<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended September 30, 1999
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from _______________________ to ______________________
Commission file number
0-21558
--------------------------------------
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
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ------
<PAGE>
CONTENTS
Part I Page
----
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Part II
Other Information 19-21
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $2,035,987 and
$1,795,099 in 1999 and 1998, respectively, and
allowance for loss on building of $206,535 in
1998 $ 20,034,780 $ 20,703,333
Net investment in direct financing leases 12,329,657 12,471,978
Investment in joint ventures 2,703,009 2,522,004
Mortgage note receivable 53,317 --
Cash and cash equivalents 2,629,366 2,362,980
Receivables, less allowance for doubtful accounts
of $205 and $214,633 in 1999 and 1998,
respectively 13,622 16,862
Prepaid expenses 12,026 7,038
Lease costs, less accumulated amortization
of $5,097 and $3,256 in 1999 and 1998,
respectively 40,891 26,297
Accrued rental income, less allowance for doubtful
accounts of $6,323 in 1999 and 1998 2,676,676 2,524,406
------------------- -------------------
$ 40,493,344 $ 40,634,898
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 153,012 $ 21,195
Accrued construction costs payable 30,000 --
Accrued and escrowed real estate taxes payable 29,025 10,137
Distributions payable 956,252 1,091,252
Due to related parties 14,032 24,025
Rents paid in advance and deposits 60,826 97,448
------------------- -------------------
Total liabilities 1,243,147 1,244,057
Commitments and Contingencies (Note 6)
Partners' capital 39,250,197 39,390,841
------------------- -------------------
$ 40,493,344 $40,634,898
=================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 611,730 $ 592,290 $ 1,846,362 $ 1,877,428
Adjustments to accrued rental income -- -- -- (224,867)
Earned income from direct financing leases 370,818 371,635 1,119,392 1,170,186
Contingent rental income 1,712 6,038 6,394 19,755
Interest and other income 27,282 7,031 72,217 51,713
------------ ------------ ------------ -------------
1,011,542 976,994 3,044,365 2,894,215
------------ ------------ ------------ -------------
Expenses:
General operating and administrative 40,451 46,999 119,332 113,005
Professional services 8,345 6,630 30,921 19,616
Bad debt expense -- 104,323 -- 188,990
Management fees to related party 10,568 10,320 32,023 31,871
Real estate taxes 603 33,877 4,099 35,029
State and other taxes -- -- 20,764 17,653
Depreciation and amortization 84,031 92,113 252,808 252,185
Transaction costs 69,671 -- 197,353 --
------------ ------------ ------------ -------------
213,669 294,262 657,300 658,349
------------ ------------ ------------ -------------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Building 797,873 682,732 2,387,065 2,235,866
Equity in Earnings of Joint Ventures 76,127 63,712 266,333 85,604
Gain on Sale of Land and Building -- -- 74,714 --
------------ ------------ ------------ -------------
Net Income $ 874,000 $ 746,444 $ 2,728,112 $ 2,321,470
============ ============ ============ =============
Allocation of Net Income:
General partners $ 8,739 $ 7,465 $ 26,634 $ 23,215
Limited partners 865,261 738,979 2,701,478 2,298,255
------------ ------------ ------------ ------------
$ 874,000 $ 746,444 $ 2,728,112 $ 2,321,470
============ ============ ============ ============
Net Income Per Limited Partner Unit $ 0.19 $ 0.16 $ 0.60 $ 0.51
============ ============ ============ ============
Weighted Average Number of Limited Partner
Units Outstanding 4,500,000 4,500,000 4,500,000 4,500,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
------------------ ---------------
General partners:
Beginning balance $ 223,305 $ 192,411
Net income 26,634 30,894
------------------ ---------------
249,939 223,305
------------------ ---------------
Limited partners:
Beginning balance 39,167,536 40,224,901
Net income 2,701,478 2,902,643
Distributions ($0.64 and $0.88 per
limited partner unit, respectively) (2,868,756) (3,960,008)
------------------ ---------------
39,000,258 39,167,536
------------------ ---------------
Total partners' capital $ 39,250,197 $ 39,390,841
================== ===============
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------------- ---------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 2,952,968 $ 3,066,225
---------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 467,300 --
Investment in joint venture (135,825) (115,256)
Collections on mortgage note receivable 2,134 --
Payment of lease costs (16,435) (3,500)
---------------- ---------------
Net cash provided by (used in) investing
activities 317,174 (118,756)
---------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (3,003,756) (2,868,756)
---------------- ---------------
Net cash used in financing activities (3,003,756) (2,868,756)
---------------- ---------------
Net Increase in Cash and Cash Equivalents 266,386 78,713
