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 June 30, 1999
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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
0-21558
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CNL Income Fund XII, Ltd.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Florida 59-3078856
- ------------------------------------------------------ ------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East South Street
Orlando, Florida 32801
- ------------------------------------------------------ ------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
------------------------------------------------
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _________
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets
Condensed Statements of Income
Condensed Statements of Partners' Capital
Condensed Statements of Cash Flows
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II
Other Information
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------- -------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,952,802 and
$1,795,099, respectively, and allowance for
loss on building of $206,535 in 1998 $ 20,087,965 $ 20,703,333
Net investment in direct financing leases 12,378,531 12,471,978
Investment in joint ventures 2,722,141 2,522,004
Mortgage note receivable 54,294 --
Cash and cash equivalents 2,484,668 2,362,980
Receivables, less allowance for doubtful accounts
of $3,620 and $214,633, respectively 79,416 16,862
Prepaid expenses 17,622 7,038
Lease costs, less accumulated amortization
of $4,252 and $3,256, respectively 25,301 26,297
Accrued rental income, less allowance for doubtful
accounts of $6,323 in 1999 and 1998 2,624,549 2,524,406
------------------- -------------------
$ 40,474,487 $ 40,634,898
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 99,964 $ 21,195
Accrued and escrowed real estate taxes payable 20,302 10,137
Distributions payable 956,252 1,091,252
Due to related party 28,712 24,025
Rents paid in advance and deposits 36,808 97,448
------------------- -------------------
Total liabilities 1,142,038 1,244,057
Commitments and Contingencies (Note 5)
Partners' capital 39,332,449 39,390,841
------------------- -------------------
$40,474,487 $40,634,898
=================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C>
Revenues:
Rental income from operating leases $629,748 $658,592 $1,234,632 $
1,285,138
Adjustments to accrued rental income -- (224,867 ) -- (224,867 )
Earned income from direct financing leases 372,240 390,877 748,574 798,551
Contingent rental income 2,311 6,295 4,682 13,717
Interest and other income 25,180 29,430 44,935 44,682
------------ ------------ ------------ ------------
1,029,479 860,327 2,032,823 1,917,221
------------ ------------ ------------ ------------
Expenses:
General operating and administrative 31,597 31,541 78,881 66,006
Professional services 11,435 -- 22,576 12,986
Bad debt expense -- 75,699 -- 84,667
Management fees to related party 10,925 10,971 21,455 21,551
Real estate taxes 1,371 1,152 3,496 1,152
State and other taxes -- 405 20,764 17,653
Depreciation and amortization 84,071 80,078 168,777 160,072
Transaction costs 92,263 -- 127,682 --
------------ ------------ ------------ ------------
231,662 199,846 443,631 364,087
------------ ------------ ------------ ------------
Income Before Equity in Earnings (Loss) of
Joint Ventures and Gain on Sale of Land and
Building 797,817 660,481 1,589,192 1,553,134
Equity in Earnings (Loss) of Joint Ventures 119,068 (43,758 ) 190,206 21,892
Gain on Sale of Land and Building 74,714 -- 74,714 --
------------ ------------ ------------ ------------
Net Income $ 991,599 $ 616,723 $1,854,112 $
1,575,026
============ ============ ============ ============
Allocation of Net Income:
General partners $ 9,270 $ 6,167 $ 17,895 $ 15,750
Limited partners 982,329 610,556 1,836,217 1,559,276
------------ ------------ ------------ ------------
$ 991,599 $ 616,723 $1,854,112 $1,575,026
============ ============ ============ ============
Net Income Per Limited Partner Unit $ 0.22 $ 0.14 $ 0.41 $ 0.35
============ ============ ============ ============
Weighted Average Number of Limited Partner
Units Outstanding 4,500,000 4,500,000 4,500,000 4,500,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
------------------------- -----------------------
<S> <C>
General partners:
Beginning balance $ 223,305 $ 192,411
Net income 17,895 30,894
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241,200 223,305
------------------------- -----------------------
Limited partners:
Beginning balance 39,167,536 40,224,901
Net income 1,836,217 2,902,643
Distributions ($0.43 and $0.88 per
