<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
0-22485
---------------------------------------
CNL Income Fund XVII, Ltd.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3295393
- - ---------------------------------- --------------------------------------
(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 17
Part II
Other Information 18-21
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
ASSETS
------
Land and buildings on operating leases, less
accumulated depreciation of $1,154,928 and
$875,817 in 1999 and 1998, respectively $ 20,369,017 $ 20,648,128
Net investment in direct financing leases 2,951,548 2,980,811
Investment in joint ventures 1,962,614 1,443,064
Cash and cash equivalents 1,088,308 1,492,343
Receivables, less allowance for doubtful accounts
of $12,522 and $1,283 in 1999 and 1998,
respectively 31,524 30,463
Due from related parties 15,804 3,500
Organization costs, less accumulated amortization
of $10,000 and $6,309 in 1999 and 1998,
respectively -- 3,691
Accrued rental income 649,550 644,643
Other assets 118,168 119,062
------------------- -------------------
$ 27,186,533 $ 27,365,705
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 10,585 $ 3,598
Accrued real estate taxes payable 6,828 --
Distributions payable 600,000 600,000
Due to related parties 7,999 14,448
Rents paid in advance and security deposits 138,126 20,578
Deferred rental income 87,287 63,918
------------------- -------------------
Total liabilities 850,825 702,542
Commitments and Contingencies (Note 6)
Minority interest 410,811 432,802
Partners' capital 25,924,897 26,230,361
------------------- -------------------
$ 27,186,533 $ 27,365,705
=================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE>
CNL INCOME FUND XVII, 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 $ 547,665 $ 604,073 $ 1,712,372 $ 1,832,554
Adjustments to accrued rental income (161,610) -- (221,253) --
Earned income from direct financing leases 91,757 93,834 275,450 282,256
Interest and other income 10,307 11,128 51,481 36,667
------------ ------------ ----------- ------------
488,119 709,035 1,818,050 2,151,477
------------ ------------ ----------- ------------
Expenses:
General operating and administrative 31,331 29,293 90,720 86,909
Professional services 8,096 4,393 19,275 15,022
Real estate taxes 6,828 20,645 11,689 20,645
Management fees to related party 6,226 6,604 19,205 19,966
State and other taxes -- 7 12,734 11,811
Depreciation and amortization 95,324 96,125 289,661 273,084
------------ ------------ ----------- ------------
147,805 157,067 443,284 427,437
------------ ------------ ----------- ------------
Income Before Minority Interest in (Income)
Losses of Consolidated Joint Venture and
Equity in Earnings of Unconsolidated Joint
Ventures 340,314 551,968 1,374,766 1,724,040
Minority Interest in (Income) Losses of
Consolidated Joint Venture 16,464 (15,703) (14,972) (46,922)
Equity in Earnings of Unconsolidated Joint
Ventures 47,058 35,536 134,742 105,321
------------ ------------ ----------- ------------
Net Income $ 403,836 $ 571,801 $ 1,494,536 $1,782,439
============ ============ =========== ============
Allocation of Net Income (Loss):
General partners $ (1,803) $ (282) $ (2,896) $ (176)
Limited partners 405,639 572,083 1,497,432 1,782,615
------------ ------------ ----------- ------------
$ 403,836 $ 571,801 $ 1,494,536 $1,782,439
============ ============ =========== ============
Net Income Per Limited Partner Unit $ 0.14 $ 0.19 $ 0.50 $ 0.59
============ ============ =========== ============
Weighted Average Number of Limited Partner
Units Outstanding 3,000,000 3,000,000 3,000,000 3,000,000
============ ============ =========== ============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
----------------------- -------------------
<S> <C> <C>
General partners:
Beginning balance $ (610) $ (551)
Net loss (2,896) (59)
----------------------- -------------------
(3,506) (610)
----------------------- -------------------
Limited partners:
Beginning balance 26,230,971 26,236,754
Net income 1,497,432 2,394,217
Distributions ($0.60 and $0.80 per
limited partner unit, respectively) (1,800,000) (2,400,000)
----------------------- -------------------
25,928,403 26,230,971
----------------------- -------------------
Total partners' capital $ 25,924,897 $ 26,230,361
======================= ===================
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND XVII, 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 $1,960,792 $1,881,998
--------------- --------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases -- 306,100
Investment in joint ventures (527,864) (127,807)
--------------- --------------
Net cash provided by (used in) investing
activities (527,864) 178,293
--------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,800,000) (1,800,000)
Distributions to holder of minority interest (36,963) (36,663)
--------------- --------------
Net cash used in financing activities (1,836,963) (1,836,663)
--------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents (404,035) 223,628
Cash and Cash Equivalents at Beginning of Period 1,492,343 1,238,799
--------------- --------------
Cash and Cash Equivalents at End of Period $1,088,308 $1,462,427
=============== ==============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Land and building under operating lease
exchanged for land and building under
operating lease $ -- $ 899,654
=============== ==============
Distributions declared and unpaid at end of
period $ 600,000 $ 600,000
=============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND XVII, 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 XVII, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 80 percent interest in CNL/GC El Cajon
Joint Venture using the consolidation method. Minority interest represents
the minority joint venture partner's proportionate share of the equity in
the Partnership's consolidated joint venture. All significant intercompany
accounts and transactions have been eliminated.
