UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 2
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21558
CNL INCOME FUND XII, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3078856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 422-1574
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($10 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
The Form 10-K of CNL Income Fund XII, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
PART I
Item 1. Business
CNL Income Fund XII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 20, 1991. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on September 29, 1992, the
Partnership offered for sale up to $45,000,000 of limited partnership interests
(the "Units") (4,500,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
March 12, 1992. The offering terminated on March 15, 1993, at which date the
maximum offering proceeds of $45,000,000 had been received from investors who
were admitted to the Partnership as limited partners ("Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$39,615,456, and were used to acquire 48 Properties, including interests in
three Properties owned by joint ventures in which the Partnership is a
co-venturer, to loan $208,855 to the tenant of Kingsville Real Estate Joint
Venture (as described in Note 6 to the financial statements in Item 8 of this
report) and to establish a working capital reserve for Partnership purposes.
During the year ended December 31, 1996, the Partnership sold its Property in
Houston, Texas, and reinvested the sales proceeds, along with additional funds,
in Middleburg Joint Venture. As a result of the above transactions, the
Partnership owned 48 Properties as of December 31, 1997. The 48 Properties
include interests in four Properties owned by joint ventures in which the
Partnership is co-venturer. The Partnership leases the Properties on a
triple-net basis with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities.
The Partnership will hold its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax
1
<PAGE>
considerations. Certain lessees also have been granted options to purchase
Properties, generally at the Property's then fair market value after a specified
portion of the lease term has elapsed. In general, the General Partners plan to
seek the sale of some of the Properties commencing seven to 12 years after their
acquisition. The Partnership has no obligation to sell all or any portion of a
Property at any particular time, except as may be required under property
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The Properties owned by the Partnership and the joint
ventures in which the Partnership is a co-venturer provide for initial terms
ranging from 14 to 20 years (the average being 19 years), and expire between
2007 and 2016. All leases are on a triple-net basis, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. The leases of the Properties provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $46,900 to
$213,800. The majority of the leases provide for percentage rent, based on sales
in excess of a specified amount. In addition, some of the leases provide that,
commencing in specified lease years (generally the sixth lease year), the annual
base rent required under the terms of the lease will increase.
Generally, the leases of the Properties provide for two to four
five-year renewal options subject to the same terms and conditions as the
initial lease. Certain lessees also have been granted options to purchase
Properties at the Property's then fair market value after a specified portion of
the lease term has elapsed. Under the terms of certain leases, the option
purchase price may equal the Partnership's original cost to purchase the
Property (including acquisition costs), plus a specified percentage from the
date of the lease or a specified percentage of the Partnership's purchase price,
if that amount is greater than the Property's fair market value at the time the
purchase option is exercised.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership first must
offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
In June 1996, the tenant of the Sizzler Property in Tempe, Arizona,
declared bankruptcy and ceased operations of the restaurant business located on
the Property. In March 1997, the Partnership entered into a new lease for this
Property and in connection therewith, incurred $55,000 in renovation costs. The
renovations were completed in May 1997. The lease terms for this Property are
substantially the same as the Partnership's other leases as described above in
the first two paragraphs of this section.
2
<PAGE>
Major Tenants
During 1997, three lessees (or group of affiliated lessees) of the
Partnership, (i) Long John Silver's, Inc., (ii) Foodmaker, Inc. and (iii)
Flagstar Enterprises, Inc., Denny's, Inc. and Quincy's Restaurants, Inc. (which
are affiliated entities under common control of Flagstar Corporation)
(hereinafter referred to as Flagstar Corporation), each contributed more than
ten percent of the Partnership's total rental income (including the
Partnership's share of rental income from four Properties owned by joint
ventures). As of December 31, 1997, Long John Silver's, Inc. was the lessee
under leases relating to eight restaurants, Foodmaker, Inc. was the lessee under
leases relating to ten restaurants and Flagstar Corporation was the lessee under
leases relating to 15 restaurants. It is anticipated that based on the minimum
rental payments required by the leases, these three lessees or group of
affiliated lessees each will continue to contribute more than ten percent of the
Partnership's total rental income in 1998 and subsequent years. In addition,
four Restaurant Chains, Long John Silver's, Hardee's, Jack in the Box and
Denny's, each accounted for more than ten percent of the Partnership's total
rental income during 1997 (including the Partnership's share of rental income
from four Properties owned by joint ventures). In subsequent years, it is
anticipated that these four Restaurant Chains each will continue to account for
more than ten percent of the Partnership's total rental income to which the
Partnership is entitled under the terms of the leases. Any failure of these
lessees or Restaurant Chains could materially affect the Partnership's income.
