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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, 2004
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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 _________
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes___ No X
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 8-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Item 4. Controls and Procedures 11-12
Part II
Other Information 13-14
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
2004 2003
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 17,094,101 $ 17,424,556
Net investment in direct financing leases 1,817,871 1,874,555
Real estate held for sale -- 999,822
Investment in joint ventures 4,827,748 4,899,183
Mortgage notes receivable 257,135 442,550
Cash and cash equivalents 2,407,133 1,509,370
Receivables -- 36,055
Accrued rental income 432,177 464,175
Other assets 30,929 29,784
------------------- -------------------
$ 26,867,094 $ 27,680,050
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 62,606 $ 10,643
Real estate taxes payable 7,255 8,231
Distributions payable 787,501 787,501
Due to related parties 49,001 12,465
Rents paid in advance and deposits 82,808 79,938
------------------- -------------------
Total liabilities 989,171 898,778
Minority interests 2,446,376 2,498,161
Partners' capital 23,431,547 24,283,111
------------------- -------------------
$ 26,867,094 $ 27,680,050
=================== ===================
See accompanying notes to condensed financial statements.
1
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- -------------- -------------- ----------------
Revenues:
Rental income from operating leases $ 543,417 $ 541,042 $ 1,622,951 $ 1,623,127
Earned income from direct financing leases 50,927 53,017 154,402 160,495
Contingent rental income 4,824 2,686 6,780 28,935
Interest and other income 5,977 10,312 22,114 31,460
------------- -------------- -------------- ----------------
605,145 607,057 1,806,247 1,844,017
------------- -------------- -------------- ----------------
Expenses:
General operating and administrative 95,668 56,502 235,931 191,205
Property related 20,067 48,122 111,612 68,305
State and other taxes -- -- 41,024 61,577
Depreciation and amortization 110,594 110,151 331,780 330,453
------------- -------------- -------------- ----------------
226,329 214,775 720,347 651,540
------------- -------------- -------------- ----------------
Income before minority interests and equity
in earnings of unconsolidated
joint ventures 378,816 392,282 1,085,900 1,192,477
Minority interests (63,579) (62,868) (186,687) (186,985)
Equity in earnings of unconsolidated
joint ventures 125,256 118,506 345,655 341,591
------------- -------------- -------------- ----------------
Income from continuing operations 440,493 447,920 1,244,868 1,347,083
------------- -------------- -------------- ----------------
Discontinued operations:
Income from discontinued operations -- 7,001 24,528 11,731
Gain on disposal of discontinued operations -- -- 241,543 288
------------- -------------- -------------- ----------------
-- 7,001 266,071 12,019
------------- -------------- -------------- ----------------
Net income $ 440,493 $ 454,921 $ 1,510,939 $ 1,359,102
============= ============== ============== ================
Income per limited partner unit:
Continuing operations $ 0.13 $ 0.13 $ 0.35 $ 0.38
Discontinued operations -- -- 0.08 0.01
------------- -------------- -------------- ----------------
$ 0.13 $ 0.13 $ 0.43 $ 0.39
============= ============== ============== ================
Weighted average number of limited partner
units outstanding 3,500,000 3,500,000 3,500,000 3,500,000
============= ============== ============== ================
See accompanying notes to condensed financial statements.
2
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, December 31,
2004 2003
--------------------- ------------------
General partners:
Beginning balance $ 238,417 $ 238,417
Net income -- --
--------------------- ------------------
238,417 238,417
--------------------- ------------------
Limited partners:
Beginning balance 24,044,694 25,332,203
Net income 1,510,939 1,862,495
Distributions ($0.68 and $0.90 per limited partner
unit, respectively) (2,362,503) (3,150,004)
--------------------- ------------------
23,193,130 24,044,694
--------------------- ------------------
Total partners' capital $ 23,431,547 $ 24,283,111
===================== ==================
See accompanying notes to condensed financial statements.
