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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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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
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) 650-1000
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 4,500,000 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
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The Form 10-K of CNL Income Fund XII, Ltd. for the year ended December 31,
1998 is being amended to revise the disclosure under Item 1. Business, Item 2.
Properties, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 8. Financial Statements and Supplementary
Data.
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. During the year ended December 31, 1998, the
Partnership entered into a joint venture arrangement, Columbus Joint Venture,
with affiliates of the General Partners, to construct and hold one restaurant
Property. In addition, during 1998, the Partnership sold the Property in Monroe,
North Carolina. As a result of the above transactions, as of December 31, 1998,
the Partnership owned 48 Properties. The 48 properties include five 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.
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").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger. 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.
In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties, the
General Partners will consider factors such as potential capital appreciation,
net cash flow and federal income tax considerations. Certain lessees also have
been granted options to purchase Properties, generally at the Property's then
fair market value after a specified portion of the lease term has elapsed. 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.
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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 2018. The leases are generally 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 $48,000 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. Fair market value will be determined through an appraisal by an
independent appraisal firm. 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 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and
rejected the leases relating to three of its eight leases and ceased making
rental payments to the Partnership under these rejected leases. In December
1998, the Partnership sold one of the vacant Properties and intends to reinvest
the net sales proceeds from the sale of this Property in an additional Property.
The Partnership will not recognize rental and earned income from the two
remaining vacant Properties until new tenants for these Properties are located
or until the Properties are sold and the proceeds from such sales are reinvested
in additional Properties. As of March 11, 1999, the Partnership has received
rental payments on the five leases that were not rejected. 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 resulting from the two vacant Properties, as described
above, and the possible rejection of the remaining five leases 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. The
General Partners are currently seeking either new tenants or purchasers for the
two remaining vacant Properties.
During 1994, the leases relating to the Properties in Columbus, Georgia,
and Amherst, Ohio were amended to provide for the payment of reduced annual base
rent with no scheduled rent increases. However, the lease amendments provided
for lower percentage rent breakpoints, as compared to the original lease
agreements, a change that was designed to result in higher percentage rent
payments at any time that percentage rent became payable. In accordance with a
provision in the amendments, as a result of the former tenant assigning the
leases to a new tenant during 1998, the rents under the assigned leases reverted
back to those required under the original lease agreements.
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with affiliates of the General Partners, to construct
and hold one restaurant Property. 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.
During 1998, the tenant of the Property in Kingsville Real Estate Joint
Venture experienced financial difficulties and ceased payment of rents under the
terms of its lease agreement. In January 1999, Kingsville Real Estate Joint
Ventu re entered into a five year lease with a new tenant.
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Major Tenants
During 1998, four lessees (or groups of affiliated lessees) of the
Partnership, (i) Long John Silver's, Inc., (ii) Denny's, Inc. and Quincy's, Inc.
(which are affiliated entities under common control of Advantica Restaurant
Group, Inc.) (hereinafter referred to as "Advantica Restaurant Group, Inc."),
(iii) Foodmaker, Inc., and (iv) Flagstar Enterprises, Inc., each contributed
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). As of December 31, 1998, Long John Silver's, Inc. was the lessee
under leases relating to five restaurants, (excluding the three leases rejected
by this tenant, as described above), Foodmaker, Inc. was the lessee under leases
relating to ten restaurants, Advantica Restaurant Group, Inc. was the lessee
under leases relating to four restaurants, and Flagstar Enterprises, Inc. was
the lessee under leases relating to 11 restaurants. During 1998, Long John
Silver's, Inc. filed for bankruptcy. It is anticipated that based on the minimum
rental payments required by the leases, Advantica Restaurant Group, Inc.,
Foodmaker, Inc., and Flagstar Enterprises, Inc., each will continue to
contribute more than ten percent of the Partnership's total rental income in
1999. 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 1998 (including the Partnership's share
of rental income from five Properties owned by joint ventures). In 1999, it is
anticipated that Jack in the Box, Denny's, 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 lessees or Restaurant Chains could materially affect the Partnership's
income if the Partnership is not able to re-lease these Properties in a timely
manner. As of December 31, 1998, Foodmaker, Inc. 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 the following 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; Middleburg Joint Venture with CNL Income Fund
VIII, Ltd., an affiliate of the General Partners, to purchase and hold one
Property; and Columbus Joint Venture with CNL Income Fund XVI, Ltd. and CNL
Income Fund XVIII, Ltd., affiliates of the General Partners, to 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 59.05% 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, an 87.54% interest in
Middleburg Joint Venture and a 27.72% interest in Columbus Joint Venture. The
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 even t 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,
Middleburg Joint Venture, and Columbus Joint Venture is distributed 59.05
percent, 18.61%, 31.13% 87.54% and 27.72%, 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
4
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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 Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL Fund Advisors, Inc. is 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 Fund Advisors, Inc. also assists the General Partners in
negotiating the leases. For these services, the Partnership has agreed to pay
CNL 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.
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, 1998, the Partnership owned 48 Properties. Of the 48
Properties, 43 are owned by the Partnership in fee simple and five 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 for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses. This schedule was filed with the Partnership's Form 10-K for the year
ended December 31, 1998.
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.