Effective January 1, 1999, the Partnership adopted Statement of Position
98-5 "Reporting on the Costs of Start-Up Activities." The Statement
requires that an entity expense the costs of start-up activities and
organization costs as they are incurred. Adoption of this statement did not
have a material effect on the Partnership's financial position or results
of operations.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications had
no effect on partners' capital or net income.
5
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1999 and 1998
2. Investment in Joint Ventures:
-----------------------------
In January 1999, the Partnership entered into a joint venture arrangement,
Ocean Shores Joint Venture, with CNL Income Fund X, Ltd., a Florida limited
partnership and affiliate of the general partners, to own and lease one
restaurant property. The Partnership contributed approximately $359,500 to
the joint venture. As of September 30, 1999, the Partnership owned a 30.94%
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 an affiliate.
In addition, in January 1999, the Partnership invested in a property in
Zephyrhills, Florida as tenants-in-common with CNL Income Fund IV, Ltd., an
affiliate of the general partners. As of September 30, 1999, the
Partnership contributed approximately $168,400 for a 24 percent interest in
the property. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an
affiliate, and amounts relating to its investment are included in
investment in joint ventures.
The following presents the combined, condensed financial information for
all of the Partnership's investments in joint ventures and properties held
as tenants-in-common at:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Land and buildings on operating
leases, less accumulated
depreciation $ 5,389,272 $ 4,412,584
Net investment in direct
financing lease 804,976 --
Cash 16,222 2,352
Other assets 461 87
Accrued rental income 194,579 134,121
Liabilities 25,808 11,918
Partners' capital 6,379,702 4,537,226
Revenues 540,519 554,934
Net income 455,096 458,588
</TABLE>
The Partnership recognized income totalling $134,742 and $105,321 for the
nine months ended September 30, 1999 and 1998, respectively, from these
joint ventures, $47,058 and $35,536 of which were earned during the
quarters ended September 30, 1999 and 1998, respectively.
6
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1999 and 1998
3. Merger Transaction:
-------------------
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"). Subsequent to entering into the Merger agreement, the general
partners received a number of comments from brokers who sold the
Partnership's units concerning the loss of passive income treatment in the
event the Partnership merged with APF. On June 3, 1999, the general
partners, on behalf of the Partnership, and APF agreed that it would be in
the best interests of the Partnership and APF that APF not attempt to
acquire the Partnership in the acquisition. Therefore on June 4, 1999, APF
entered into a termination agreement with the general partners of the
Partnership.
4. Concentration of Credit Risk:
-----------------------------
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 rental and
earned income from the Partnership's consolidated joint venture and the
Partnership's share of total rental and earned income from joint ventures
and properties held as tenants-in-common) during each of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> B <C>
Golden Corral Family Steakhouse
Restaurants $ 399,607 $ 576,204
Burger King 371,642 356,413
Jack in the Box 262,118 248,054
Arby's 212,798 N/A
Boston Market N/A 232,326
</TABLE>
The information denoted by N/A indicates that for each period presented,
the chains 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 one 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.