Cash and Cash Equivalents at Beginning of Period 2,362,980 1,706,415
---------------- ---------------
Cash and Cash Equivalents at End of Period $ 2,629,366 $ 1,785,128
================ ===============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage note accepted in exchange for sale of
land and building $ 55,000 $ --
================ ===============
Construction costs incurred and unpaid at end
of period $ 30,000 $ --
================ ===============
Distributions declared and unpaid at end of
period $ 956,252 $ 956,252
================ ===============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
1. Basis of Presentation:
---------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. The financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. Operating results for the quarter and nine
months ended September 30, 1999 may not be indicative of the results that
may be expected for the year ending December 31, 1999. Amounts as of
December 31, 1998, included in the financial statements, have been derived
from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income
Fund XII, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Buildings on Operating Leases:
--------------------------------------
At December 31, 1998, the Partnership had recorded an allowance for loss on
building of $206,535 relating to the property in Morganton, North Carolina,
due to the tenant filing for bankruptcy. The allowance represented the
difference between the carrying value of the property at December 31, 1998
and the estimated net realizable value for this property. In May 1999, the
Partnership sold this property to an unrelated third party for $550,000,
received $467,300 in cash and accepted the remaining net sales proceeds in
the form of a promissory note (See Note 3), resulting in a gain of $74,714
for financial reporting purposes. This gain, when netted against the
allowance recorded at December 31, 1998, resulted in a total net loss of
approximately $131,800.
3. Mortgage Note Receivable:
------------------------
In connection with the sale of the property in Morganton, North Carolina,
in May 1999, the Partnership accepted a promissory note in the principal
sum of $55,000 collateralized by a mortgage on the property. The promissory
note bears interest at a rate of 10.25% per annum and is being collected in
60 monthly installments of principal and interest. The mortgage note
receivable consisted of outstanding principal of $52,866 and accrued
interest receivable of $451 as of September 30, 1999.
5
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
3. Mortgage Note Receivable - Continued:
------------------------------------
The general partners believe that the estimated fair value of the mortgage
note receivable at September 30, 1999 approximates the outstanding
principal amounts based on estimated current rates at which similar loans
would be made to borrowers with similar credit and for similar maturities.
4. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental and earned income (including
mortgage interest income) from individual restaurant chains, each
representing more than ten percent of the Partnership's total rental and
earned income (including the Partnership's share of rental and earned
income from joint ventures) for each of the nine months ended September 30:
1999 1998
----------------- -----------------
Jack in the Box $ 768,500 $ 767,463
Denny's 603,516 565,923
Hardee's 582,053 587,444
Golden Corral 346,818 N/A
Long John Silver's 361,873 457,523
The information denoted by N/A indicates that for the applicable period
presented, the chain did not represent more than ten percent of the
Partnership's total rental and earned income.
In June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected
the leases relating to three of its eight Properties and ceased making
rental payments to the Partnership on the three rejected leases. In
December 1998 and May 1999, the Partnership sold two of the vacant
properties. In July 1999, the Partnership entered into a new lease with a
new tenant for the remaining vacant property for which rental payments
commenced in August of 1999. In August 1999, Long John Silver's, Inc.
assumed and affirmed its five remaining leases.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any of these restaurant chains could
significantly impact the results of operations of the Partnership, if the
Partnership is not able to re-lease the properties in a timely manner.
6
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
5. Related Party Transactions:
--------------------------
On September 1, 1999, CNL American Properties Fund, Inc. ("APF"), an
affiliate of the general partners, acquired CNL Fund Advisors, Inc.
("CFA"), an affiliate who provides certain services relating to management
of the Partnership and its properties pursuant to a management agreement
with the Partnership. As a result of this acquisition, CFA became a wholly
owned subsidiary of APF; however, the terms of the management agreement
between the Partnership and CFA remain unchanged and in effect.