limited partner unit, respectively) (1,912,504 ) (3,960,008 )
------------------------- -----------------------
39,091,249 39,167,536
------------------------- -----------------------
Total partners' capital $ 39,332,449 $ 39,390,841
========================= =======================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---------------- ---------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $1,837,011 $2,183,206
---------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 467,300 --
Investment in joint venture (135,825 ) --
Collections on mortgage note receivable 706 --
Payment of lease costs -- (3,500 )
---------------- ---------------
Net cash provided by (used in) investing
activities 332,181 (3,500 )
---------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,047,504 ) (1,912,504 )
---------------- ---------------
Net cash used in financing activities (2,047,504 ) (1,912,504 )
---------------- ---------------
Net Increase in Cash and Cash Equivalents 121,688 267,202
Cash and Cash Equivalents at Beginning of Period 2,362,980 1,706,415
---------------- ---------------
Cash and Cash Equivalents at End of Period $2,484,668 $1,973,617
================ ===============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage note accepted in exchange for
sale of land and building $ 55,000 $ --
================ ===============
Distributions declared and unpaid at
end of period $ 956,252 $ 956,252
================ ===============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 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 six months ended June 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 XII, Ltd. (the "Partnership") for the year ended December
31, 1998.
2. Land and Buildings on Operating Leases:
At December 31, 1998, the Partnership had recorded an allowance for
loss on building of $206,535 relating to the property in Morganton,
North Carolina, 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 May 1999, the Partnership sold this property to an
unrelated third party for $550,000, received $467,300 in cash and
accepted the remaining net sales proceeds in the form of a promissory
note (See Note 3), resulting in a gain of $74,714 for financial
reporting purposes. This gain, when netted against the allowance
recorded at December 31, 1998, resulted in a total net loss of
approximately $131,800.
3. Mortgage Note Receivable:
In connection with the sale of the property in Morganton, North
Carolina, in May 1999, the Partnership accepted a promissory note in
the principal sum of $55,000 collateralized by a mortgage on the
property. The promissory note bears interest at a rate of 10.25% per
annum and is being collected in 60 monthly installments of principal
and interest.
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
4. Concentration of Credit Risk:
The following schedule presents total rental and earned income
(including mortgage interest income) from individual restaurant chains,
each representing more than ten percent of the Partnership's total
rental and earned income (including the Partnership's share of rental
and earned income from joint ventures) for each of the six months ended
June 30:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C>
Jack in the Box $512,334 $511,296
Denny's 403,411 377,287
Hardee's 388,484 392,060
Golden Corral 243,680 N/A
Long John Silver's 236,194 335,117
</TABLE>
The information denoted by N/A indicates that for the applicable period
presented, the chain did not represent more than ten percent of the
Partnership's total rental and earned income.
In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy
and rejected the leases relating to three of its eight Properties and
ceased making rental payments to the Partnership. In December 1998 and
May 1999, the Partnership sold two of the vacant properties. In July
1999, the Partnership entered into a new lease with a new tenant for
the remaining vacant property for which rental payments are expected to
commence in the third quarter of 1999. While Long John Silver's, Inc.
has not rejected or affirmed the remaining five leases, there can be no
assurance that some or all of the leases will not be rejected in the
future. The lost revenues that would result in the event the remaining
five leases are rejected could have an adverse effect on the results of
operations of the Partnership, if the Partnership is not able to
re-lease these properties in a timely manner.
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any of these restaurant
chains could significantly impact the results of operations of the
Partnership, if the Partnership is not able to re-lease the properties
in a timely manner.