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The following table lists the Properties owned by the Partnership as of
December 31, 1998 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with the Partnership's Form 10-K for the year ended December
31, 1998.
State Number of Properties
----- --------------------
Alabama 1
Arizona 5
California 2
Florida 4
Georgia 5
Louisiana 1
Missouri 2
Mississippi 2
North Carolina 5
New Mexico 1
Ohio 3
South Carolina 2
Tennessee 5
Texas 9
Washington 1
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TOTAL PROPERTIES: 48
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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, 1998, 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, 1998, the aggregate cost of
the Properties owned by the Partnership and joint ventures for federal income
tax purposes was $35,828,091 and $5,272,142, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 1998 by Restaurant Chain.
Restaurant Chain Number of Properties
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Arby's 1
Burger King 2
Denny's 9
Golden Corral 2
Hardee's 11
Jack in the Box 10
KFC 1
Long John Silver's 8
Quincy's 1
Shoney's 2
Other 1
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TOTAL PROPERTIES: 48
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The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
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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.
As of December 31, 1998, 1997, 1996, 1995 and 1994 the Properties were 96%,
100%, 98%, 100% and 100% occupied, respectively. The following is a schedule of
the average annual rent for each of the five years ended December 31:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Rental Income (1) $4,247,369 $4,443,606 $4,442,092 $4,489,250 $4,485,134
Properties (2) 48 48 48 48 48
Average per Unit $ 88,487 $ 92,575 $ 92,544 $ 93,526 $ 93,440
</TABLE>
(1) Rental income includes the Partnership's share of rental income from the
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.
The following is a schedule of lease expirations for leases in place as of
December 31, 1998 for each of the ten years beginning with 1999 and thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
- ---------------------- ------------------ ------------------ ---------------------
<S> <C> <C> <C>
1999 -- -- --
2000 -- -- --
2001 -- -- --
2002 -- -- --
2003 -- -- --
2004 1 81,228 1.92%
2005 -- -- --
2006 -- -- --
2007 2 257,662 6.09%
2008 -- -- --
Thereafter 43 3,893,730 91.99%
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Totals 46 4,232,620 100.00%
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</TABLE>
(1) Excludes two Properties which were vacant at December 31, 1998.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1998 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business -Leases.
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Flagstar Enterprises, Inc. leases 11 Hardee'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 $74,300 (ranging from approximately
$54,900 to $93,300).
Long John Silver's, Inc. leases five Long John Silver's restaurants. The
initial term of each lease is 20 years (expiring in 2013) and the average
minimum base annual rent is approximately $78,000 (ranging from approximately
$68,900 to $86,800).
Advantica Restaurant Group, Inc. leases three Denny's restaurants and one
Quincy's restaurant. The initial term of each lease is 20 years (expiring in
2012) and the average minimum base annual rent is approximately $111,600
(ranging from approximately $76,800 to $144,200).
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 $107,600 (ranging from approximately $83,500
to $135,300).
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.
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 generally triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1998, 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, 1998, 1997, and 1996, 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 $4,116,780, $3,806,988, and
$3,951,689 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase in cash from operations during 1998, as compared to 1997, is
primarily a result of changes in the Partnership's working capital, and the
decrease in cash from operations during 1997, as compared to 1996, is 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, 1998, 1997 and 1996.
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.
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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 which were completed in May 1997.
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant Property. As of December 31, 1998, the Partnership had
contributed approximately $115,000 to purchase land and pay for construction
costs relating to the joint venture and owned a 27.72% interest in the profits
and losses of this joint venture. When funding is completed, the Partnership
expects to have an approximate 28 percent interest in the profits and losses of
the joint venture.
In December 1998, the Partnership sold its Property in Monroe, North
Carolina, to an unrelated third party, and received net sales proceeds of
$483,549. As a result of this transaction, the Partnership recognized a loss of
$104,374 for financial reporting purposes. The Partnership intends to reinvest
these net sales proceeds in an additional Property.
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 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 additional
Properties, are invested in money market accounts or other short-term highly
liquid investments such as demand deposit accounts at commercial banks, CDs and
money market accounts with less than a 30-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or to make
distributions to partners. At December 31, 1998, the Partnership had $2,362,980
invested in such short-term investments as compared to $1,706,415 at December
31, 1997. The increase in cash and cash equivalents during 1998, is primarily
due to the receipt of $483,549 in net sales proceeds from the 1998 sale of the
Property in Monroe, North Carolina. As of December 31, 1998, 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, 1998, 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.
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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 $3,960,008 for the year ended December 31, 1998, and $3,825,008 for
each of the years ended December 31, 1997 and 1996. This represents a
distribution of $0.88 per Unit for the year ended December 31, 1998, and $0.85
per Unit for each of the years ended December 31, 1997 and 1996. No amounts
distributed or to be distributed to the Limited Partners for the years ended
December 31, 1998, 1997, and 1996, 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 1998, 1997, and 1996, affiliates of the General Partners incurred on
behalf of the Partnership $130,847, $97,078, and $118,929, respectively, for
certain operating expenses. As of December 31, 1998 and 1997, the Partnership
owed $24,025 and $6,887, respectively, to affiliates for such amounts and
accounting and administrative services. As of March 11, 1999, the Partnership
had reimbursed the affiliates all such amounts. Other liabilities including
distributions payable increased to $1,220,032 at December 31, 1998, from
$1,006,791 at December 31, 1997, primarily as the result of the Partnership's
accruing a special distribution of accumulated, excess operating reserves
payable to the Limited Partners of $135,000 at December 31, 1998. The increase
was also partially a result of an increase in rents paid in advance 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.