3
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2004 2003
--------------- ----------------
Net cash provided by operating activities $ 2,074,924 $ 2,098,627
--------------- ----------------
Cash flows from investing activities:
Proceeds from sale of assets 1,238,536 286,544
Collections on mortgage notes receivable 185,278 14,520
--------------- ----------------
Net cash provided by investing activities 1,423,814 301,064
--------------- ----------------
Cash flows from financing activities:
Distributions to limited partners (2,362,503) (2,362,503)
Distributions to holders of minority interests (238,472) (220,822)
--------------- ----------------
Net cash used in financing activities (2,600,975) (2,583,325)
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 897,763 (183,634)
Cash and cash equivalents at beginning of period 1,509,370 1,917,240
--------------- ----------------
Cash and cash equivalents at end of period $ 2,407,133 $ 1,733,606
=============== ================
Supplemental schedule of non-cash financing activities:
Distributions declared and unpaid at end of
period $ 787,501 $ 787,501
=============== ================
See accompanying notes to condensed financial statements.
4
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
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 the general partners, necessary for a fair
statement of the results for the interim periods presented. Operating
results for the quarter and nine months ended September 30, 2004 may
not be indicative of the results that may be expected for the year
ending December 31, 2004. Amounts as of December 31, 2003, 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, 2003.
The Partnership accounts for its 60% interest in Katy Joint Venture and
its 45.2% interest in CNL Restaurant Investments II using the
consolidation method. Minority interests represent the minority joint
venture partners' proportionate share of the equity in the joint
ventures. All significant intercompany accounts and transactions have
been eliminated.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January
2003) ("FIN 46R"), "Consolidation of Variable Interest Entities"
requiring existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries. The primary beneficiary of
a variable interest entity is the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected residual
returns, or both, as a result of holding variable interests, which are
the ownership, contractual, or other pecuniary interests in an entity
that change with changes in the fair value of the entity's net assets
excluding variable interests. Prior to FIN 46R, a company generally
included another entity in its financial statements only if it
controlled the entity through voting interests. Application of FIN 46R
is required in financial statements of public entities that have
interests in variable interest entities for periods ending after March
15, 2004. The Partnership adopted FIN 46R during the quarter ended
March 31, 2004, which resulted in the consolidation of previously
unconsolidated joint ventures, which were accounted for under the
equity method. FIN 46R does not require, but does permit restatement of
previously issued financial statements. The Partnership has restated
prior year's financial statements to maintain comparability between the
periods presented. Such consolidation resulted in certain assets and
minority interest, and revenues and expenses, of the entities being
reported on a gross basis in the Partnership's financial statements;
however, these restatements had no effect on partners' capital or net
income.
2. Discontinued Operations
During 2003, CNL Restaurant Investments II, in which the Partnership
owns a 45.2% interest, and accounts for under the consolidation method,
entered into negotiations with a third party to sell the property in
San Antonio, Texas. In 2004, the contract was terminated, and as a
result, the Partnership reclassified the assets from real estate held
for sale to real estate properties with operating leases.
In July 2002, the Partnership entered into an agreement to sell its
vacant property in Wildwood, Florida. The contract was subsequently
terminated and during the quarter ended March 31, 2004, the Partnership
received $7,500 as consideration for terminating the contract. During
2003, the Partnership entered into a new contract to sell this
property. In February 2004, the Partnership sold the property to a
third party and received net sales proceeds of approximately $526,400,
resulting in a gain on disposal of discontinued operations of
approximately $12,100. The Partnership had recorded provisions for
write-down of assets in
5
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
2. Discontinued Operations - Continued
previous years relating to this property. In March 2004, the
Partnership entered into an agreement to sell its property in
Greenville, Tennessee. The Partnership sold this property in May 2004
for approximately $712,100 resulting in a gain on disposal of
discontinued operations of approximately $229,400.
The following presents the operating results of the discontinued
operations for these two properties, along with the property in Grand
Prairie, Texas that was sold in February 2003.