As of December 31, 1997, Foodmaker, Inc. and Flagstar Corporation each leased
Properties with an aggregate carrying value in excess of 20 percent of the total
assets of the Partnership.
Joint Venture Arrangements
The Partnership has entered into four separate joint venture
arrangements: Williston Real Estate Joint Venture with CNL Income Fund X, Ltd.,
an affiliate of the General Partners, to hold one Property; Des Moines Real
Estate Joint Venture with CNL Income Fund VII, Ltd. and CNL Income Fund XI,
Ltd., affiliates of the General Partners , to hold one Property; Kingsville Real
Estate Joint Venture with CNL Income Fund IV, Ltd., an affiliate of the General
Partners, to hold one Property; and Middleburg Joint Venture with CNL Income
Fund VIII, Ltd., an affiliate of the General Partners, to purchase and hold one
Property. Each of the affiliates is a limited partnership organized pursuant to
the laws of the State of Florida.
The joint venture arrangements provide for the Partnership and its
joint venture partners to share in all costs and benefits associated with the
joint ventures in accordance with their respective percentage interests in the
joint ventures. The Partnership has a 59 percent interest in Williston Real
Estate Joint Venture, an 18.61% interest in Des Moines Real Estate Joint
Venture, a 31.13% interest in Kingsville Real Estate Joint Venture and an 87.54%
interest in Middleburg Joint Venture. The
3
<PAGE>
Partnership and its joint venture partners are also jointly and severally liable
for all debts, obligations and other liabilities of the joint ventures.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of any of the joint venturers or by an event of
dissolution. Events of dissolution include the bankruptcy, insolvency or
termination of any joint venturer, sale of the Property owned by the joint
venture and mutual agreement of the Partnership and its joint venture partners
to dissolve the joint venture.
The Partnership shares management control equally with affiliates of
the General Partners for each joint venture. The joint venture agreements
restrict each venturer's ability to sell, transfer or assign its joint venture
interest without first offering it for sale to its joint venture partners,
either upon such terms and conditions as to which the venturers may agree or, in
the event the venturers cannot agree, on the same terms and conditions as any
offer from a third party to purchase such joint venture interest.
Net cash flow from operations of Williston Real Estate Joint Venture,
Des Moines Real Estate Joint Venture, Kingsville Real Estate Joint Venture and
Middleburg Joint Venture is distributed 59 percent, 18.61%, 31.13% and 87.54%,
respectively, to the Partnership and the balance is distributed to each of the
joint venture partners in accordance with its respective percentage interest in
the joint venture. Any liquidation proceeds, after paying joint venture debts
and liabilities and funding reserves for contingent liabilities, will be
distributed first to the joint venture partners with positive capital account
balances in proportion to such balances until such balances equal zero, and
thereafter in proportion to each joint venture partner's percentage interest in
the joint venture.
The use of joint venture arrangements allows the Partnership to fully
invest its available funds at times at which it would not have sufficient funds
to purchase an additional property, or at times when a suitable opportunity to
purchase an additional property is not available. The use of joint venture
arrangements also provides the Partnership with increased diversification of its
portfolio among a greater number of properties.
Certain Management Services
CNL Income Fund Advisors, Inc., an affiliate of the General Partners,
provided certain services relating to management of the Partnership and its
Properties pursuant to a management agreement with the Partnership through
December 31, 1995. Under this agreement, CNL Income Fund Advisors, Inc. was
responsible for collecting rental payments, inspecting the Properties and the
tenants' books and records, assisting the Partnership in responding to tenant
inquiries and notices and providing information to the Partnership about the
status of the leases and the Properties. CNL Income Fund Advisors, Inc. also
assisted the General Partners in negotiating the leases. For these services,
4
<PAGE>
the Partnership had agreed to pay CNL Income Fund Advisors, Inc. an annual fee
of one percent of the sum of gross rental revenues from Properties wholly owned
by the Partnership plus the Partnership's allocable share of gross revenues of
joint ventures in which the Partnership is a co-venturer, but not in excess of
competitive fees for comparable services.