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
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 2,384,248 shares of its common stock, par value $0.01 per share
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the
price paid by APF investors (after an adjustment for a one for two
reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. 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 Partnership's property portfolio and other
assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $46,951,127 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 fourth quarter of 1999, 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 and CNL Fund Advisors, Inc. and certain of its affiliates
in connection with the proposed Merger. 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund XII, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on August 20, 1991, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, 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 leases
are generally triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of June 30, 1999,
the Partnership owned 47 Properties, which included interests in five Properties
owned by joint ventures in which the Partnership is a co-venturer.
Capital Resources
The Partnership's primary source of capital for the six months ended
June 30, 1999 and 1998, was cash from operations (which includes cash received
from tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $1,837,011 and
$2,183,206, for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, is primarily a result of changes
in the Partnership's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In August 1998, the Partnership entered into a joint venture
arrangement, Columbus Joint Venture, with affiliates of the general partners, to
construct, own and lease one restaurant Property. As of June 30, 1999, the
Partnership had contributed approximately $251,100, of which approximately
$135,800 was contributed during the six months ended June 30, 1999, to the joint
venture to purchase land and pay for construction costs relating to the joint
venture. As of June 30, 1999, the Partnership owned an approximate 28 percent
interest in the profits and losses of the joint venture.
In May 1999, the Partnership sold its Property in Morganton, North
Carolina, to an unrelated third party for $550,000 and received $467,300 in cash
and accepted the remaining sales proceeds in the form of a promissory note in
the principal sum of $55,000. The Partnership had recorded an allowance for loss
on building relating to this Property of $206,535 at December 31, 1998 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. At June 30, 1999 the
Partnership recorded a gain relating to the sale of this Property of $74,714,
for financial reporting purposes, resulting in an overall net loss relating to
the sale of this Property of approximately $131,800. The promissory note is
collateralized by a mortgage on the Property. The promissory note bears interest
at a rate of 10.25% per annum and is being collected in 60 monthly installments
of principal and interest. Net sales proceeds of $467,300 received in cash and
proceeds received from the collection of this promissory note will be used to
reinvest in an additional Property.
Currently, rental income from the Partnership's Properties and net
sales proceeds from the sale of Properties, pending reinvestment in additional
Properties are invested in money market accounts or other short-term, highly
liquid investments such as demand deposits at 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. At June 30, 1999, the Partnership had
$2,484,668 invested in such short-term investments, as compared to $2,362,980 at
December 31, 1998. The funds remaining at June 30, 1999, after payment of
distributions and other liabilities, will be used to acquire 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 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 cash from operations, the Partnership declared distributions to
the limited partners of $1,912,504 for each of the six months ended June 30,
1999 and 1998 ($956,252 for each of the quarters ended June 30, 1999 and 1998).
This represents distributions for each applicable six months of $0.43 per unit
($0.21 per unit for each applicable quarter). No distributions were made to the
general partners for the quarters and six months ended June 30, 1999 and 1998.
No amounts distributed to the limited partners for the six months ended June 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 decreased to $1,142,038 at June
30, 1999, from $1,244,057 at December 31, 1998, primarily as a result of the
Partnership paying in January 1999, a special distribution to the limited
partners of $135,000 accrued at December 31, 1998. 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.