7
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
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 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.
In September 1999, the Partnership's consolidated joint venture, CNL/GC EL
Cajon Joint Venture, entered into an agreement with a third party to sell
its property in El Cajon, California. During the quarter and nine months
ended September 30, 1999, the Partnership reserved approximately $161,600
for financial reporting purposes, relating to the property in El Cajon,
California. This reserve represented the difference between (i) the
property's carrying value plus the additional rental income (accrued rental
income) recognized since inception of the lease relating to the
straight-lining of future scheduled rent increases for this property in
accordance with generally accepted accounting principles and (ii) the
estimated net sales proceeds from the sale of the property based on the
purchase and pending sales contract with a third party. The Partnership
reserved the non-recoverable portion of the accrued rental income as a
result of the anticipated sale. The loss provision represents the
difference between the carrying value of the property at September 30, 1999
and the estimated net sales proceeds from the sale of the property based on
the purchase and a pending sales contract with a third party. As of
November 5, 1999, the sale had not occurred.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund XVII, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on February 10, 1995, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, to be leased primarily to operators of national and regional
fast-food, family-style and casual dining restaurant chains (collectively, the
"Properties"). The leases generally are triple-net leases, with the lessee
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1999, the Partnership owned 30 Properties, which
included interests in four Properties owned by joint ventures in which the
Partnership is a co-venturer and four Properties owned with affiliates as
tenants-in-common.
Capital Resources
- - -----------------
The Partnership's primary source of capital is cash from operations (which
includes cash received from tenants, distributions from joint ventures, and
interest and other income received, less cash paid for expenses). Cash from
operations was $1,960,792 and $1,881,998 for the nine months ended September 30,
1999 and 1998, respectively. The increase 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 January 1999, the Partnership entered into a joint venture arrangement,
Ocean Shores Joint Venture, with CNL Income Fund X, Ltd., an affiliate of the
general partners, to own and lease one restaurant property. The Partnership
contributed approximately $359,500 to the joint venture. As of September 30,
1999, the Partnership owned a 30.94% interest in the profits and losses of the
joint venture.
In addition, in January 1999, the Partnership invested in a property in
Zephyrhills, Florida as tenants-in-common with CNL Income Fund IV, Ltd., an
affiliate of the general partners. As of September 30, 1999, the Partnership had
contributed approximately $168,400 for a 24 percent interest in the Property.
Currently, rental income from the Partnership's Properties is invested in
money market accounts or other short-term, highly liquid investments such as
demand deposits at commercial banks, certificates of deposit, and money market
accounts with less than a 30-day maturity date, pending the Partnership's use of
such funds to pay Partnership expenses or to make distributions to the partners.
At September 30, 1999, the Partnership had $1,088,308 invested in such
short-term investments, as compared to $1,492,343 at December 31, 1998. The
decrease in short-term investments at September 30, 1999 was primarily due to
the fact that in January 1999 the Partnership invested in a joint venture
arrangement, Ocean Shores Joint Venture, and in a Property in Zephyrhills,
Florida, as tenants-in-common, with an affiliate of the general partners,
9
<PAGE>
as described above. The funds remaining at September 30, 1999, after payment of
distributions and other liabilities, will be used 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.
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 cash from operations, the Partnership declared distributions to limited
partners of $1,800,000 for each of the nine months ended September 30, 1999 and
1998 ($600,000 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 $0.60 per unit ($0.20 per unit for each of the quarters ended
September 30, 1999 and 1998). No distributions were made to the general partners
for the quarter 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.
Total liabilities of the Partnership, including distributions payable,
increased to $850,825 at September 30, 1999, from $702,542 at December 31, 1998,
partially as a result of an increase in rents paid in advance at September 30,
1999, as compared to December 31, 1998, and partially as a result of the
Partnership receiving and holding approximately $84,500 in a security deposit at
September 30, 1999, relating to one of the three Boston Market Properties which
was not rejected in conjunction with the tenant filing for bankruptcy as
described below in "Results of Operations." 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.