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and its obligations under, the management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
management agreement, including the payment of fees, as described above, remain
unchanged.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL Fund Advisors, Inc. perform
certain services for the Partnership. In addition, the General Partners have
available to them the resources and expertise of the officers and employees of
CNL Group, Inc., a diversified real estate company, and its affiliates, who may
also perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1997, the Partnership owned 48 Properties. Of the 48
Properties, 44 are owned by the Partnership in fee simple and four are owned
through joint venture arrangements. See Item 1. Business - Joint Venture
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation filed with this report for a listing of
the Properties and their respective costs, including acquisition fees and
certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 9,200
to 467,400 square feet depending upon building size and local demographic
factors. Sites purchased by the Partnership are in locations zoned for
commercial use which have been reviewed for traffic patterns and volume.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
5
<PAGE>
State Number of Properties
Alabama 1
Arizona 5
California 2
Florida 4
Georgia 5
Louisiana 1
Missouri 2
Mississippi 2
North Carolina 6
New Mexico 1
Ohio 2
South Carolina 2
Tennessee 5
Texas 9
Washington 1
------
TOTAL PROPERTIES: 48
======
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes range from approximately
2,100 to 11,400 square feet. All buildings on Properties are freestanding and
surrounded by paved parking areas. Buildings are suitable for conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations. As of December 31, 1997, the Partnership had no plans for
renovation of the Properties. Depreciation expense is computed for buildings and
improvements using the straight line method using a depreciable life of 40 years
for federal income tax purposes. As of December 31, 1997, the aggregate cost
basis of the Properties owned by the Partnership and joint ventures for federal
income tax purposes was $36,384,555 and $4,397,441, respectively.
6
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
Burger King 2
Denny's 9
Golden Corral 2
Hardee's 11
Jack in the Box 10
KFC 1
Long John Silver's 9
Mill Avenue Sports Rock Cafe 1
Quincy's 1
Shoney's 2
------
TOTAL PROPERTIES 48
======
The General Partners consider the Properties to be
7
<PAGE>
well-maintained and sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 1997, 1995, 1994, and 1993 all of the Properties were
occupied. At December 31, 1996, 98% of the Properties were leased. The following
is a schedule of the average annual rent for each of the five years ended
December 31:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- ----------
<S> <C>
Rental Income (1) $4,443,606 $4,442,092 $4,489,250 $4,485,134 $3,341,215
Properties 48 48 48 48 48
Average Rent per Unit $92,575 $92,544 $93,526 $93,440 $69,609
</TABLE>
(1) Rental revenues include the Partnership's share of rental revenues from the
four Properties owned through joint venture arrangements. Rental revenues
have been adjusted, as applicable, for any amounts for which the Partnership
has established an allowance for doubtful accounts.
8
<PAGE>
The following is a schedule of lease expirations for leases in place as of
December 31, 1997 for each of the ten years beginning with 1998 and thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
<S> <C>
1998 - - -
1999 - - -
2000 - - -
2001 - - -
2002 - - -
2003 - - -
2004 - - -
2005 - - -
2006 - - -
2007 2 257,662 5.88%
Thereafter 46 4,126,177 94.12%
------- --------------- --------------
Totals 48 4,383,839 100.00%
======= =============== ==============
</TABLE>
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1997 (see Item 1. Business Major
Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Flagstar Corporation leases 11 Hardee's restaurants, three Denny's
restaurants, and one Quincy's restaurant. The initial term of each lease is 20
years (expiring between 2012 and 2013) and the average minimum base annual rent
is approximately $77,900 (ranging from approximately $51,400 to $128,800).