6. Commitments and Contingencies:
-----------------------------
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which
the Partnership would be merged with and into a subsidiary of APF (the
"Merger"). As consideration for the Merger, APF has agreed to issue
2,384,248 shares of its common stock, par value $0.01 per share (the "APF
Shares"). 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 partners that is expected to be held in the first quarter of
2000, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. If the limited partners at the special
meeting approve the Merger, APF will own the properties and other assets of
the Partnership. The general partners intend to recommend that the limited
partners of the Partnership approve the Merger. In connection with their
recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs
based upon the percentage of "For" votes and the general partners will bear
the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
7
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
6. Commitments and Contingencies - Continued:
-----------------------------------------
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint
to add three additional limited partners as plaintiffs. Additionally, on
June 22, 1999, a limited partner in certain of the CNL Income Funds served
a lawsuit against the general partners, APF, CNL Fund Advisors, Inc. and
certain of its affiliates in connection with the proposed Merger. On
September 23, 1999, the judge assigned to the two lawsuits entered an order
consolidating the two cases. Pursuant to this order, the plaintiffs in
these cases filed a consolidated and amended complaint on November 8, 1999.
The various defendants, including the general partners, have 45 days to
respond to that consolidated complaint. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims. See Part II Item 1. Legal Proceedings.
7. Subsequent Event:
----------------
In November 1999, the Partnership used the proceeds from the sales of the
properties in Monroe and Morganton, North Carolina, to enter into a joint
venture arrangement, Bossier City Joint Venture, with CNL Income Fund VIII,
Ltd. and CNL Income Fund XIV, Ltd., both Florida limited partnerships and
affiliates of the general partners, to hold one restaurant property. The
Partnership contributed approximately $730,000 to acquire the restaurant
property. The Partnership owns an approximate 55 percent interest in the
profits and losses of the joint venture. The Partnership will account for
its investment in this joint venture under the equity method since the
Partnership will share control with affiliates.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund XII, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on August 20, 1991, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, as well as properties upon which restaurants were to be
constructed (the "Properties"), which are leased primarily to operators of
national and regional fast-food and family-style restaurant chains. The leases
are generally triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of September 30,
1999, the Partnership owned 47 Properties, which included interests in five
Properties owned by joint ventures in which the Partnership is a co-venturer.
Capital Resources
- -----------------
The Partnership's primary source of capital for the nine months ended
September 30, 1999 and 1998, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and other
income received, less cash paid for expenses). Cash from operations was
$2,952,968 and $3,066,225 for the nine months ended September 30, 1999 and 1998,
respectively. The decrease in cash from operations for the nine months ended
September 30, 1999, as compared to the nine months ended September 30, 1998, was
primarily a result of changes in the Partnership's working capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1999.
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with affiliates of the general partners, to construct,
own and lease one restaurant Property. As of September 30, 1999, the Partnership
had contributed approximately $251,100, of which $135,825 was contributed during
the nine months ended September 30, 1999, to the joint venture to purchase land
and pay for construction costs relating to the joint venture. As of September
30, 1999, the Partnership owned an approximate 28 percent interest in the
profits and losses of the joint venture.
In May 1999, the Partnership sold its Property in Morganton, North
Carolina, to an unrelated third party for $550,000, received $467,300 in cash
and accepted the remaining sales proceeds in the form of a promissory note in
the principal sum of $55,000. The Partnership had recorded an allowance for loss
on building relating to this Property of $206,535 at December 31, 1998 due to
the tenant filing for bankruptcy. The allowance represented the difference
between the carrying value of the Property at December 31, 1998 and the
estimated net realizable value for this Property. During the nine months ended
September 30, 1999, the Partnership recorded a gain relating to the sale of this
Property of $74,714 for financial reporting purposes, resulting in an overall
net loss relating to the sale of this Property of approximately $131,800. The
promissory note is collateralized by a mortgage on the Property, bears interest
at a rate of 10.25% per annum and is being collected in 60 monthly installments
of principal and interest. The net sales proceeds of $467,300 received in cash
and proceeds received from the collection of this promissory note will be used
to reinvest in an additional Property.