10
<PAGE>
Results of Operations
- - ---------------------
During the nine months ended September 30, 1999 and 1998, the Partnership
and its consolidated joint venture, CNL/GC El Cajon Joint Venture, owned and
leased 23 wholly owned Properties to operators of fast-food and family-style
restaurant chains. In connection with the Properties, during the nine months
ended September 30, 1999 and 1998, the Partnership earned $1,766,569 and
$2,114,810, respectively, in rental income from operating leases (net of
adjustments to accrued rental income) and earned income from direct financing
leases from these Properties, $477,812 and $697,907 of which was earned during
the quarters ended September 30, 1999 and 1998, respectively. The decrease in
rental and earned income during the nine months ended September 30, 1999, as
compared to the nine months ended September 30, 1998, was partially attributable
to a decrease in rental income due from the tenants of the Properties in Aiken,
South Carolina and Weatherford, Texas, as a result of receiving reimbursements
of construction costs from the developer during the nine months ended September
30, 1998, which reduced the cost of the Property on which rental income is
computed.
During 1998, the tenant of three Boston Market Properties filed for
bankruptcy, but continued making rental payments on the Properties. In April
1999, the tenant rejected, vacated and ceased making rental payments on two of
the three leases resulting in a decrease in rental and earned income of
approximately $48,600 and $87,200 during the quarter and nine months ended
September 30, 1999, respectively. In addition, the Partnership wrote off
approximately $59,700 of accrued rental income (non-cash accounting adjustment
relating to the straight-lining of future scheduled rent increases over the
terms of the leases in accordance with generally accepted accounting principles)
relating to the two rejected leases during the nine months ended September 30,
1999. The Partnership will not recognize rental and earned income from these two
Properties until new tenants for these Properties are located or until the
Properties are sold and the proceeds from the sale are reinvested in additional
Properties. While the tenant has not rejected or affirmed the remaining lease,
there can be no assurance that the lease will not be rejected in the future. The
lost revenues resulting from the rejection of the two leases and the possible
rejection of the third lease could have an adverse effect of the results of
operations of the Partnership if the Partnership is unable to re-lease these
Properties in a timely manner.
In addition, the decrease in rental and earned income during the quarter
and nine months ended September 30, 1999, as compared to the quarter and nine
months ended September 30, 1998, was partially attributable to the fact that
during the quarter and nine months ended September 30, 1999, the Partnership's
consolidated joint venture, CNL/GC EL Cajon Joint Venture, reserved
approximately $161,600 in accrued rental income (non-cash accounting adjustments
relating to the straight-lining of future scheduled rent increases over the term
of the lease in accordance with generally accepted accounting principles). The
reserve represented the difference between the carrying value of the Property
plus the additional rental income (accrued rental income) at September 30, 1999,
and the estimated net sales proceeds from the sale of the Property based on a
pending sales contract with a third party. The Property had not been sold as of
November 5, 1999.
11
<PAGE>
During the nine months ended September 30, 1999 and 1998, the Partnership
also earned $51,481 and $36,667, respectively, in interest and other income,
$10,307 and $11,128 of which was earned during the quarters ended September 30,
1999 and 1998, respectively. The increase in interest and other income for the
nine months ended September 30, 1999 was primarily due to the fact that the
Partnership reversed $13,399 in transaction costs during the nine months ended
September 30, 1999. These represented amounts that had previously been expensed
related to the general partners retaining financial and legal advisors to assist
them in evaluating and negotiating the proposed merger with APF, as described
below. The general partners and APF agreed that it would be in the best interest
of the Partnership that it not be acquired in the acquisition due to the limited
partners' loss of passive income in the acquisition, as described below. As a
result, the general partners have agreed to reimburse the Partnership for these
costs.