Long John Silver's, Inc. leases eight Long John Silver's restaurants. The
initial term of each lease is 20 years (expiring between 2012 and 2013) and the
average minimum base annual rent is approximately $70,000 (ranging from
approximately $61,600 to $76,300).
Foodmaker, Inc. leases ten Jack in the Box restaurants. The initial term
of each lease is 18 years (expiring between 2010 and 2011) and the average
minimum base annual rent is approximately $98,200 (ranging from approximately
$75,900 to $123,400).
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
At the time the Partnership elects to dispose of its Properties, other
than as a result of the exercise of tenant options to purchase Properties, the
Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
10
<PAGE>
PART II
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Partnership was organized on August 20, 1991, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are triple-net leases, with the lessees generally responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1997, the Partnership owned 48 Properties, either directly or through joint
venture arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended December
31, 1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $3,806,988, $3,951,689 and
$3,819,362 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, and the
increase during 1996, as compared to 1995, are primarily a result of changes in
income and expenses as described in "Results of Operations" below and changes in
the Partnership's working capital during each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
In April 1996, the Partnership sold its Property in Houston, Texas, to an
unrelated third party for $1,640,000. As a result of this transaction, the
Partnership recognized a loss of $15,355 for financial reporting purposes
primarily due to acquisition fees and miscellaneous acquisition expenses that
the Partnership had allocated to this Property. In May 1996, the Partnership
reinvested the sales proceeds from this sale, along with additional funds, in
Middleburg Joint Venture. The Partnership has an 87.54% interest in the profits
and losses of Middleburg Joint Venture and the remaining interest in this joint
venture is held by an affiliate of the Partnership which has the same General
Partners.
In March 1997, the Partnership entered into a new lease for the Property
in Tempe, Arizona. In connection therewith, the Partnership incurred $55,000 in
renovation costs during the year ended December 31, 1997. The renovations were
completed in may 1997.
None of the Properties owned by the Partnership or the joint ventures in
which the Partnership owns an interest, is or may be encumbered. Subject to
certain restrictions on borrowing, however, the Partnership may borrow funds but
will not encumber any of the Properties in connection with any such borrowing.
The Partnership will not borrow for the purpose of returning capital to the
Limited Partners. The Partnership will not borrow under arrangements that would
make the Limited Partners liable to
12
<PAGE>
creditors of the Partnership. The General Partners further have represented that
they will use their reasonable efforts to structure any borrowing so that it
will not constitute "acquisition indebtedness" for federal income tax purposes
and also will limit the Partnership's outstanding indebtedness to three percent
of the aggregate adjusted tax basis of its Properties. Affiliates of the General
Partners from time to time incur certain operating expenses on behalf of the
Partnership for which the Partnership reimburses the affiliates without
interest.
Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of Properties, pending reinvestment in an additional
Property, are invested in money market accounts or other short-term highly
liquid investments such as demand deposit accounts at commercial banks, CDs and
money market accounts with less than a 30-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or to make
distributions to partners. At December 31, 1997, the Partnership had $1,706,415
invested in such short-term investments as compared to $1,800,601 at December
31, 1996. As of December 31, 1997, the average interest rate earned on the
rental income deposited in demand deposit accounts at commercial banks was
approximately three percent annually. The funds remaining at December 31, 1997,
after payment of distributions and other liabilities, will be used 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.