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- -------------- --------------- --------------
Rental revenues $ -- $ 12,965 $ 20,944 $ 39,209
Other income -- -- 7,500 --
Expenses -- (5,964) (3,916) (27,478)
------------- -------------- --------------- --------------
Income from discontinued
operations $ -- $ 7,001 $ 24,528 $ 11,731
============= ============== =============== ==============
3. Mortgage Notes Receivable
In January 2004, the Partnership received a balloon payment of
approximately $176,500 relating to the mortgage note receivable for the
property in Alliance, Ohio. This amount represented the total
outstanding principal and interest balances.
4. Concentration of Credit Risk
The following schedule presents total rental revenues from individual
lessees, each representing more than 10% of the Partnership's total
rental revenues and mortgage interest income (including total rental
revenues from the consolidated joint ventures and the Partnership's
share of total rental revenues from unconsolidated joint ventures and
properties held as tenants-in-common with affiliates of the general
partners) for each of the periods ended September 30:
2004 2003
--------------- -----------------
Carrols Corporation and Texas Taco Cabana, LP
(under common control of Carrols Corporation) $ 603,877 $ 627,565
Burger King Corporation and BK Acquisition, Inc.
(under common control of Burger King Corporation) 490,285 490,136
Golden Corral Corporation 379,013 377,177
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than 10% of the
Partnership's total rental revenues and mortgage interest income
(including total rental revenues from the consolidated joint ventures
and the Partnership's share of total
6
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
4. Concentration of Credit Risk - Continued
rental revenues from unconsolidated joint ventures and properties held
as tenants-in-common with affiliates of the general partners) for each
of the periods ended September 30:
2004 2003
---------------- ----------------
Burger King $ 895,338 $ 920,220
Golden Corral Buffet and Grill 379,013 377,177
Taco Cabana 270,936 270,992
Although the properties are geographically diverse throughout the
United States and the lessees operate a variety of restaurant concepts,
default by any one of these lessees or restaurant chains will
significantly impact the results of operations if the Partnership is
not able to re-lease the properties in a timely manner.
5. Merger Transaction
On August 9, 2004, the Partnership entered into a definitive Agreement
and Plan of Merger pursuant to which the Partnership will be merged
with a subsidiary of U.S. Restaurant Properties, Inc. (NYSE: USV). The
merger is one of multiple concurrent transactions pursuant to which 17
other affiliated limited partnerships also will be merged with a
subsidiary of U.S. Restaurant Properties, Inc. and in which CNL
Restaurant Properties, Inc., an affiliate, also will be merged with
U.S. Restaurant Properties, Inc. CNL Restaurant Properties, Inc.
currently provides property management and other services to the
Partnership. The merger of the Partnership (and each of the 17 other
affiliated mergers) is subject to certain conditions including approval
by a majority of the limited partners, consummation of a minimum number
of limited partnership mergers representing at least 75.0% in value (as
measured by the value of the merger consideration) of all limited
partnerships, consummation of the merger between U. S. Restaurant
Properties, Inc. and CNL Restaurant Properties, Inc., approval of the
shareholders of U.S. Restaurant Properties, Inc., and availability of
financing. The transaction is expected to be consummated in the first
quarter of 2005.
Under the terms of the merger agreement, if the transaction is
approved, the limited partners will receive total consideration of
approximately $27.72 million, consisting of approximately $23.18
million in cash and approximately $4.54 million in U.S. Restaurant
Properties, Inc. Series A Convertible Preferred Stock that is listed on
the New York Stock Exchange. The general partners will receive total
consideration of approximately $187,000 consisting of approximately
$156,000 in cash and approximately $31,000 in preferred stock.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund IX, Ltd. (the "Partnership," which may be referred to
as "we," "us," or "our") 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, 2003, we owned 20 Properties
directly and 16 Properties indirectly through joint venture or tenancy in common
arrangements. As of September 30, 2004, we owned 18 Properties directly and 16
Properties indirectly through joint venture or tenancy in common arrangements.