Results of Operations
During the years ended December 31, 1996, the Partnership owned and leased
45 wholly owned Properties (including one Property in Houston, Texas, which was
sold in April 1996). During 1998 and 1997, the Partnership owned and leased 44
wholly owned Properties (including one Property in Monroe, North Carolina, which
was sold in December 1998). During 1996 and 1997, the Partnership was a
co-venturer in four separate joint ventures that each owned and leased one
Property, and during 1998, the Partnership was a co-venturer in five separate
joint ventures that each owned and leased one Property. As of December 31, 1998,
the Partnership owned, either directly or through joint venture arrangements, 48
Properties which are, in general, 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 $48,000 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. 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, 1998, 1997, and 1996, the Partnership
earned $3,862,390, $4,102,842, and $4,165,640, respectively, in rental income
from operating leases (net of adjustments to accrued rental income) and earned
income from direct financing leases from Properties wholly owned by the
Partnership. Rental and earned income decreased approximately $136,300 during
1998, as compared to 1997, primarily due to the fact that in June 1998, Long
John Silver's, Inc., filed for bankruptcy and rejected the leases relating to
three of its eight leases. As a result, the tenant ceased making rental payments
on the three rejected leases. As of March 11, 1999, the Partnership has
continued receiving rental payments relating to the five leases not rejected by
the tenant. In conjunction with the three rejected leases, during 1998, the
Partnership wrote off approximately $224,900 of accrued rental income (non-cash
accounting adjustments relating to the straight-lining of future scheduled rent
increases over the lease term in accordance with generally accepted accounting
principles). In December 1998, the Partnership sold one of the vacant
Properties, as described above in "Capital Resources," and intends to reinvest
the net sales proceeds from the sale of this Property in an additional Property.
The Partnership will not recognize any rental and earned income from these two
vacant Properties until new tenants for these Properties are located, or until
the Properties are sold and the proceeds from such sales are reinvested in
additional Properties. 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 resulting
from the two vacant Properties, as described above, and the possible rejection
of the
10
<PAGE>
remaining five leases 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. The General Partners are currently seeking either new
tenants or buyers for the two remaining, vacant Properties.
The decrease in rental and earned income during 1997, as compared to 1996,
is primarily attributable to a decrease of approximately $51,800 during the year
ended December 31, 1997 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
during 1997 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 earned from the new tenant
during 1997.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
also earned $23,433, $54,330, and $67,652, respectively, in contingent rental
income. The decrease in contingent rental income during 1998 and 1997, 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, 1998, 1997, and 1996, the
Partnership earned $95,142, $277,325, and $200,499, respectively, attributable
to net income earned by joint ventures in which the Partnership is a co-
venturer. The decrease in net income earned by joint ventures during 1998, as
compared to 1997, is 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 $116,700 during 1998. The tenant of this Property experienced
financial difficulties and ceased payment of rents under the terms of their
lease agreement. No such allowance was established during the year ended
December 31, 1997. In addition, during 1998, the joint venture established an
allowance for loss on land and net investment in the direct financing lease for
its Property in Kingsville, Texas of approximately $316,000. The allowance
represents the difference between the Property's carrying value at December 31,
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. The increase in net income earned by joint ventures during
1997, as compared to 1996, is primarily due to the fact that the Partnership
invested in Middleburg Joint Venture in May 1996, as described above in "Capital
Resources."
During the year ended December 31, 1998, four of the Partnership's lessees
(or group of affiliated lessees), (i) Long John Silver's, Inc., (ii) Foodmaker,
Inc., (iii) Denny's Inc. and Quincy's, Inc. (which are affiliated under common
control of Advantica Restaurant Group, Inc.), and (iv) Flagstar Enterprises,
Inc., each contributed 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). As of December 31, 1998, Long John Silver's, Inc. was
the lessee under leases relating to five restaurants (excluding the three leases
rejected by the tenant, as described above), Foodmaker, Inc. was the lessee
under leases relating to ten restaurants, Advantica Restaurant Group, Inc. was
the lessee under leases relating to four restaurants, and Flagstar Enterprises,
Inc. was the lessee under leases relating to 11 restaurants. It is anticipated
that based on the minimum rental payments required by the leases, Foodmaker,
Inc., Advantica Restaurant Group, Inc., and Flagstar Enterprises, Inc. each will
continue to contribute more than ten percent of the Partnership's total rental
income during 1999. In addition, during the year ended December 31, 1998, 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 five Properties
owned by joint ventures). During 1998, Long John Silver's Inc. filed for
bankruptcy, as described above. In 1999, it is anticipated that Jack in the Box,
Denny's, 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 lessees or Restaurant Chains could
materially affect the Partnership's income if the Partnership is not able to
re-lease the Properties in a timely manner.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
also earned $70,227, $87,719, and $119,267, respectively, in interest and other
income. The decrease in interest and other income during 1998, as compared to
1997, is primarily a result of the Partnership establishing an allowance for
doubtful accounts during 1998,
11
<PAGE>
of approximately $17,300 for past due accrued interest income amounts that
relate to the loan with the tenant of the Property in Kingsville Real Estate
Joint Venture due to financial difficulties the tenant is experiencing. In
January 1999, Kingsville Real Estate Joint Venture entered into a new lease with
a new tenant, and in conjunction therewith, the General Partners agreed to cease
collection efforts on the past due amounts. The decrease in interest and other
income during 1997, as compared to 1996, 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
$806,746, $570,002, and $594,660, for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily attributable to the fact that 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 is experiencing. 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.