9
<PAGE>
In November 1999, the Partnership reinvested the proceeds from the above
sale plus the sales proceeds from the 1998 sale of the Property in Monroe, North
Carolina in a joint venture, Bossier City Joint Venture, with CNL Income Fund
VIII, Ltd. and CNL Income Fund XIV, Ltd., both Florida limited partnerships and
affiliates of the general partners, to hold one restaurant property. The
Partnership owns an approximate 55 percent interest in the profits and losses of
the joint venture. The Partnership will distribute amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any (at a level
reasonably assumed by the general partners), resulting from the sale.
Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of Properties pending reinvestment in additional
Properties are invested in money market accounts or other short-term, highly
liquid investments such as demand deposits at commercial banks, certificates of
deposit, and money market accounts with less than a 30-day maturity date,
pending the Partnership's use of such funds to pay Partnership expenses, invest
in an additional Property, or to make distributions to the partners. At
September 30, 1999, the Partnership had $2,629,366 invested in such short-term
investments, as compared to $2,362,980 at December 31, 1998. The funds remaining
at September 30, 1999, after payment of distributions and other liabilities,
will be used to acquire additional Properties, to pay for renovations, as
described below, and to meet the Partnership's working capital and other needs.
Short-Term Liquidity
- --------------------
The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash and
leasing them under triple-net leases to operators who meet specified financial
standards minimizes the Partnership's operating expenses. The general partners
believe that the leases will continue to generate cash flow in excess of
operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining after
the payment of operating expenses of the Partnership, to the extent that the
general partners determine that such funds are available for distribution. Based
on current cash from operations, and for the nine months ended September 30,
1999, anticipated future cash from operations, the Partnership declared
distributions to the limited partners of $2,868,756 for each of the nine months
ended September 30, 1999 and 1998 ($956,252 for each of the quarters ended
September 30, 1999 and 1998). This represents distributions for each of the nine
months ended September 30, 1999 and 1998 of $0.64 per unit ($0.21 per unit for
each of the quarters ended September 30, 1999 and 1998). No distributions were
made to the general partners for the quarters and nine months ended September
30, 1999 and 1998. No amounts distributed to the limited partners for the nine
months ended September 30, 1999 and 1998, are required to be or have been
treated by the Partnership as a return of capital for purposes of calculating
the limited partners' return on their adjusted capital contributions. The
Partnership intends to continue to make distributions of cash available for
distribution to the limited partners on a quarterly basis.
10
<PAGE>
Total liabilities of the Partnership decreased to $1,243,147 at September
30, 1999, from $1,244,057 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 nine months ended September 30, 1998, the Partnership owned and
leased 44 wholly owned Properties (which included one Property sold in December
1998), and during the nine months ended September 30, 1999, the Partnership
owned and leased 43 wholly owned Properties (which included one Property sold in
May 1999) to operators of fast-food and family-style restaurant chains. During
the nine months ended September 30, 1999 and 1998, the Partnership earned
$2,965,754 and $2,822,747, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these Properties, $982,548 and $963,925 of which was
earned during the quarters ended September 30, 1999 and 1998, respectively.
Rental and earned income was lower during the nine months ended September 30,
1998, as compared to the nine months ended September 30, 1999, due to the fact
that in June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected
the leases relating to three of the eight Properties that it leased. As a
result, the tenant ceased making rental payments on the three rejected leases,
and in addition, during the nine months ended September 30, 1998, the
Partnership wrote off $224,867 in accrued rental income (non-cash accounting
adjustments relating to the straight-lining of future scheduled rent increases
over the lease term in accordance with generally accepted accounting principles)
relating to these Properties. No amounts were written-off during the nine months
ended September 30, 1999. The effect from the write-off of accrued rental income
was partially offset by the fact that the Partnership recorded rental and earned
income during the quarter and nine months ended September 30, 1998, prior to the
tenant vacating the Properties in June 1998. In December 1998 and May 1999, the
Partnership sold two of the vacant Properties and intends to reinvest the net
sales proceeds from the sales of these Properties in additional Properties, as
discussed in "Capital Resources". In July 1999, the Partnership entered into a
lease with a new tenant for the remaining vacant Property. In connection with
the lease, the Partnership agreed to pay up to $30,000 of the construction costs
necessary to convert this Property into a new concept. Conversion of this
Property was completed in August 1999, at which time rental payments commenced
causing a slight increase in rental and earned income during the quarter and
nine months ended September 30, 1999. In August 1999, Long John Silver's, Inc.
assumed and affirmed its five remaining leases, and the Partnership has
continued receiving rental payments relating to these five leases.