Merger Transaction
The general partners believe their primary objective is to maintain
current operations with restaurant operators as successfully as possible, while
evaluating strategic alternatives, including alternatives that may provide
liquidity to the limited partners. Real estate markets are strong throughout
much of the nation, and the performance of restaurants has generally improved
after several challenging years. As a result, the general partners believe that
this is an attractive period for a strategic event to monetize the interests of
the limited partners.
In furtherance of this, on August 9, 2004, we entered into a definitive
Agreement and Plan of Merger pursuant to which we will be merged with a
subsidiary of U.S. Restaurant Properties, Inc. (NYSE: USV). The merger is one of
multiple concurrent transactions pursuant to which 17 other affiliated limited
partnerships also will be merged with a subsidiary of U.S. Restaurant
Properties, Inc. and in which CNL Restaurant Properties, Inc., an affiliate,
also will be merged with U.S. Restaurant Properties, Inc. Our merger (and each
of the 17 other affiliated mergers) is subject to certain conditions including
approval by a majority of the limited partners, consummation of a minimum number
of limited partnership mergers representing at least 75.0% in value (as measured
by the value of the merger consideration) of all limited partnerships,
consummation of the merger between U. S. Restaurant Properties, Inc. and CNL
Restaurant Properties, Inc., approval of the shareholders of U.S. Restaurant
Properties, Inc., and availability of financing. U.S. Restaurant Properties,
Inc. is a real estate investment trust (REIT) that focuses primarily on
acquiring, owning and leasing restaurant properties. The transaction is expected
to be consummated in the first quarter of 2005.
Under the terms of the merger agreement, if the transaction is
approved, our limited partners will receive total consideration of approximately
$27.72 million, consisting of approximately $23.18 million in cash and
approximately $4.54 million in U.S. Restaurant Properties, Inc. Series A
Convertible Preferred Stock that is listed on the New York Stock Exchange. The
general partners will receive total consideration of approximately $187,000
consisting of approximately $156,000 in cash and approximately $31,000 in
preferred stock.
We received an opinion from Wachovia Capital Markets, LLC that as of
August 9, 2004 the merger consideration to be received by the holders of our
general and limited partnership interests is fair, from a financial point of
view, to such holders.
As reflected above, the contemplated transactions are complex, and
contingent upon certain conditions. The restaurant marketplace, the real estate
industry, and the equities markets, all individually or taken as a whole, could
impact the economics of this transaction. As a result, there is no assurance
that we will be successful in completing the contemplated transaction.
Capital Resources
Net cash provided by operating activities was $2,074,924 and $2,098,627
for the nine months ended September 30, 2004 and 2003, respectively. Other
sources and uses of cash included the following during the nine months ended
September 30, 2004.
8
As of December 31, 2003, we had accepted two promissory notes in
connection with the 2000 sale of two Properties. In January 2004, we received a
balloon payment of approximately $176,500 relating to the mortgage note
receivable for the Property in Alliance, Ohio. This amount represented the total
outstanding principal and interest balances.
In February and May 2004, we sold the Properties in Wildwood, Florida
and Greenville, Tennessee, respectively, each to a third party, and received
total net sales proceeds of approximately $1,238,500, resulting in a total gain
on disposal of discontinued operations of approximately $241,500. We had
recorded provisions for write-down of assets in previous years relating to the
Property in Wildwood, Florida. We intend to reinvest these proceeds in
additional Properties or to pay liabilities as needed.
At September 30, 2004, we had $2,407,133 in cash and cash equivalents,
as compared to $1,509,370 at December 31, 2003. At September 30, 2004, these
funds were held in demand deposit accounts at a commercial bank. The increase in
cash and cash equivalents at September 30, 2004 was primarily a result of
holding sales proceeds and the balloon payment relating to the mortgage note
receivable that was prepaid in January. The funds remaining at September 30,
2004, after the payment of distributions and other liabilities, may be used to
invest in additional Properties and to meet our working capital needs.