Due to low operating expenses and ongoing cash flow, the General Partners
believe that the Partnership has sufficient working capital reserves at this
time. In addition, because all leases of the Partnership's Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
13
<PAGE>
The Partnership generally distributes cash from operations remaining after
the payment of the operating expenses of the Partnership, to the extent that the
General Partners determine that such funds are available for distribution. Based
on cash from operations, the Partnership declared distributions to the Limited
Partners of $3,825,008 for each of the years ended December 31, 1997 and 1996,
and $3,870,007 for the year ended December 31, 1995. This represents a
distribution of $0.85 per Unit for each of the years ended December 31, 1997 and
1996, and $0.86 per Unit for the year ended December 31, 1995. No amounts
distributed or to be distributed to the Limited Partners for the years ended
December 31, 1997, 1996 and 1995, are required to be or have been treated by the
Partnership as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Partnership
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
During 1997, 1996 and 1995, affiliates of the General Partners
incurred on behalf of the Partnership $97,078, $118,929 and $105,019,
respectively, for certain operating expenses. As of December 31, 1997 and 1996,
the Partnership owed $6,887 and $2,981, respectively, to affiliates for such
amounts and accounting and administrative services. As of February 28, 1998, the
Partnership had reimbursed the affiliates all such amounts. Other liabilities
including distributions payable decreased to $1,006,791 at December 31, 1997,
from $1,050,051 at December 31, 1996, primarily as the result of a decrease in
rents paid in advance at December 31, 1997. 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 years ended December 31, 1996 and 1995, the Partnership owned
and leased 45 wholly owned Properties (including one Property in Houston, Texas,
which was sold in April 1996). During 1997, the Partnership owned and leased 44
wholly owned Properties. In addition, during 1995, the Partnership was a
co-venturer in three separate joint ventures that each owned and leased one
Property, and during 1996 and 1997, the Partnership was a co-venturer in four
separate joint ventures that each owned and leased one Property. As of December
31, 1997, the Partnership owned, either directly or through joint venture
arrangements, 48 Properties which are subject to long-term, triple-net leases.
The leases of the Properties provide for minimum base annual rental payments
(payable in monthly installments) ranging from approximately $46,900 to
$213,800. The majority of the leases provide for percentage rent based on sales
in excess of a specified amount. In addition, some of the leases provide that,
commencing in specified lease years
14
<PAGE>
(generally the sixth lease year), the annual base rent required under the terms
of the lease will increase. For further description of the Partnership's leases
and Properties, see Item 1. Business -Leases and Item 2. Properties,
respectively.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
earned $4,102,842, $4,165,640 and $4,330,100, respectively, in rental income
from operating leases and earned income from direct financing leases from
Properties wholly owned by the Partnership. The decrease in rental and earned
income during 1997 and 1996, each as compared to the previous year, is primarily
attributable to a decrease of approximately $51,800 and $136,500 during the
years ended December 31, 1997 and 1996, respectively, as a result of the sale of
the Property in Houston, Texas, in April 1996, as discussed above in "Capital
Resources."
In addition, rental and earned income also decreased approximately $23,500
and $39,800 during 1997 and 1996, each as compared to the previous year, as a
result of the fact that the tenant of the Property in Tempe, Arizona, declared
bankruptcy and ceased operations of the restaurant business located on the
Property in June 1996. As a result of the termination of this lease, during the
year ended December 31, 1996, the Partnership reclassified this lease from a
direct financing lease to an operating lease. In March 1997, the Partnership
entered into a new lease for the Property in Tempe, Arizona with a new tenant to
operate the Property for which rental payments commenced in July 1997. The
decrease in rental and earned income during 1997, as compared to 1996, was
partially offset by an increase in rental income of $38,600 earned from the new
tenant during 1997.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
also earned $54,330, $67,652 and $70,819, respectively, in contingent rental
income. The decrease in contingent rental income during 1997 and 1996, each as
compared to the previous year, is primarily attributable to decreased gross
sales of certain restaurant Properties requiring the payments of contingent
rental income.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $277,325, $200,499 and $81,582, respectively, attributable to
net income earned by joint ventures in which the Partnership is a co-venturer.
