the plaintiffs in these cases filed a consolidated and
amended complaint on November 8, 1999. The various defendants, including the
general partners, have 45 days to respond to that consolidated complaint. The
general partners and APF believe that the lawsuits are without merit and intend
to defend vigorously against the claims. See Part II - Item 1. Legal
Proceedings.
12
<PAGE>
Year 2000 Readiness Disclosure
- ------------------------------
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information
technology systems. The general partners and their affiliates provide all
services requiring the use of information and non-information technology systems
pursuant to a management agreement with the Partnership. The information
technology system of the general partners' affiliates consists of a network of
personal computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the general partners and their affiliates formed a Year
2000 committee (the "Y2K Team") for the purpose of identifying, understanding
and addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the general partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consisted
of identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections, interviews
and tests to identify which of the systems used by the Partnership could have a
potential year 2000 problem.
The information system of the general partners' affiliates is comprised
of hardware and software applications from mainstream suppliers. Accordingly,
the Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the
non-information technology systems providers of the affiliates.
In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of
13
<PAGE>
the Partnership's transfer agent and financial institutions. The Partnership
depends on its transfer agent to maintain and track investor information and its
financial institutions for availability of cash.
As of September 30, 1999, the Y2K Team had received responses from
approximately 62 percent of the third parties. All of the responses were in
writing. Of the third parties responding, all indicated that they are currently
year 2000 compliant or will be year 2000 compliant prior to the year 2000.
Although the Y2K Team continues to receive positive responses from the companies
with which the Partnership has third party relationships regarding their year
2000 compliance, the general partners cannot be assured that the third parties
have adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. As of September 30, 1999, the Y2K Team had received
responses from approximately 67 percent of the tenants. All of the responses
were in writing. Of the tenant's responding, all indicated that they are
currently year 2000 compliant or will be year 2000 compliant prior to the year
2000. The general partners cannot be assured that the tenants have adequately
considered the impact of the year 2000. The Partnership has also instituted a
policy of requiring any new tenants to indicate that their systems are year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades for its hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the general partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the general partners and their affiliates. The general
partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The general partners believe that the reasonably likely worst case
scenario with regard to the information and non-information technology systems
used by the Partnership is the failure of one or more of these systems as a
result of year 2000 problems. Because the Partnership's major source of income
is rental payments under long-term triple-net leases, any failure of information
or non-information technology systems used by the Partnership is not expected to
have a material impact on the results of operations of the Partnership. Even if
such systems failed, the payment of rent under the Partnership's leases would
not be affected. In addition, the Y2K Team is expected to correct any Y2K
problems within the control of the general partners and their affiliates before
the year 2000.
14
<PAGE>
The Y2K Team has determined that a contingency plan to address this
risk is not necessary at this time. However, if the Y2K Team identifies
additional risks associated with the year 2000 compliance of the information or
non-information technology systems used by the Partnership, the Y2K Team will
develop a contingency plan if deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records
The general partners believe that the reasonably likely worst case
scenario with regard to the Partnership's transfer agent is that the transfer
agent will fail to achieve year 2000 compliance of its systems and will not be
able to accurately maintain the records of the Partnership. This could result in
the inability of the Partnership to accurately identify its limited partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the general partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which the
general partners and their affiliates would maintain the records of the
Partnership manually, in the event that the systems of the transfer agent are
not year 2000 compliant. The general partners and their affiliates would have to
allocate resources to internally perform the functions of the transfer agent.
The general partners do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Partnership.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The general partners believe that the reasonably likely worst case
scenario with regard to the Partnership's financial institutions is that some or
all of its funds on deposit with such financial institutions may be temporarily
unavailable. The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the general
partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues. The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis. The general
partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.
Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
The general partners believe that the reasonably likely worst case
scenario with regard to the Partnership's tenants is that some of the tenants
may make rental payments late as the result of the failure of the tenants to
achieve year 2000 compliance of their systems used in the payment of rent, the
failure of the tenant's financial institutions to achieve year 2000 compliance,
15
<PAGE>
or the temporary disruption of the tenants' businesses. The Y2K Team is in the
process of requesting responses from the Partnership's tenants indicating the
extent to which their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. The general partners cannot be
assured that the tenants have addressed all possible year 2000 issues. The late
payment of rent by one or more tenants would affect the results of operations of
the Partnership in the short-term.