During the quarter and nine months ended September 30, 1998, the
Partnership owned and leased three Properties with affiliates as
tenants-in-common and two Properties indirectly through joint venture
arrangements, and during the quarter and nine months ended September 30, 1999,
the Partnership owned and leased four Properties with affiliates as
tenants-in-common and three Properties indirectly through joint venture
arrangements. In connection therewith, during the nine months ended September
30, 1999 and 1998, the Partnership earned $134,742 and $105,321, respectively,
$47,058 and $35,536 of which were earned during the quarters ended September 30,
1999 and 1998, respectively. The increase was primarily due to the fact that the
Partnership entered into a joint venture arrangement, Ocean Shores Joint
Venture, with CNL Income Fund X, Ltd., an affiliate of the general partners, and
invested in a Property in Zephyrhills, Florida, as tenants-in-common with CNL
Income Fund IV, Ltd., an affiliate of the general partners, in January 1999.
During at least one of the nine months ended September 30, 1999 and 1998,
five restaurant chains, Golden Corral, Burger King, Jack in the Box, Arby's and
Boston Market each accounted for more than ten percent of the Partnership's
total rental and earned income (including rental and earned income from the
Partnership's consolidated joint venture and the Partnership's share of total
rental and earned income from joint ventures and properties held as
tenants-in-common). It is anticipated that Golden Corral, Burger King, Jack in
the Box and Arby's will each continue to contribute more than ten percent of the
Partnership's total rental and earned income to which the Partnership is
entitled under the terms of the leases during the remainder of 1999. Any failure
of these restaurant chains could materially adversely affect the Partnership's
income if the Partnership is not able to re-lease the Properties in a timely
manner.
Operating expenses, including depreciation and amortization expense, were
$443,284 and $427,437 for the nine months ended September 30, 1999 and 1998,
respectively, of which $147,805 and $157,067 were incurred for the quarters
ended September 30, 1999 and 1998, respectively. The increase in operating
expenses for the nine months ended September 30, 1999, as compared to the nine
months ended September 30, 1998, was partially due to the fact that depreciation
expense was lower during the nine months ended September 30, 1998, as a result
of a cumulative adjustment to depreciation expense relating to the reimbursement
from the developer of construction costs relating to the Properties in Aiken,
South Carolina and Weatherford, Texas, as described above, which reduced the
depreciable base of each Property.
12
<PAGE>
Additionally, the increase during the nine months ended September 30, 1999,
was partially attributable to, and the decrease during the quarter was partially
offset by, an increase in insurance and legal fees incurred in connection with
the fact that the tenant of two Boston Market Properties who had filed for
bankruptcy, rejected the leases and ceased making rental payments relating to
these two Properties as described above. The Partnership will continue to incur
certain expenses such as real estate taxes, insurance and maintenance relating
to these Properties until replacement tenants or purchasers are located. The
Partnership is currently seeking either replacement tenants or purchasers for
these Properties.
Merger Transaction
- - ------------------
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").
Subsequent to entering into the Merger agreement, the general partners received
a number of comments from brokers who sold the Partnership's units concerning
the loss of passive income treatment in the event the Partnership merged with
APF. On June 3, 1999, the general partners, on behalf of the Partnership, and
APF agreed that it would be in the best interests of the Partnership and APF
that APF not attempt to acquire the Partnership in the acquisition.
Notwithstanding this agreement, representatives of APF stated that they may
attempt, depending on market conditions, seek to acquire the Partnership after
APF was listed on the New York Stock Exchange. Therefore on June 4, 1999, APF
entered into a termination agreement with the general partners of the
Partnership.
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.
13
<PAGE>
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 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,
14
<PAGE>
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 50 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.
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.
15
<PAGE>
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
16
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
<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.
---------------------------------------------------
18
<PAGE>
Item 5. Other Information. Inapplicable.
-----------------
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 (filed as Appendix B to the Prospectus Supplement
for the Registrant, constituting a part of the Registration
Statement of APF on Form S-4, File No. 74329.)
**3.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XVII, Ltd. (Filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-11, No. 33-
90998, incorporated herein by reference.)
**3.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XVII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on March
21, 1996, and incorporated herein by reference.)
**4.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XVII, Ltd. (Filed as Exhibit 3.1 to Registration
Statement No. 33-90998 on Form S-11 and incorporated herein
by reference.)
**4.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XVII, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on March
21, 1996, and incorporated herein by reference.)