In addition, during the nine months ended September 30, 1999 and 1998, the
Partnership earned $6,394 and $19,755, respectively, in contingent rental
income, $1,712 and $6,038 of which was earned during the quarters ended
September 30, 1999 and 1998, respectively. The decrease in contingent rental
income during the quarter and nine months ended September 30, 1999, as compared
to the quarter and nine months ended September 30, 1998, was primarily due to
decreased gross sales of certain restaurant Properties requiring the payment of
contingent rental income.
11
<PAGE>
In addition, during the nine months ended September 30, 1999 and 1998, the
Partnership owned and leased five Properties indirectly through joint venture
arrangements. In connection with the joint venture arrangements, during the nine
months ended September 30, 1999 and 1998, the Partnership earned $266,333 and
$85,604, respectively, of which $76,127 and $63,712 were earned during the
quarters ended September 30, 1999 and 1998, respectively. Net income earned by
joint ventures was lower during the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1999, primarily due to the fact
that Kingsville Real Estate Joint Venture (in which the Partnership owns a
31.13% interest in the profits and losses of the joint venture) established an
allowance for doubtful accounts of approximately $87,800 during the nine months
ended September 30, 1998, in accordance with its collection policy. No such
allowance was established during the nine months ended September 30, 1999. In
addition, during the nine months ended September 30, 1998, Kingsville Real
Estate Joint Venture established a provision for loss on land and net investment
in direct financing lease for its Property in Kingsville, Texas for
approximately $316,000. The allowance represented the difference between the
Property's carrying value at September 30, 1998 and the estimated net realizable
value of the Property. In January 1999, Kingsville Real Estate Joint Venture
entered into a new lease for this Property with a new tenant and the general
partners ceased collection efforts on the past due rental amounts.
During the nine months ended September 30, 1999, five restaurant chains,
Long John Silver's, Hardee's, Jack in the Box, Golden Corral, and Denny's, each
accounted for more than ten percent of the Partnership's total rental, earned
and interest income (including the Partnership's share of rental income from
Properties owned by joint ventures). During 1998, Long John Silver's Inc. filed
for bankruptcy, as described above. It is anticipated that during the remainder
of 1999, each of these five chains will continue to account for more than ten
percent of the Partnership's total rental, earned and interest income to which
the Partnership is entitled under the terms of the leases. Any failure of these
restaurant chains could materially affect the Partnership's income if the
Partnership is not able to re-lease the Properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$657,300 and $658,349 for the nine months ended September 30, 1999 and 1998,
respectively, of which $213,669 and $294,262 were incurred during the quarters
ended September 30, 1999 and 1998, respectively. Operating expenses were higher
during the quarter and nine months ended September 30, 1998, as compared to the
quarter and nine months ended September 30, 1999, due to the fact that during
the quarter and nine months ended September 30, 1998, the Partnership recorded
bad debt expense of $104,323 and $188,990, respectively, for past due principal
and interest amounts relating to a loan with the tenant of the Property in
Kingsville Real Estate Joint Venture due to financial difficulties the tenant
experienced. In January 1999, Kingsville Real Estate Joint Venture entered into
a new lease, with a new tenant, and the general partners ceased collection
efforts on the past due rental amounts.
The decrease in operating expenses during the quarter and nine months ended
September 30, 1999, was partially offset by the fact that the Partnership
incurred $69,671 and $197,353 in transaction costs during the quarter and nine
months ended September 30, 1999, respectively, relating to the general partners
retaining financial and legal advisors to assist them in evaluating and
negotiating the proposed merger with CNL American Properties Fund, Inc. ("APF"),
as
12
<PAGE>
described below. If the limited partners reject the merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of "For"
votes and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
In addition, the decrease in operating expenses during the quarter and nine
months ended September 30, 1999, was partially attributable to the fact that
during the quarter and nine months ended September 30, 1998, the Partnership
incurred legal, insurance and real estate tax expenses on the three Properties
for which the leases were rejected and which were vacant during the quarter and
nine months ended September 30, 1998, as a result of Long John Silver's, Inc.
filing for bankruptcy, as described above. The Partnership sold two of the
vacant Properties in December 1998 and May 1999, and the Partnership entered
into a long-term triple net lease with a new tenant for the remaining vacant
Property in July 1999. The new tenant is responsible for real estate taxes,
insurance and maintenance; therefore, the general partners do not anticipate
that the Partnership will continue to incur these expenses. Due to the fact that
Long John Silver's, Inc. assumed and affirmed its remaining leases, as described
above, Long John Silver's, Inc. will be responsible for such expenses relating
to these Properties; therefore, the general partners do not anticipate that the
Partnership will incur these expenses for these Properties in the future.