Short-Term Liquidity
Our investment strategy of acquiring Properties for cash and leasing
them under triple-net leases to operators who generally meet specified financial
standards minimizes our operating expenses. The general partners believe that
the leases will generate net cash flow in excess of operating expenses.
Our short-term liquidity requirements consist primarily of our
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
our operations.
We generally distribute cash from operations remaining after the
payment of operating expenses, to the extent that the general partners determine
that such funds are available for distribution. Based on current and anticipated
future cash from operations and a portion of sales proceeds, we declared
distributions to limited partners of $2,362,503 for each of the nine months
ended September 30, 2004 and 2003 ($787,501 for each of the quarters ended
September 30, 2004 and 2003). This represents distributions of $0.68 per unit
for each of the nine months ended September 30, 2004 and 2003 ($0.23 for each
applicable quarter). No distributions were made to the general partners for the
quarters and nine months ended September 30, 2004 and 2003. No amounts
distributed to the limited partners for the nine months ended September 30, 2004
and 2003 are required to be or have been treated as a return of capital for
purposes of calculating the limited partners' return on their adjusted capital
contributions. We intend to continue to make distributions of cash to the
limited partners on a quarterly basis.
Total liabilities, including distributions payable, were $989,171 at
September 30, 2004, as compared to $898,778 at December 31, 2003. The increase
in total liabilities was primarily due to an increase in amounts due to related
parties and an increase in accounts payable and accrued expenses. The general
partners believe that we have sufficient cash on hand to meet our current
working capital needs.
Long-Term Liquidity
We have no long-term debt or other long-term liquidity requirements.
Results of Operations
Rental revenues from continuing operations were $1,777,353 during the
nine months ended September 30, 2004, as compared to $1,783,622 during the same
period of 2003, $594,344 and $594,059 of which were earned during the third
quarters of 2004 and 2003, respectively. Rental revenues from continuing
operations remained relatively constant because all of the changes in the
Property portfolio related to the Properties accounted for as discontinued
operations.
9
During the quarters and nine months ended September 30, 2004 and 2003,
we did not record rental revenues relating to the Property in North Baltimore,
Ohio. In August 2002, the tenant of this Property terminated the lease, as
permitted in the lease agreement, when a partial right of way taking reduced
road access to the restaurant. The general partners are currently seeking a
replacement tenant for this Property. The lost revenues resulting from the
vacant Property will continue to have an adverse effect on our results of
operations until we are able to re-lease it.
In December 2003, Waving Leaves, Inc., the tenant of the Property in
Wooster, Ohio, filed for Chapter 11 bankruptcy protection and rejected the one
lease it had with us. In June 2004, the lease was assigned to and assumed by
Hardee's Food Systems, Inc., the guarantor. As of November 5, 2004, we have
received from the guarantor all rental payments relating to this lease.
We earned $6,780 in contingent rental income during the nine months
ended September 30, 2004, as compared to $28,935 during the same period of 2003,
$4,824 and $2,686 of which were earned during the third quarters of 2004 and
2003, respectively. The decrease in contingent rental income during 2004 was due
to a decrease in reported gross sales of the restaurants with leases that
require the payment of contingent rental income. We earned $22,114 in interest
and other income during the nine months ended September 30, 2004, as compared to
$31,460 during the same period of 2003, $5,977 and $10,312 of which were earned
during the third quarters of 2004 and 2003, respectively. Interest and other
income was higher during the quarter and nine months ended September 30, 2003,
because we earned interest on a mortgage note receivable held in connection with
the 2000 sale of the Property in Alliance, Ohio. The mortgage note receivable
was paid in full in January 2004.
We earned $345,655 attributable to net income earned by unconsolidated
joint ventures during the nine months ended September 30, 2004, as compared to
$341,591 during the same period of 2003, $125,256 and $118,506 of which were
earned during the third quarters of 2004 and 2003, respectively. These amounts
remained relatively constant because the Property portfolio owned by the joint
ventures and the tenancies in common did not change.