In addition, the increase in operating expenses during 1998, is partially
attributable to the fact that the Partnership accrued insurance and real estate
tax expenses as a result of Long John Silver's, Inc. filing for bankruptcy and
rejecting the leases relating to three of its eight leased Properties in June
1998, as described above. In addition, the increase in operating expenses during
1998, is 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 December 1998, the Partnership sold one of the vacant Properties and intends
to reinvest the net sales proceeds it received from the sale of this Property in
an additional Property. The Partnership will continue to incur certain expenses,
such as real estate taxes, insurance, and maintenance relating to the two
remaining, vacant Properties until new tenants or buyers are located. The
Partnership is currently seeking either new tenants or purchasers for these two
Properties.
In addition, the increase in operating expenses during 1998, is partially a
result of the Partnership incurring $24,282 in transaction costs 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.
The decrease in operating expenses during 1997, as compared to 1996, 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 described
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. In
addition, the decrease in operating expenses during 1997, is partially
attributable to the Partnership incurring certain expenses, such as insurance
and legal fees during 1996, due to the former tenant of the Property in Tempe,
Arizona declaring bankruptcy during 1996.
As a result of the sales of the Properties in Monroe, North Carolina and
Houston, Texas, as described above in "Capital Resources," the Partnership
recognized losses of $104,374 and $15,355 for financial reporting purposes for
the years ended December 31, 1998 and 1996, respectively. No Properties were
sold during 1997.
During the year ended December 31, 1998, the Partnership recorded a
provision for loss on building in the amount of $206,535 for financial reporting
purposes relating to the Long John Silver's Property in Morganton, North
12
<PAGE>
Carolina. The tenant of this Property filed for bankruptcy and ceased payment of
rents under the terms of its lease agreement, as described above. The allowance
represents the difference between the carrying value of the Property at December
31, 1998 and the estimated net realizable value for this Property.
The Partnership's leases as of December 31, 1998, are, in general, 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.
Proposed Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF. As consideration for the Merger, APF has agreed to issue
4,768,496 APF Shares. In order to assist the General Partners in evaluating the
proposed merger consideration, the General Partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $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 Limited
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.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the year
2000 could result in a variety of problems from data miscalculations to the
failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information technology
systems. The General Partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership. The information technology
system of the General Partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the General Partners and their affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the General Partners and members from their affiliates,
including
13
<PAGE>
representatives from senior management, information systems, telecommunications,
legal, office management, accounting and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections, interviews
and tests to identify which of the systems used by the Partnership could have a
potential year 2000 problem.
The information system of the General Partners' affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the
non-information technology systems providers of the affiliates.
In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing. Of
the third parties responding, all indicated that they are currently year 2000
compliant or will be year 2000 compliant prior to the year 2000. Although the
Y2K Team continues to receive positive responses from the companies with which
the Partnership has third party relationships regarding their year 2000
compliance, the General Partners cannot be assured that the third parties have
adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. The Y2K Team is in the process of evaluating the
responses and expects to complete this process by October 31, 1999. The
Partnership has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades of the hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the General Partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the General Partners and their affiliates. The General
Partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The General Partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems. Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information or non-
information technology systems used by the Partnership is not expected to have a
material impact on the results of operations of the Partnership. Even if such
systems failed, the payment of rent under the Partnership's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of the General Partners and their affiliates before the year
2000.
14
<PAGE>
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional risks
associated with the year 2000 compliance of the information or non-information
technology systems used by the Partnership, the Y2K Team will develop a
contingency plan if deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership. This could result in the
inability of the Partnership to accurately identify its Limited Partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the General Partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which the General
Partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant. The General Partners and their affiliates would have to allocate
resources to internally perform the functions of the transfer agent. The General
Partners do not anticipate that the additional cost of these resources would
have a material impact on the results of operations of the Partnership.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such financial institutions may be temporarily
unavailable. The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the General
Partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues. The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis. The General
Partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.
Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses. The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000. The General Partners cannot be assured
that the tenants have addressed all possible year 2000 issues. The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.
The General Partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The General
Partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the General Partners will
assess the remedies available to the Partnership under its lease agreements.