As a result of the sale of the Property in Morganton, North Carolina, as
described above in "Capital Resources," the Partnership recorded a gain of
$74,714 for financial reporting purposes during the nine months ended September
30, 1999. No Properties were sold during the quarter and nine months ended
September 30, 1998.
Proposed Merger
- ---------------
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger"). As
consideration for the Merger, APF has agreed to issue 2,384,248 shares of its
common stock, par value $0.01 per share (the "APF Shares"). 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 partners that is expected to be held in the first quarter
of 2000, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. If the limited partners at the special meeting
approve the Merger, APF will own the properties and other assets of the
Partnership. The general partners intend to recommend that the limited partners
of the Partnership approve the Merger. In connection with their recommendation,
the general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of "For"
votes and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
13
<PAGE>
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22, 1999,
a limited partner in certain of the CNL Income Funds served a lawsuit against
the general partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates
in connection with the proposed Merger. On September 23, 1999, the judge
assigned to the two lawsuits entered an order consolidating the two cases.
Pursuant to this order, the plaintiffs in these cases filed a consolidated and
amended complaint on November 8, 1999. The various defendants, including the
general partners, have 45 days to respond to that consolidated complaint. The
general partners and APF believe that the lawsuits are without merit and intend
to defend vigorously against the claims. See Part II - Item 1. Legal
Proceedings.
Year 2000 Readiness Disclosure
- ------------------------------
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information technology
systems. The general partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership. The information technology
system of the general partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the general partners and their affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the general partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consisted of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The
14
<PAGE>
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 30, 1999, the Y2K Team had received responses from
approximately 62 percent of the third parties. All of the responses were in
writing. Of the third parties responding, all indicated that they are currently
year 2000 compliant or will be year 2000 compliant prior to the year 2000.
Although the Y2K Team continues to receive positive responses from the companies
with which the Partnership has third party relationships regarding their year
2000 compliance, the general partners cannot be assured that the third parties
have adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. As of September 30, 1999, the Y2K Team had received
responses from approximately 77 percent of the tenants. All of the responses
were in writing. Of the tenant's responding, all indicated that they are
currently year 2000 compliant or will be year 2000 compliant prior to the year
2000. The general partners cannot be assured that the tenants have adequately
considered the impact of the year 2000. The Partnership has also instituted a
policy of requiring any new tenants to indicate that their systems are year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades for its hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the general partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the general partners and their affiliates. The general
partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
15
<PAGE>
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.
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
16
<PAGE>
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.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Partnership has provided a fixed rate mortgage note to a borrower. The
general partners believe that the estimated fair value of the mortgage note at
September 30, 1999 approximated the outstanding principal amount. The
Partnership is exposed to equity loss in the event of changes in interest rates.
The following table presents the expected cash flows of principal that are
sensitive to these changes.
Mortgage Note
Fixed Rate
-----------------------------
1999 $ 2,934
2000 9,421
2001 10,433
2002 11,554
2003 12,796
Thereafter 5,728
-------------
$52,866
=============
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
On May 11, 1999, four limited partners in several CNL Income Funds served a
derivative and purported class action lawsuit filed April 22, 1999 against
the general partners and APF in the Circuit Court of the Ninth Judicial
Circuit of Orange County, Florida, alleging that the general partners
breached their fiduciary duties and violated provisions of certain of the
CNL Income Fund partnership agreements in connection with the proposed
Merger. The plaintiffs are seeking unspecified damages and equitable
relief. On July 8, 1999, the plaintiffs filed an amended complaint which,
in addition to naming three additional plaintiffs, includes allegations of
aiding and abetting and conspiring to breach fiduciary duties, negligence
and breach of duty of good faith against certain of the defendants and
seeks additional equitable relief. As amended, the caption of the case is
Jon Hale, Mary J. Hewitt, Charles A. Hewitt, Gretchen M. Hewitt Bernard J.