<PAGE>
Results of Operations
During the six months ended June 30, 1998, the Partnership owned and
leased 44 wholly owned Properties (which included one Property sold in December
1998), and during the six months ended June 30, 1999, the Partnership owned and
leased 43 wholly owned Properties (which included one Property sold in May 1999)
to operators of fast-food and family-style restaurant chains. During the six
months ended June 30, 1999 and 1998, the Partnership earned $1,983,206 and
$1,858,822, respectively, in rental income from operating leases (net of
adjustments to accrued rental income) and earned income from direct financing
leases from these Properties, $1,001,988 and $824,602 of which was earned during
the quarters ended June 30, 1999 and 1998, respectively. Rental and earned
income was lower during the quarter and six months ended June 30, 1998, as
compared to the quarter and six months ended June 30, 1999, due to the fact that
in June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected the
leases relating to three of the eight Properties that it leased. As a result,
the tenant ceased making rental payments on the three rejected leases, and
during the quarter and six months ended June 30, 1998, the Partnership wrote off
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 these
Properties. No amounts were written-off during the quarter and six months ended
June 30, 1999. The effect from the write-off of accrued rental income was
partially offset by the fact that the Partnership recorded rental and earned
income during the quarter and six months ended June 30, 1998, prior to the
tenant vacating the Properties in June 1998. No rental and earned income was
recognized during the quarter and six months ended June 30, 1999 from the former
tenant. The Partnership has continued receiving rental payments relating to the
five leases not rejected by the tenant. In December 1998 and May 1999, the
Partnership sold two of the vacant Properties and intends to reinvest the net
sales proceeds from the sales of these Properties in additional Properties, as
discussed in "Capital Resources". In July 1999, the Partnership entered into a
new lease with a new tenant for the remaining vacant Property. In connection
with the new lease, the tenant has agreed to pay for all construction costs
necessary to convert this Property into a new concept. Conversion of this
Property is expected to be completed during the third quarter of 1999, at which
time rental payments are expected to commence. While Long John Silver's, Inc.
has not rejected or affirmed the remaining five leases, there can be no
assurance that some or all of the leases will not be rejected in the future. The
lost revenues that would result in the event the remaining five leases are
rejected could have an adverse effect on the results of operations of the
Partnership, if the Partnership is not able to re-lease these Properties in a
timely manner.
In addition, during the six months ended June 30, 1998, the Partnership
owned and leased four Properties indirectly through joint venture arrangements
and during the six months ended June 30, 1999, the Partnership owned and leased
five Properties indirectly through joint venture arrangements. In connection
with the joint venture arrangements, during the six months ended June 30, 1999
and 1998, the Partnership earned $190,206 and $21,892, respectively, of which
income of $119,068 and a loss of $43,758 were recognized during the quarters
ended June 30, 1999 and 1998, respectively. Net income earned by joint ventures
was lower during the quarter and six months ended June 30, 1998, as compared to
the quarter and six months ended June 30, 1999, primarily due to the fact that
Kingsville Real Estate Joint Venture (in which the Partnership owns a 31.13%
interest in the profits and losses of the joint venture) established an
allowance for doubtful accounts of approximately $50,800 and $65,900 during the
quarter and six months ended June 30, 1998, respectively, in accordance with its
collection policy. No such allowance was established during the quarter and six
months ended June 30, 1999. In addition, during the quarter and six months ended
June 30, 1998, Kingsville Real Estate Joint Venture established a provision for
loss on land and net investment in direct financing lease for its Property in
Kingsville, Texas for approximately $316,000. The allowance represented the
difference between the Property's carrying value at June 30, 1998 and the
estimated net realizable value of the Property. In January 1999, Kingsville Real
Estate Joint Venture entered into a new lease for this Property with a new
tenant and the general partners ceased collection efforts on the past due
amounts.
During the six months ended June 30, 1999, five restaurant chains, Long
John Silver's, Hardee's, Jack in the Box, Golden Corral, 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 five Properties owned
by joint ventures). During 1998, Long John Silver's Inc. filed for bankruptcy,
as described above. It is anticipated that during the remainder of 1999, Jack in
the Box, Denny's, Golden Corral, and Hardee's 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
restaurant chains could materially affect the Partnership's income if the
Partnership is not able to re-lease the Properties in a timely manner.
Operating expenses, including depreciation and amortization expense,
were $443,631 and $364,087 for the six months ended June 30, 1999 and 1998,
respectively, of which $231,662 and $199,846 were incurred during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was partially a result of the
Partnership incurring $92,263 and $127,682 in transaction costs during the
quarter and six months ended June 30, 1999, respectively, relating 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.