15
<PAGE>
Item 8. Financial Statements and Supplementary Data
16
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 18
Financial Statements:
Balance Sheets 19
Statements of Income 20
Statements of Partners' Capital 21
Statements of Cash Flows 22
Notes to Financial Statements 24
</TABLE>
17
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund XII, Ltd.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund XII, Ltd. (a Florida limited partnership) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the index appearing under item 14(a)(2)
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related financial statements. These financial
statements and financial statement schedules are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 27, 1999, except for Note 11 for which the date is March 11, 1999
18
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- -----------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on building $20,703,333 $20,820,279
Net investment in direct financing leases 12,471,978 13,656,265
Investment in joint ventures 2,522,004 2,517,421
Cash and cash equivalents 2,362,980 1,706,415
Receivables, less allowance for doubtful
accounts of $214,633 and $7,482 16,862 202,472
Prepaid expenses 7,038 7,216
Lease costs, less accumulated amortization of
$3,256 and $1,307 26,297 24,746
Accrued rental income, less allowance for
doubtful accounts of $6,323 in 1998 2,524,406 2,496,176
----------- -----------
$40,634,898 $41,430,990
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 21,195 $ 10,558
Accrued and escrowed real estate taxes payable 10,137 3,244
Distributions payable 1,091,252 956,252
Due to related parties 24,025 6,887
Rents paid in advance and deposits 97,448 36,737
----------- -----------
Total liabilities 1,244,057 1,013,678
Partners' capital 39,390,841 40,417,312
----------- -----------
$40,634,898 $41,430,990
=========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases $ 2,515,351 $ 2,455,312 $ 2,473,574
Adjustments to accrued rental income (224,867) -- --
Earned income from direct financing 1,571,906 1,647,530 1,692,066
leases
Contingent rental income 23,433 54,330 67,652
Interest and other income 70,227 87,719 119,267
----------- ----------- -----------
3,956,050 4,244,891 4,352,559
----------- ----------- -----------
Expenses:
General operating and administrative 148,427 162,593 173,614
Professional services 32,758 28,665 39,121
Bad debt expense 188,990 -- --
Management fees to related parties 41,537 40,218 40,244
Real estate taxes 8,989 -- 7,891
State and other taxes 17,653 18,496 18,471
Depreciation and amortization 344,110 320,030 315,319
Transaction costs 24,282 -- --
----------- ----------- -----------
806,746 570,002 594,660
----------- ----------- -----------
Income Before Equity in Earnings of Joint
Ventures, Loss on Sale of Land and
Buildings, and Provision for Loss on
Building 3,149,304 3,674,889 3,757,899
Equity in Earnings of Joint Ventures 95,142 277,325 200,499
Loss on Sale of Land and Buildings (104,374) -- (15,355)
Provision for Loss on Building (206,535) -- --
----------- ----------- -----------
Net Income $ 2,933,537 $ 3,952,214 $ 3,943,043
=========== =========== ===========
Allocation of Net Income:
General partners $ 30,894 $ 39,522 $ 39,533
Limited partners 2,902,643 3,912,692 3,903,510
----------- ----------- -----------
$ 2,933,537 $ 3,952,214 $ 3,943,043
=========== =========== ===========
Net Income Per Limited Partner Unit $ 0.65 $ 0.87 $ 0.87
=========== =========== ===========
Weighted Average Number of
Limited Partner Units Outstanding 4,500,000 4,500,000 4,500,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------------------- ---------------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1,000 $ 112,356 $ 45,000,000 $ (10,690,019) $ 11,123,278 $ (5,374,544) $ 40,172,071
Distributions to limited
partners ($0.85 per
limited partner unit) -- -- -- (3,825,008) -- -- (3,825,008)
Net income -- 39,533 -- -- 3,903,510 -- 3,943,043
------------- ----------- ------------- ------------- ------------ ------------ ------------
Balance, December 31, 1996 1,000 151,889 45,000,000 (14,515,027) 15,026,788 (5,374,544) 40,290,106
Distributions to limited
partners ($0.85 per
limited partner unit) -- -- -- (3,825,008) -- -- (3,825,008)
Net income -- 39,522 -- -- 3,912,692 -- 3,952,214
------------- ----------- ------------- ------------- ------------ ------------ ------------
Balance, December 31, 1997 1,000 191,411 45,000,000 (18,340,035) 18,939,480 (5,374,544) 40,417,312
Distributions to limited
partners ($0.88 per
limited partner unit) -- -- -- (3,960,008) -- -- (3,960,008)
Net income -- 30,894 -- -- 2,902,643 -- 2,933,537
------------- ----------- ------------- ------------- ------------ ------------ ------------
Balance, December 31, 1998 $ 1,000 $ 222,305 $ 45,000,000 $ (22,300,043) $ 21,842,123 $ (5,374,544) $ 39,390,841
============= =========== ============= ============= ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 4,094,016 $ 3,736,731 $ 3,951,047
Distributions from joint ventures 205,815 256,653 190,596
Cash paid for expenses (243,316) (252,145) (278,240)
Interest received 60,265 65,749 88,286
Net cash provided by operating
----------- ----------- -----------
activities 4,116,780 3,806,988 3,951,689
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 483,549 -- 1,640,000
Additions to land and buildings on --
operating leases -- (55,000)
Investment in joint ventures (115,256) -- (1,645,024)
Collections on loan to tenant of joint
venture -- 4,886 7,741
Payment of lease costs (3,500) (26,052) --
----------- ----------- -----------
Net cash provided by (used in)
investing activities 364,793 (76,166) 2,717
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net cash used in financing activities (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents 656,565 (94,186) 84,398
Cash and Cash Equivalents at Beginning of Year 1,706,415 1,800,601 1,716,203
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 2,362,980 $ 1,706,415 $ 1,800,601
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $ 2,933,537 $ 3,952,214 $ 3,943,043
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense 188,990 -- --
Depreciation 342,161 317,189 313,319
Amortization 1,949 2,841 2,000
Equity in earnings of joint venture,
net of distributions 110,673 (20,672) (9,903)
Loss on sale of land and buildings 104,374 -- 15,355
Provision for loss on building 206,535 -- --
Decrease in net investment in direct
financing leases 164,614 132,771 121,597
Decrease (increase) in receivables (3,380) (4,450) 48,671
Decrease (increase) in prepaid expenses 178 (430) (4,862)
Increase in accrued rental income (28,230) (533,121) (518,502)
Increase (decrease) in accounts
payable and accrued expenses 17,530 (10,207) 8,745
Increase (decrease) in due to related
parties 17,138 3,906 (4,269)
Increase (decrease) in rents paid in
advance and deposits 60,711 (33,053) 36,495
----------- ----------- -----------
Total adjustments 1,183,243 (145,226) 8,646
----------- ----------- -----------
Net Cash Provided by Operating Activities $ 4,116,780 $ 3,806,988 $ 3,951,689
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31 $ 1,091,252 $ 956,252 $ 956,252
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund XII, Ltd. (the
-----------------------------------
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators or franchisees of
national and regional fast-food and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
General Partner. The general partners have responsibility for managing the
day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the acquisition
--------------------------------
of land and buildings at cost, including acquisition and closing costs.