The increase in net income earned by joint ventures during 1997 and 1996, each
as compared to the previous year, is primarily due to the fact that the
Partnership invested in Middleburg Joint Venture in May 1996, as described above
in "Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
three of the Partnership's lessees (or group of affiliated lessees), Long John
Silver's, Inc., Foodmaker, Inc. and Flagstar Corporation, each contributed more
than ten percent of the Partnership's total rental income (including the
Partnership's share of rental income from four Properties owned by joint
ventures). As of December 31, 1997, Long John Silver's, Inc. was the lessee
under leases relating to eight restaurants, Foodmaker, Inc. was the lessee under
leases relating to ten
15
<PAGE>
restaurants and Flagstar Corporation was the lessee under leases relating to 15
restaurants. It is anticipated that based on the minimum rental payments
required by the leases, these three lessees or group of affiliated lessees each
will continue to contribute more than ten percent of the Partnership's total
rental income during 1998 and subsequent years. In addition, during at least one
of the years ended December 31, 1997, 1996 and 1995, four Restaurant Chains,
Long John Silver's, Hardee's, Jack in the Box and Denny's, each accounted for
more than ten percent of the Partnership's total rental income (including the
Partnership's share of rental income from four Properties owned by joint
ventures). In subsequent years, it is anticipated that these four Restaurant
Chains each will continue to account for more than ten percent of the
Partnership's total rental income to which the Partnership is entitled under the
terms of the leases. Any failure of these lessees or Restaurant Chains could
materially affect the Partnership's income.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
also earned $87,719, $119,267 and $88,070, respectively, in interest and other
income. The decrease in interest and other income during 1997, as compared to
1996, and the increase in interest and other income during 1996, as compared to
1995, is primarily attributable to the Partnership granting certain easement
rights during 1996, to the owner of the Property adjacent to the Partnership's
Property in Black Mountain, North Carolina, in exchange for $25,000. In
addition, the decrease in interest and other income during 1997, as compared to
1996, is offset by an increase attributable to the Partnership recognizing
approximately $7,900 in other income due to the fact that the former tenant of
the Property in Tempe, Arizona, paid past due real estate taxes relating to the
Property and the Partnership reversed such amounts during 1997 that it had
previously accrued as payable during 1996.
Operating expenses, including depreciation and amortization expense, were
$570,002, $594,660 and $556,199 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, and the increase in 1996, as compared to 1995, is partially
attributable to the fact that during 1996, the Partnership recorded current and
past due real estate taxes relating to the Property in Tempe, Arizona, due to
financial difficulties the tenant was experiencing. As discussed above, the
amounts accrued during 1996 were reversed and recorded as other income during
1997. No real estate taxes were recorded during 1997 relating to the Property in
Tempe, Arizona, due to the fact that the new tenant is responsible for the real
estate taxes under the terms of the new lease.
In addition, the decrease in operating expenses during 1997, as compared
to 1996, is partially attributable to a decrease in accounting and
administrative expenses associated with operating the Partnership and its
Properties. The decrease in operating expenses during 1997, as compared to 1996,
and the increase in 1996, as compared to 1995, is partially attributable to the
Partnership incurring certain expenses, such as insurance and
16
<PAGE>
legal fees during 1996, due to the former tenant of the Property in Tempe,
Arizona declaring bankruptcy during 1996. The increase in operating expenses
during 1996, as compared to 1995, is primarily attributable to an increase in
accounting and administrative expenses associated with operating the Partnership
and its Properties and an increase in insurance expense as a result of the
General Partners' obtaining contingent liability and property coverage for the
Partnership beginning in May 1995.
The decrease in operating expenses during 1997, was partially offset by an
increase in depreciation expense as a result of the reclassification of the
lease relating to the Property in Tempe, Arizona, from a direct financing lease
to an operating lease, as described above in "Capital Resources." The increase
in operating expenses during 1996, as compared to 1995, was partially offset by
a decrease in depreciation expense during the year ended December 31, 1996, as a
result of the sale of the Property located in Houston, Texas, in April 1996, as
described above in "Capital Resources."
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on their computer package software.
The hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the General Partners do not expect this matter to materially impact
how the Partnership conducts business nor its future results of operations or
financial position.
As a result of the sale of the Property in Houston, Texas, as described
above in "Capital Resources," the Partnership recognized a loss of $15,355 for
financial reporting purposes for the year ended December 31, 1996. The loss was
primarily due to acquisition fees and miscellaneous acquisition expenses that
the Partnership had allocated to this Property. No Properties were sold during
1995 and 1997.
The Partnership's leases as of December 31, 1997, are triple-net leases
and contain provisions that the General Partners believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also may cause capital appreciation of the
Partnership's Properties. Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
July, 1999.
<PAGE>
CNL INCOME FUND XII, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
---------------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
---------------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
---------------------------
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ Robert A. Bourne President, Treasurer and Director July 29, 1999
- -------------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Oficer and Director July 29, 1999
- -------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