In addition, the increase in operating expenses during the quarter and
six months ended June 30, 1999, was partially attributable to the fact that the
Partnership incurred legal, insurance and real estate tax expenses on the two
Properties for which the leases were rejected and which were vacant during the
quarter and six months ended June 30, 1999, as a result of Long John Silver's,
Inc. filing for bankruptcy, as described above. In addition, the increase in
operating expenses during the quarter and six months ended June 30, 1999, was
partially attributable to an increase in depreciation expense due to the fact
that during 1998, the Partnership reclassified these assets from net investment
in direct financing leases to land and buildings on operating leases. In May
1999, the Partnership sold one of the vacant Properties and in July 1999 the
Partnership entered into a long-term triple net lease with a new tenant for the
remaining vacant Property. The new tenant is responsible for real estate taxes,
insurance and maintenance; therefore, the general partners do not anticipate
that the Partnership will continue to incur these expenses. The Partnership will
incur certain expenses such as real estate taxes, insurance, and maintenance
relating to one or more of the five Properties still leased by Long John
Silver's, Inc. if one or more of the leases are rejected.
The increase in operating expenses during the quarter and six months
ended June 30, 1999 was partially offset by the fact that during the quarter and
six months ended June 30, 1998, the Partnership recorded bad debt expense for
past due principal and interest amounts relating to the loan with the tenant of
the Property in Kingsville Real Estate Joint Venture due to financial
difficulties the tenant experienced. In January 1999, Kingsville Real Estate
Joint Venture entered into a new lease with a new tenant, and the general
partners ceased collection efforts on the past due amounts.
As a result of the sale of the Property in Morganton, North Carolina,
as described above in "Capital Resources," the Partnership recorded a gain of
$74,714 for financial reporting purposes during the quarter and six months ended
June 30, 1999. No Properties were sold during the quarter and six months ended
June 30, 1998.
Proposed Merger
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 2,384,248 shares of its
common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. 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 Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $46,951,127 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 fourth quarter of 1999, 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 and CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. 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.
Year 2000 Readiness Disclosure
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. As of June 30, 1999 the
Partnership did not have any information or non-information technology systems.
The general partners and certain of the affiliates of the general partners
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 affiliates of the general partners 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 of the general partners are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The affiliates of the general partners have no
internally generated programmed software coding to correct because substantially
all of the software utilized by the general partners and affiliates is purchased
or licensed from external providers. The maintenance of non-information
technology systems at the Partnership's Properties is the responsibility of the
tenants of the Properties in accordance with the terms of the Partnership's
leases.
In early 1998, the general partners and affiliates formed a Year 2000
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 certain of the affiliates of the general
partners, including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management. The Y2K Team's initial step in assessing the Partnership's Year 2000
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of the
Partnership's systems could have a potential Year 2000 problem.
The information system of the affiliates of the general partners is
comprised of hardware and software applications from mainstream suppliers.
Accordingly, the Y2K Team is in the process of contacting the respective vendors
and manufacturers to verify the Year 2000 compliance of their products. In
addition, the Y2K Team has requested and is evaluating documentation from other
companies with which the Partnership has a material third party relationship,
including the Partnership's tenants, vendors, financial institutions and the
Partnership's transfer agent. The Partnership depends on its tenants for rents
and cash flows, its financial institutions for availability of cash and its
transfer agent to maintain and track investor information. The Y2K Team has also
requested and is evaluating documentation from the non-information technology
systems providers of the affiliates of the general partners. Although the
general partners continue 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 tenants, financial
institutions, transfer agent, other vendors and system providers have adequately
considered the impact of the Year 2000. The general partners are not able to
measure the effect on the operations of the Partnership of any third party's
failure to adequately address the impact of the Year 2000.