Land and buildings are leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating
expenses relating to the property, including property taxes, insurance,
maintenance and repairs. The leases are accounted for using either the
direct financing or the operating methods. Such methods are described
below:
Direct financing method - The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method - Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as
rentals are earned and depreciation is charged to operations as
incurred. Buildings are depreciated on the straight-line method over
their estimated useful lives of 30 years. When scheduled rentals vary
during the lease term, income is recognized on a straight-line basis
so as to produce a constant periodic rent over the lease term
commencing on the date the property is placed in service.
24
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date. Whenever a tenant defaults under the terms of its
lease, or events or changes in circumstance indicate that the tenant
will not lease the property through the end of the lease term, the
Partnership either reserves or writes-off the cumulative accrued
rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases,
plus any accrued rental income, are removed from the accounts and gains or
losses from sales are reflected in income. The general partners of the
Partnership review properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future
undiscounted cash flows, including the residual value of the property, with
the carrying cost of the individual property. If an impairment is
indicated, the assets are adjusted to their fair values. Although the
general partners have made their best estimate of these factors based on
current conditions, it is reasonably possible that changes could occur in
the near term which could adversely affect the general partners' estimate
of net cash flows expected to be generated from its properties and the need
for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance
for doubtful accounts, which is netted against receivables, and to decrease
rental or other income or increase bad debt expense for the current period,
although the Partnership continues to pursue collection of such amounts. If
amounts are subsequently determined to be uncollectible, the corresponding
receivable and allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership's investments in Des Moines
----------------------------
Real Estate Joint Venture, Williston Real Estate Joint Venture, Kingsville
Real Estate Joint Venture, Middleburg Joint Venture and Columbus Joint
Venture are accounted for using the equity method since the Partnership
shares control with affiliates which have the same general partners.
25
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Cash and Cash Equivalents - The Partnership considers all highly liquid
-------------------------
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts. The Partnership limits investment of temporary cash investments
to financial institutions with high credit standing; therefore, the
Partnership believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Lease Costs - Brokerage fees associated with negotiating a new lease are
-----------
amortized over the term of the new lease using the straight-line method.
Income Taxes - Under Section 701 of the Internal Revenue Code, all income,
------------
expenses and tax credit items flow through to the partners for tax
purposes. Therefore, no provision for federal income taxes is provided in
the accompanying financial statements. The Partnership is subject to
certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment.
Use of Estimates - The general partners of the Partnership have made a
----------------
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. The more significant areas requiring the use of
management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
26
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
2. Leases:
------
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards No.
13, "Accounting for Leases." Some of the leases have been classified as
operating leases and some of the leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct
financing leases while the land portions of the majority of the leases are
operating leases. Substantially all leases are for 14 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant pays
all property taxes and assessments, fully maintains the interior and
exterior of the building and carries insurance coverage for public
liability, property damage, fire and extended coverage. The lease options
generally allow tenants to renew the leases for two to four successive
five-year periods subject to the same terms and conditions as the initial
lease. Most leases also allow the tenant to purchase the property at fair
market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $12,584,387 $12,837,754
Buildings 10,120,580 9,443,412
----------- -----------
22,704,967 22,281,166
Less accumulated depreciation (1,795,099) (1,460,887)
----------- -----------
20,909,868 20,820,279
Less allowance for loss on
building (206,535) --
----------- -----------
$20,703,333 $20,820,279
=========== ===========
</TABLE>
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 which were completed in May 1997.
27
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
In December 1998, the Partnership sold its property in Monroe, North
Carolina, and received net sales proceeds of $483,549, resulting in a loss
of $104,374 for financial reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended
December 31, 1998, 1997 and 1996, the Partnership recognized $28,230 (net
of $6,323 in reserves and $224,867 in write-offs), $533,121, and $518,502,
respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 2,212,548
2000 2,214,984
2001 2,224,926
2002 2,244,948
2003 2,521,540
Thereafter 21,695,400
------------
$ 33,114,346
============
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during the
initial lease terms. In addition, this table does not include any amounts
for future contingent rentals which may be received on the leases based on
a percentage of the tenant's gross sales.