During the nine months ended September 30, 2004, three of our lessees
(or group of affiliated lessees), (i) Carrols Corporation and Texas Taco Cabana,
LP (which are affiliated entities under common control) (hereinafter referred to
as Carrols Corp.), (ii) Burger King Corporation and BK Acquisition, Inc. (which
are affiliated entities under common control) (hereinafter referred to as Burger
King Corp.) and (iii) Golden Corral Corporation, each contributed more than ten
percent of total rental revenues and mortgage interest income (including total
rental revenues from the consolidated joint ventures and our share of total
rental revenues from unconsolidated joint ventures and Properties held as
tenants-in-common with affiliates of the general partners). We anticipate that,
based on the minimum rental payments required by the leases, each of these
lessees will continue to contribute more than ten percent of the total rental
revenues in 2004. In addition, three restaurant chains, Burger King, Golden
Corral Buffet and Grill, and Taco Cabana, each accounted for more than ten
percent of total rental revenues and mortgage interest during the nine months
ended September 30, 2004 (including total rental revenues from the consolidated
joint ventures and our share of total rental revenues from unconsolidated joint
ventures and Properties held as tenants-in-common with affiliates of the general
partners). We anticipate that these three restaurant chains will each continue
to account for more than ten percent of the total rental revenues in 2004. Any
failure of these lessees or restaurant chains will materially affect our
operating results if we are not able to re-lease the Properties in a timely
manner.
Operating expenses, including depreciation and amortization expense,
were $720,347 during the nine months ended September 30, 2004, as compared to
$651,540 during the same period of 2003, $226,329 and $214,775 of which were
incurred during the third quarters of 2004 and 2003, respectively. The increase
in operating expenses during the nine months ended September 30, 2004, was
partially caused by an increase in property related expenses, such as legal
fees, repairs and maintenance, insurance and real estate taxes relating to the
Property in North Baltimore, Ohio. The tenant of this Property terminated the
lease in 2002, as described above. We will continue to incur these expenses
relating to this Property until we are able to re-lease the Property. The
increase in operating expenses during the quarter and nine months ended
September 30, 2004, was also partially due to incurring additional general
operating and administrative expenses, including, primarily, legal fees incurred
in connection with the merger transaction described above. The increase during
the quarter and nine months ended September 30, 2004 was partially offset by a
decrease in Property related expenses and a decrease in the amount of state tax
expense relating to several states in which we conduct business, respectively.
10
We recognized income from discontinued operations (rental revenues less
property related expenses) of $11,731 during the nine months ended September 30,
2003, relating to the Properties in Grand Prairie, Texas, Wildwood, Florida, and
Greenville, Tennessee. We sold the Grand Prairie, Texas Property in February
2003 and recorded a gain on disposal of discontinued operations of approximately
$300. We recognized income from discontinued operations of $7,001 during the
quarter ended September 30, 2003 and income from discontinued operations of
$24,528 during the nine months ended September 30, 2004, relating to the
Properties in Wildwood, Florida and Greenville, Tennessee. Income from
discontinued operations included $7,500 that we received and recognized as
income during the first quarter of 2004, as consideration for terminating a 2002
contract to sell the Property in Wildwood, Florida. In 2003, we entered into a
new contract to sell this Property and in February 2004, we sold the Property
and recorded a gain on disposal of discontinued operations of approximately
$12,100. In May 2004, we sold the Property in Greenville, Tennessee and recorded
a gain on disposal of discontinued operations of approximately $229,400. We had
recorded provisions for write-down of assets in previous years relating to the
Properties in Grand Prairie, Texas and Wildwood, Florida.