The general partners and their affiliates have identified and have
implemented upgrades for certain hardware equipment. In addition, the general
partners and their affiliates have identified certain software applications
which will require upgrades to become Year 2000 compliant. The general partners
expect that all of these upgrades, as well as any other necessary remedial
measures on the information technology systems used in the business activities
and operations of the Partnership, to be completed by September 30, 1999,
although, the general partners cannot be assured that the upgrade solutions
provided by the vendors have addressed all possible Year 2000 issues. The
general partners do not expect the aggregate cost of the Year 2000 remedial
measures to be material to the results of operations of the Partnership.
The general partners and their affiliates have received certification
from the Partnership's transfer agent of its Year 2000 compliance. Due to the
material relationship of the Partnership with its transfer agent, the Y2K Team
is evaluating the Year 2000 compliance of the systems of the transfer agent and
expects to have the evaluation completed by September 30, 1999. Despite the
positive response from the transfer agent and the evaluation of the transfer
agent's system by the Y2K Team, the general partners cannot be assured that the
transfer agent has addressed all possible Year 2000 issues. In the event that
the systems of the transfer agent are not Year 2000 compliant, the general
partners and their affiliates will 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 Partnership.
Based upon the progress the general partners and their affiliates have
made in addressing the Year 2000 issues and their plan and timeline to complete
the compliance program, the general partners do not foresee significant risks
associated with Year 2000 compliance at this time. The general partners and
their affiliates plan to address their significant Year 2000 issues prior to the
Partnership being affected by them; therefore, we have not developed a
comprehensive contingency plan. However, if the general partners and their
affiliates identify significant risks related to their Year 2000 compliance, or
if their progress deviates from the anticipated timeline, the general partners
and their affiliates will develop contingency plans as deemed necessary at that
time.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Partnership has provided a fixed rate mortgage note to a borrower.
The general partners believe that the estimated fair value of the mortgage note
at June 30, 1999 approximated the outstanding principal amounts. The Partnership
is exposed to equity loss in the event of changes in interest rates. The
following table presents the expected cash flows of principal that are sensitive
to these changes.
Mortgage note
Fixed Rate
-----------------------------
1999 $ 4,362
2000 9,421
2001 10,433
2002 11,554
2003 12,796
Thereafter 5,728
-------------
$54,294
=============
<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.
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.
<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 and as amended June
4, 1999 (Filed as Appendix B to the Prospectus
Supplement for the Registrant, constituting a
part of Amendment No. 1 to the Registration
Statement of APF on Form S-4, File No. 74329.)
3.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund XII, Ltd. (Included as Exhibit
3.2 to Registration Statement No. 33-43278-01 on
Form S-11 and incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund XII, Ltd. (Included as Exhibit
3.2 to Registration Statement No. 33-43278-01 on
Form S-1 and incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited
Partnership of CNL Income Fund XII, Ltd.
(Included as Exhibit 4.2 to Form 10-K filed with
the Securities and Exchange Commission on April
15, 1993, and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund XII,
Ltd. and CNL Investment Company (Included as
Exhibit 10.1 to Form 10-K filed with the
Securities and Exchange Commission on April 15,
1993, 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 31, 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.)
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 11th day of August, 1999.
By: CNL INCOME FUND XII, LTD.
General Partner
By: /s/ James M. Seneff, Jr.
-----------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
-----------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund XII, Ltd. at June 30, 1999, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10-Q of CNL Income Fund XII, Ltd. for the six months ended June 30,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,484,668
<SECURITIES> 0
<RECEIVABLES> 83,036
<ALLOWANCES> 3,620
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 22,040,767
<DEPRECIATION> 1,952,802
<TOTAL-ASSETS> 40,474,487
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,332,449
<TOTAL-LIABILITY-AND-EQUITY> 40,474,487
<SALES> 0
<TOTAL-REVENUES> 2,032,823
<CGS> 0
<TOTAL-COSTS> 443,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,854,112
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,854,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854,112
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund XII, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