During the year ended December 31, 1998, the Partnership established an
allowance for loss on building of $206,535, relating to the Long John
Silver's property in Morganton, North Carolina. The tenant of this property
filed for bankruptcy and ceased payment of rents under the terms of its
lease agreement. The allowance represents the difference between the
carrying value of the property at December 31, 1998, and the current
estimated net realizable value for this property.
28
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
4. Net Investment in Direct Financing Leases:
-----------------------------------------
The following lists the components of the net investment in direct
financing leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Minimum lease payments
receivable $ 24,790,776 $ 28,413,665
Estimated residual values 3,924,188 4,190,941
Less unearned income (16,242,986) (18,948,341)
------------ ------------
Net investment in direct financing
leases $ 12,471,978 $ 13,656,265
============ ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 1,678,170
2000 1,678,170
2001 1,678,170
2002 1,678,170
2003 1,731,030
Thereafter 16,347,066
-----------
$24,790,776
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future
periods (see Note 3).
During the year ended December 31, 1998, three of the Partnership's leases
with Long John Silver's, Inc. were rejected in connection with the tenant
filing for bankruptcy. As a result, the Partnership reclassified these
assets from net investment in direct financing leases to land and buildings
on operating leases. In accordance with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying value. No loss on termination of direct financing leases
was recorded for financial reporting purposes.
29
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures:
----------------------------
As of December 31, 1998, the Partnership had a 59.05%, an 18.61%, a 31.13%,
and an 87.54% interest in the profits and losses of Williston Real Estate
Joint Venture, Des Moines Real Estate Joint Venture, Kingsville Real Estate
Joint Venture, and Middleburg Joint Venture, respectively. The remaining
interests in these joint ventures are held by affiliates of the Partnership
which have the same general partners.
In August 1998, the Partnership entered into a joint venture agreement,
Columbus Joint Venture, with affiliates of the general partners, to
construct and hold one restaurant property. As of December 31, 1998, the
Partnership contributed amounts to purchase land and pay construction costs
relating to the joint venture. The Partnership has agreed to contribute
additional amounts to the joint venture for construction costs. As of
December 31, 1998 the Partnership owned a 27.72% interest in the profits
and losses of this joint venture. When funding is complete, the Partnership
expects to have an approximate 28 percent interest in the profits and
losses of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares
control with affiliates.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture, Middleburg Joint Venture, and
Columbus Joint Venture each own and lease one property to an operator of
national fast-food or family-style restaurants. The following presents the
joint ventures' combined, condensed financial information at December 31:
30
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
----------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating
leases, less accumulated
depreciation and allowance for
loss on land $2,498,504 $1,768,636
Net investment in direct financing
leases, less allowance for
impairment in carrying value 2,219,798 2,446,688
Cash 5,671 6,893
Receivables -- 13,843
Accrued rental income 166,447 157,252
Other assets 283 443
Liabilities 483,138 7,673
Partners' capital 4,407,565 4,386,082
Revenues 337,881 481,085
Provision for loss on land and direct
financing lease (316,113) --
Net income (loss) (38,867) 446,047
</TABLE>
The Partnership recognized income totalling $95,142, $277,325, and $200,499
for the years ended December 31, 1998, 1997, and 1996, respectively, from
these joint ventures.
6. Receivables:
-----------
During 1993, the Partnership loaned $208,855 to the tenant of the property
owned by Kingsville Real Estate Joint Venture in connection with the
purchase of equipment for the restaurant property. The loan, which bore
interest at a rate of ten percent, was payable over 84 months and was
collateralized by the restaurant equipment. Receivables at December 31,
1997, included $188,642 relating to this loan, including accrued interest
of $7,488. During the year ended December 31, 1998, the Partnership
established an allowance for doubtful accounts of $205,965, which
represented the entire amount outstanding under the loan plus accrued
interest, due to the uncertainty of collectibility of this note. No amounts
relating to this loan are included in receivables at December 31, 1998.
31
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
7. Allocations and Distributions:
-----------------------------
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of properties, are allocated 99 percent to
the limited partners and one percent to the general partners. Distributions
of net cash flow are made 99 percent to the limited partners and one
percent to the general partners; provided, however, that the one percent of
net cash flow to be distributed to the general partners is subordinated to
receipt by the limited partners of an aggregate, ten percent, cumulative,
noncompounded annual return on their invested capital contributions (the
"Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in
liquidation of the Partnership, to the extent distributed, will be
distributed first to the limited partners in an amount sufficient to
provide them with their Limited Partners' 10% Return, plus the return of
their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners.
Any gain from the sale of a property not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will
be used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves
that may be deemed necessary for any anticipated or unforeseen liabilities
or obligations of the Partnership, iii) third, to pay all of the
Partnership's liabilities, if any, to the general and limited partners, iv)
fourth, after allocations of net income, gains and/or losses, to distribute
to the partners with positive capital accounts balances, in proportion to
such balances, up to amounts sufficient to reduce such positive balances to
zero, and v) thereafter, any funds remaining shall then be distributed 95
percent to the limited partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,960,008, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared
distributions to the limited partners of $3,825,008. No distributions have
been made to the general partners to date.