The general partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The general
partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's
tenants, the Y2K Team is not able to develop a contingency plan to address these
risks. In the event of late payment or non-payment of rent, the general partners
will assess the remedies available to the Partnership under its lease
agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On May 11, 1999, four limited partners in several CNL Income
Funds served a derivative and purported class action lawsuit
filed April 22, 1999 against the general partners and APF in
the Circuit Court of the Ninth Judicial Circuit of Orange
County, Florida, alleging that the general partners breached
their fiduciary duties and violated provisions of certain of
the CNL Income Fund partnership agreements in connection with
the proposed Merger. The plaintiffs are seeking unspecified
damages and equitable relief. On July 8, 1999, the plaintiffs
filed an amended complaint which, in addition to naming three
additional plaintiffs, includes allegations of aiding and
abetting and conspiring to breach fiduciary duties, negligence
and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended,
the caption of the case is Jon Hale, Mary J. Hewitt, Charles
---------------------------------
A. Hewitt, Gretchen M. Hewitt Bernard J. Schulte, Edward M.
-----------------------------------------------------------
and Margaret Berol Trust, and Vicky Berol v. James M. Seneff,
-------------------------------------------------------------
Jr., Robert A. Bourne, CNL Realty Corporation, and CNL
------------------------------------------------------
American Properties Fund, Inc., Case No. CIO-99-0003561.
------------------------------
On June 22, 1999, a limited partner of several CNL Income
Funds served a purported class action lawsuit filed April 29,
1999 against the general partners and APF, Ira Gaines,
-----------
individually and on behalf of a class of persons similarly
----------------------------------------------------------
situated, v. CNL American Properties Fund, Inc., James M.
---------------------------------------------------------
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, CNL
----------------------------------------------------------
Fund Advisors, Inc., CNL Financial Corporation a/k/a CNL
--------------------------------------------------------
Financial Corp., CNL Financial Services, Inc. and CNL Group,
------------------------------------------------------------
Inc., Case NO. CIO-99-3796, in the Circuit Court of the Ninth
-----
Judicial Circuit of Orange County, Florida, alleging that the
general partners breached their fiduciary duties and that APF
aided and abetted their breach of fiduciary duties in
connection with the proposed Merger. The plaintiff is seeking
unspecified damages and equitable relief.
On September 23, 1999, Judge Lawrence Kirkwood entered an
order consolidating the two cases under the caption In re: CNL
----------
Income Funds Litigation, Case No. 99-3561. Pursuant to this
-----------------------------------------
order, the plaintiffs in these cases filed a consolidated and
amended complaint on November 8, 1999, and the various
defendants, including the general partners, have 45 days to
respond to that consolidated complaint.
Item 2. Changes in Securities. Inapplicable.
---------------------
Item 3. Default upon Senior Securities. Inapplicable.
------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Inapplicable.
------------
Item 5. Other Information. Inapplicable.
-----------------
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund, Inc.
("APF") dated March 11, 1999, as amended June 4,
1999, and as amended October 27, 1999 (Filed as
Appendix B to the Prospectus Supplement for the
Registrant, constituting a part of Amendment No.
3 to the Registration Statement of APF on Form
S-4, File No. 333-74329.)
3.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund IX, Ltd. (Included as Exhibit
3.1 to Registration Statement No. 33-35049 on
Form S-11 and incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund IX, Ltd. (Included as Exhibit
3.1 to Registration Statement No. 33-35049 on
Form S-11 and incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited
Partnership of CNL Income Fund IX, Ltd. (Included
as Exhibit 4.6 to Post-Effective Amendment No. 1
to Registration Statement No. 33-35049 on Form S-
11 and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund IX,
Ltd. and CNL Investment Company (Included as
Exhibit 10.1 to Form 10-K filed with the
Securities and Exchange Commission on March 17,
1998, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL
Investment Company to CNL Income Fund Advisors,
Inc. (Included as Exhibit 10.2 to Form 10-K filed
with the Securities and Exchange Commission on
March 30, 1995, and incorporated herein by
reference.)
10.3 Assignment of Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors,
Inc. (Included as Exhibit 10.3 to Form 10-K filed
with the Securities and Exchange Commission on
April 1, 1996, and incorporated herein by
reference.)
27 Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1999.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF CNL INCOME FUND IX, LTD. AT SEPTEMBER 30, 1999, AND ITS STATEMENT OF
INCOME FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FORM 10-Q OF CNL INCOME FUND IX, LTD. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,912,299
<SECURITIES> 0
<RECEIVABLES> 136,551
<ALLOWANCES> 98,820
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 16,595,061
<DEPRECIATION> 1,821,941
<TOTAL-ASSETS> 29,624,754
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 28,593,815
<TOTAL-LIABILITY-AND-EQUITY> 29,624,754
<SALES> 0
<TOTAL-REVENUES> 1,847,658
<CGS> 0
<TOTAL-COSTS> 617,473
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,742,400
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,742,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,742,400
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>DUE TO THE NATURE OF ITS INDUSTRY, CNL INCOME FUND IX, LTD. HAS AN
UNCLASSIFIED BALANCE SHEET; THEREFORE, NO VALUES ARE SHOWN ABOVE FOR CURRENT
ASSETS AND CURRENT LIABILITIES.
</FN>
</TABLE>