During 2003, CNL Restaurant Investments II, in which we own a 45.2%
interest, and account for under the consolidation method, entered into
negotiations with a third party to sell the Property in San Antonio, Texas. In
2004, the contract was terminated, and as a result, we reclassified the assets
from real estate held for sale to real estate properties with operating leases.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January 2003) ("FIN
46R"), "Consolidation of Variable Interest Entities" requiring existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, which are the ownership, contractual, or other pecuniary
interests in an entity that change with changes in the fair value of the
entity's net assets excluding variable interests. Prior to FIN 46R, a company
generally included another entity in its financial statements only if it
controlled the entity through voting interests. Application of FIN 46R is
required in financial statements of public entities that have interests in
variable interest entities for periods ending after March 15, 2004. We adopted
FIN 46R during the quarter ended March 31, 2004, which resulted in the
consolidation of previously unconsolidated joint ventures, Katy Joint Venture
and CNL Restaurant Investments II, which were accounted for under the equity
method. FIN 46R does not require, but does permit restatement of previously
issued financial statements. We restated prior year's financial statements to
maintain comparability between the periods presented. Such consolidation
resulted in certain assets and minority interest, and revenues and expenses, of
the entities being reported on a gross basis in our financial statements;
however, these restatements had no effect on partners' capital or net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In January 2004, we received a balloon payment of approximately
$175,800 relating to the fixed rate mortgage note receivable from the 2000 sale
of the Property in Alliance, Ohio. This amount represented the total outstanding
principal balance. No other changes in our market risk occurred from December
31, 2003 through September 30, 2004. Information regarding our market risk at
December 31, 2003 is included in our Annual Report on Form 10-K for the year
ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The general partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. The principal executive and financial
officers of the corporate general partner have evaluated our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report on
Form 10-Q and have determined that such disclosure controls and procedures are
effective.
11
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
------------------------------------------------------------
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.
------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger among U.S. Restaurant
Properties, Inc., Ivanhoe Acquisition IX, LLC, and CNL
Income Fund IX, Ltd., dated as of August 9, 2004.
(Included as Exhibit 99.2 to Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004,
and incorporated herein by reference.)
3.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund IX, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-35049 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund IX, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-35049 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership of
CNL Income Fund IX, Ltd. (Included as Exhibit 4.6 to
Post-Effective Amendment No. 1 to Registration Statement
No. 33-35049 on Form S-11 and incorporated herein by
reference.)
10.1 Management Agreement between CNL Income Fund IX, Ltd.
and CNL Investment Company. (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange
Commission on March 17, 1998, and incorporated herein by
reference.)
10.2 Assignment of Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as
Exhibit 10.2 to Form 10-K filed with the Securities and
Exchange Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund
Advisors, Inc. to CNL APF Partners, LP. (Included as
Exhibit 10.4 to Form 10-Q filed with the Securities
Exchange Commission on August 9, 2001, and incorporated
herein by reference.)
13
10.5 Assignment of Management Agreement from CNL APF
Partners, LP to CNL Restaurants XVIII, Inc. (Included as
Exhibit 10.5 to Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2002, and incorporated
herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November 2004.
CNL INCOME FUND IX, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
--------------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
--------------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Number
Exhibits
2.1 Agreement and Plan of Merger among U.S. Restaurant
Properties, Inc., Ivanhoe Acquisition IX, LLC, and CNL
Income Fund IX, Ltd., dated as of August 9, 2004.
(Included as Exhibit 99.2 to Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004,
and incorporated herein by reference.)
3.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund IX, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-35049 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund IX, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-35049 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership of
CNL Income Fund IX, Ltd. (Included as Exhibit 4.6 to
Post-Effective Amendment No. 1 to Registration Statement
No. 33-35049 on Form S-11 and incorporated herein by
reference.)
10.1 Management Agreement between CNL Income Fund IX, Ltd.
and CNL Investment Company. (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange
Commission on March 17, 1998, and incorporated herein by
reference.)
10.2 Assignment of Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as
Exhibit 10.2 to Form 10-K filed with the Securities and
Exchange Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund
Advisors, Inc. to CNL APF Partners, LP. (Included as
Exhibit 10.4 to Form 10-Q filed with the Securities
Exchange Commission on August 9, 2001, and incorporated
herein by reference.)
10.5 Assignment of Management Agreement from CNL APF
Partners, LP to CNL Restaurants XVIII, Inc. (Included as
Exhibit 10.5 to Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2002, and incorporated
herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2