--------------------------------------------------------------------------
Schulte, Edward M. and Margaret Berol Trust, and Vicky Berol v. James M.
------------------------------------------------------------------------
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, and CNL American
-----------------------------------------------------------------------
Properties Fund, Inc., Case No. CIO-99-0003561.
----------------------
On June 22, 1999, a limited partner of several CNL Income Funds served a
purported class action lawsuit filed April 29, 1999 against the general
partners and APF, Ira Gaines, individually and on behalf of a class of
----------------------------------------------------
persons similarly situated, v. CNL American Properties Fund, Inc., James M.
---------------------------------------------------------------------------
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, CNL Fund Advisors,
-------------------------------------------------------------------------
Inc., CNL Financial Corporation a/k/a CNL Financial Corp., CNL Financial
------------------------------------------------------------------------
Services, Inc. and CNL Group, Inc., Case NO. CIO-99-3796, in the Circuit
-----------------------------------
Court of the Ninth Judicial Circuit of Orange County, Florida, alleging
that the general partners breached their fiduciary duties and that APF
aided and abetted their breach of fiduciary duties in connection with the
proposed Merger. The plaintiff is seeking unspecified damages and equitable
relief.
On September 23, 1999, Judge Lawrence Kirkwood entered an order
consolidating the two cases under the caption In re: CNL Income Funds
-----------------------
Litigation, Case No. 99-3561. Pursuant to this order, the plaintiffs in
-----------------------------
these cases filed a consolidated and amended complaint on November 8, 1999,
and the various defendants, including the general partners, have 45 days to
respond to that consolidated complaint.
Item 2. Changes in Securities. Inapplicable.
----------------------
Item 3. Default upon Senior Securities. Inapplicable.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
----------------------------------------------------
Item 5. Other Information. Inapplicable.
------------------
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the Registrant and
CNL American Properties Fund, Inc. ("APF") dated March 11,
1999, as amended June 4, 1999, and as amended October 27, 1999
(Filed as Appendix B to the Prospectus Supplement for the
Registrant, constituting a part of Amendment No. 3 to the
Registration Statement of APF on Form S-4, File No. 333-
74329.)
3.1 Affidavit and Certificate of Limited Partnership of CNL Income
Fund XII, Ltd. (Included as Exhibit 3.2 to Registration
Statement No. 33-43278-01 on Form S-11 and incorporated herein
by reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL Income
Fund XII, Ltd. (Included as Exhibit 3.2 to Registration
Statement No. 33-43278-01 on Form S-1 and incorporated herein
by reference.)
4.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on April 15,
1993, and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund XII, Ltd. and CNL
Investment Company (Included as Exhibit 10.1 to Form 10-K
filed with the Securities and Exchange Commission on April 15,
1993, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL Investment Company
to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to
Form 10-K filed with the Securities and Exchange Commission on
March 31, 1995, and incorporated herein by reference.)
10.3 Assignment of Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit
10.3 to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein by
reference.)
27 Financial Data Schedule (Filed herewith.)
20
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November, 1999.
By: CNL INCOME FUND XII, LTD.
General Partner
By: /s/ James M. Seneff, Jr.
------------------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
------------------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF CNL INCOME FUND XII, LTD. AT SEPTEMBER 30, 1999, AND ITS STATEMENT OF
INCOME FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FORM 10-Q OF CNL INCOME FUND XII, LTD. FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,629,366
<SECURITIES> 0
<RECEIVABLES> 13,827
<ALLOWANCES> 205
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 22,070,767
<DEPRECIATION> 2,035,987
<TOTAL-ASSETS> 40,493,344
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,250,197
<TOTAL-LIABILITY-AND-EQUITY> 40,493,344
<SALES> 0
<TOTAL-REVENUES> 3,044,365
<CGS> 0
<TOTAL-COSTS> 657,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,728,112
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,728,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,728,112
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>DUE TO THE NATURE OF ITS INDUSTRY, CNL INCOME FUND XII, LTD. HAS AN
UNCLASSIFIED BALANCE SHEET; THEREFORE, NO VALUES ARE SHOWN ABOVE FOR CURRENT
ASSETS AND CURRENT LIABILITIES.
</FN>
</TABLE>