**4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS
Escrow and Transfer Agency, Inc. and between CNL Income Fund
XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating
to the Distribution Reinvestment Plans (Filed as Exhibit 4.4
to the Registrant's Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**8.1 Opinion of Baker & Hostetler regarding certain material
issues relating to the Distribution Reinvestment Plan of CNL
Income Fund XVII, Ltd. (Filed as Exhibit 8.3 to Amendment No.
Three to the Registrant's Registration Statement on Form S-
11, No. 33-90998, incorporated herein by reference.)
**10.1 Management Agreement between CNL Income Fund XVII, Ltd. and
CNL Fund Advisors, Inc. (Included as Exhibit 10.1 to Form
10-K
19
<PAGE>
filed with the Securities and Exchange Commission on March
21, 1996, and incorporated herein by reference.)
**10.2 Form of Joint Venture Agreement for Joint Ventures with
Unaffiliated Entities (Filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-11, No. 33-
90998, incorporated herein by reference.)
**10.3 Form of Joint Venture Agreement for Joint Ventures with
Affiliated Programs (Filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-11, No. 33-
90998, incorporated herein by reference.)
**10.4 Form of Development Agreement (Filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-11, No. 33-
90998, incorporated herein by reference.)
**10.5 Form of Indemnification and Put Agreement (Filed as Exhibit
10.6 to the Registrant's Registration Statement on Form S-11,
No. 33-90998, incorporated herein by reference.)
**10.6 Form of Unconditional Guarantee of Payment and Performance
(Filed as Exhibit 10.7 to the Registrant's Registration
Statement on Form S-11, No. 33-90998, incorporated herein by
reference.)
**10.7 Form of Lease Agreement for Existing Restaurant (Filed as
Exhibit 10.8 to the Registrant's Registration Statement on
Form S-11, No. 33-90998, incorporated herein by reference.)
**10.8 Form of Lease Agreement for Restaurant to be Constructed
(Filed as Exhibit 10.9 to the Registrant's Registration
Statement on Form S-11, No. 33-90998, incorporated herein by
reference.)
**10.9 Form of Premises Lease for Golden Corral Restaurant (Filed as
Exhibit 10.10 to the Registrant's Registration Statement on
Form S-11, No. 33-90998, incorporated herein by reference.)
**10.10 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS
Escrow and Transfer Agency, Inc. and between CNL Income Fund
XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating
to the Distribution Reinvestment Plans (Filed as Exhibit 4.4
to the Registrant's Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
20
<PAGE>
**10.11 Form of Cotenancy Agreement with Unaffiliated Entity (Filed
as Exhibit 10.12 to Amendment No. One to the Registrant's
Registration Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**10.12 Form of Cotenancy Agreement with Affiliated Entity (Filed as
Exhibit 10.13 to Amendment No. One to the Registrant's
Registration Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**10.13 Form of Registered Investor Advisor Agreement (Filed as
Exhibit 10.14 to Amendment No. One to the Registrant's
Registration Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**10.14 Termination Agreement by and between CNL Income Fund XVII,
Ltd. and CNL American Properties Fund, Inc. ("APF") dated
June 4, 1999 (incorporated by reference hereby to Exhibit
10.54 of Amendment No. 1 to APF's Registration Statement on
Form S-4, File No. 333-74329 filed with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended)
27 Financial Data Schedule (Filed herewith.)
**previously filed
(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
CNL INCOME FUND XVII, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
-------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
-------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF CNL INCOME FUND XVII, 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 XVII, 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> 1,088,308
<SECURITIES> 0
<RECEIVABLES> 44,046
<ALLOWANCES> 12,522
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 21,523,945
<DEPRECIATION> 1,154,928
<TOTAL-ASSETS> 27,186,533
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 25,924,897
<TOTAL-LIABILITY-AND-EQUITY> 27,186,533
<SALES> 0
<TOTAL-REVENUES> 1,818,050
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 443,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,494,536
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,494,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,494,536
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>DUE TO THE NATURE OF ITS INDUSTRY, CNL INCOME FUND XVII, LTD. HAS AN
UNCLASSIFIED BALANCE SHEET; THEREFORE, NO VALUES ARE SHOWN ABOVE FOR CURRENT
ASSETS AND CURRENT LIABILITIES.
</FN>
</TABLE>