32
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. Income Taxes:
------------
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial
reporting purposes $2,933,537 $3,952,214 $3,943,043
Depreciation for tax reporting
purposes in excess of
depreciation for financial
reporting purposes (224,652) (249,366) (259,752)
Direct financing leases recorded as
operating leases for tax reporting
purposes 164,614 132,771 121,597
Provision for loss on building 206,535 -- --
Loss on sale of land and buildings
for tax reporting purposes less than
(in excess of) loss for financial
reporting purposes 25,699 -- (26,151)
Capitalization of transaction costs for
tax reporting purposes 24,282 -- --
Equity in earnings of joint ventures
for tax reporting purposes in
excess of (less than) equity in
earnings of joint ventures for
financial reporting purposes 138,311 (51,481) (46,345)
Allowance for doubtful accounts 207,151 (15,913) (16,396)
Accrued rental income (28,230) (533,121) (518,502)
Rents paid in advance 60,711 (39,303) 36,495
---------- ---------- ----------
Net income for federal income tax
purposes $3,507,958 $3,195,801 $3,233,989
========== ========== ==========
</TABLE>
33
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions:
--------------------------
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL
Fund Advisors, Inc. The other individual general partner, Robert A. Bourne,
serves as treasurer, director and vice chairman of the board of CNL Fund
Advisors. During the years ended December 31, 1998, 1997, and 1996, CNL
Fund Advisors, Inc. (hereinafter referred to as the "Affiliate") performed
certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership
agreed to pay the Affiliate a management fee of one percent of the sum of
gross revenues from properties owned by the Partnership and the
Partnership's allocable share of gross revenues from joint ventures. The
management fee, which will not exceed fees which are competitive for
similar services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliate.
The Partnership incurred management fees of $41,537, $40,218, and $40,244
for the years ended December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties
based on the lesser of one-half of a competitive real estate commission or
three percent of the sales price if the Affiliate provides a substantial
amount of services in connection with the sale. However, if the net sales
proceeds are reinvested in a replacement property, no such real estate
disposition fees will be incurred until such replacement property is sold
and the net sales proceeds are distributed. The payment of the real estate
disposition fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital contributions.
No deferred, subordinated real estate disposition fees have been incurred
since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $107,911, $92,866, and $97,722
for the years ended December 31, 1998, 1997, and 1996, respectively, for
such services.
34
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions - Continued:
--------------------------------------
The due to related parties at December 31, 1998 and 1997, totalled $24,025
and $6,887, respectively.
10. Concentration of Credit Risk:
----------------------------
The following schedule presents rental and earned income from individual
lessees, or affiliated groups of lessees, 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 years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Foodmaker, Inc. $1,023,630 $1,024,667 $1,024,667
Flagstar Enterprises, Inc. (and
Denny's Inc. and Quincy's
Restaurants, Inc. for the years
ended December 31, 1997 and
1996) 784,922 1,216,908 1,224,953
Long John Silver's, Inc. 508,351 647,829 649,992
Advantica Restaurant Group,
Inc. (and Denny's, Inc. and
Quincy's Restaurants, Inc. for
the year ended December 31,
1998) 424,742 N/A N/A
</TABLE>
In addition, the following schedule presents total rental and earned 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 years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Jack in the Box $1,023,630 $1,024,667 $1,024,667
Hardee's 784,922 787,260 791,998
Denny's 782,486 807,547 818,672
Long John Silver's 574,044 713,522 715,685
</TABLE>
35
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
10. Concentration of Credit Risk - Continued:
----------------------------------------
The information denoted by N/A indicates that for each period presented,
the tenant or group of affiliated tenants and the chain did not represent
more than ten percent of the Partnership's total rental and earned income.
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 lessees or 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.
In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and
rejected the leases relating to three of its eight leases and ceased making
rental payments to the Partnership. In December 1998, the Partnership sold
one of the vacant properties and intends to reinvest the net sales proceeds
from the sale of this property in an additional property. The Partnership
will not recognize rental and earned income from these two remaining
properties until new tenants for these properties are located or until the
properties are sold and the proceeds from such sales are reinvested in
additional properties. 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
resulting from the two remaining vacant properties, as described above, and
the possible rejection of the remaining five leases 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. The general
partners are currently seeking either new tenants or purchasers for the two
remaining vacant properties.
11. Subsequent Event:
----------------
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 4,768,496 shares of its
common stock, par value $0.01 per shares (the "APF Shares"). In order to assist
the general partners in evaluating the proposed merger consideration, the
general partners retained Valuation Associates, a nationally recognized real
estate appraisal firm, to appraise the fair value of the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets was $46,951,127 as of December
31, 1998. Legg Mason Wood Walker, Incorporated has rendered a
36
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
11. Subsequent Event - Continued:
----------------------------
fairness opinion that the APF Share consideration, payable by APF, is fair
to the Partnership from a financial point of view. 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, 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. 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.
37
<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 28th day of
October, 1999.
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> <C>
/s/ Robert A. Bourne President, Treasurer and Director October 28, 1999
- ---------------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director October 28, 1999
- ---------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
