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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31,1998
----------------------
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 Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($10 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 3,000,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is
no market value for such Units. Each Unit was originally sold at $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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The Form 10-K of CNL Income Fund XVII, Ltd. for the year ended December 31,
1998 is being amended to revise the disclosure under Item 1. Business, Item 2.
Properties, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 8. Financial Statements and Supplementary
Data.
PART I
Item 1. Business
CNL Income Fund XVII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on February 10, 1995. The general partners of the Partnership are
Robert A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on September 2, 1995, the
Partnership offered for sale up to $30,000,000 of limited partnership interests
(the "Units") (3,000,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
August 11, 1995. The offering terminated on September 19, 1996, at which date
the maximum offering proceeds of $30,000,000 had been received from investors
who were admitted to the Partnership as limited partners (the "Limited
Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food, family-style and casual dining
restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership
from its offering of Units, after deduction of organizational and offering
expenses, totalled $26,400,000 and were used as of December 31, 1998, to acquire
28 Properties. The 28 Properties include three Properties owned by joint
ventures in which the Partnership is a co-venturer and three Properties owned
with affiliates as tenants-in-common, to pay acquisition fees totalling
$1,350,000 and to establish a working capital reserve for Partnership purposes.
During 1998, the Partnership received approximately $306,100 in a reimbursement
from the developer of the Properties in Aiken, South Carolina and Weatherford,
Texas, upon final reconciliation of total construction costs. In January 1999,
the Partnership invested these amounts, along with other net offering proceeds,
in a Property in Zephyrhills, Florida, with an affiliate as tenants-in-common,
and entered into a joint venture arrangement, Ocean Shores Joint Venture, with
an affiliate of the General Partners to purchase and hold one Property in Ocean
Shores, Washington, indirectly through a joint venture in which the Partnership
is a co-venturer. The Partnership leases the Properties on a triple-net basis
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger. At a special meeting of the partners that is expected to be held in
the fourth quarter of 1999, Limited Partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. If the Limited Partners at the
special meeting approve the Merger, APF will own the Properties and other assets
of the Partnership.
In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties,
the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed. The Partnership has no obligation to sell all or any portion of a
Property at any particular time, except as may be required under property
purchase options granted to certain lessees.
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Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties provide for initial terms
ranging from 13 to 20 years (the average being 18 years) and expire between 2011
and 2017. The majority of the leases are on a triple-net basis, with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties provide for minimum base annual
rental payments (payable in monthly installments) ranging from approximately
$57,300 to $248,700. The majority of the leases provide for percentage rent,
based on sales in excess of a specified amount. In addition, the majority of
the leases provide that, commencing in specified lease years (generally the
sixth lease year), the annual base rent required under the terms of the lease
will increase.
Generally, the leases of the Properties provide for two to five five-year
renewal options subject to the same terms and conditions as the initial lease.
Certain lessees also have been granted options to purchase Properties at the
Property's then fair market value after a specified portion of the lease term
has elapsed. Fair market value will be determined through an appraisal by an
independent appraisal firm. Under the terms of certain leases, the option
purchase price may equal the Partnership's original cost to purchase the
Property (including acquisition costs), plus a specified percentage from the
date of the lease or a specified percentage of the Partnership's purchase price,
if that amount is greater than the Property's fair market value at the time the
purchase option is exercised.
The leases also generally provide that, in the event the Partnership wishes
to sell the Property subject to the terms of the lease, the Partnership first
must offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
During 1998, the Partnership exchanged a Boston Market Property in Troy,
Ohio, for a Boston Market Property in Inglewood, California. The terms of the
Troy Property lease facilitated such an exchange between the Partnership and the
lessee. In conjunction therewith, the lease was amended to allow the Inglewood
Property to continue under the terms of the Troy lease; therefore, all terms of
the lease remained unchanged.
In January 1999, the Partnership invested in an Arby's Property in
Zephyrills, Florida, as tenants-in-common with an affiliate of the General
Partners and entered into a joint venture, Ocean Shores Joint Venture, with an
affiliate of the General Partners to purchase and hold one Property indirectly.
The lease terms for these Properties are substantially the same as the
Partnership's other leases as described above in the first three paragraphs of
this section.
Major Tenants
During 1998, five lessees of the Partnership and its consolidated joint
venture, Golden Corral Corporation, National Restaurant Enterprises, Inc.,
DenAmerica Corp., Foodmaker, Inc. and San Diego Food Holdings, Inc. each
contributed more than ten percent of the Partnership's total rental income
(including rental income from the Partnership's consolidated joint venture, the
Partnership's share of rental income from two Properties owned by unconsolidated
joint ventures and three Properties owned with affiliates as tenants-in-common).
As of December 31, 1998, each of Golden Corral Corporation and National
Restaurant Enterprises, Inc. was the lessee under leases relating to three
restaurants, each of DenAmerica Corp. and Foodmaker, Inc. was the lessee under
leases relating to four restaurants and San Diego Food Holdings, Inc. was the
lessee under a lease relating to one restaurant. It is anticipated that based on
the minimum rental payments required by the leases, these five lessees each will
contribute more than ten percent of the Partnership's total rental income in
1999. In addition, four Restaurant Chains, Golden Corral Family Steakhouse
Restaurants, ("Golden Corral"), Jack in the Box, Boston Market and Burger King,
each accounted for more than ten percent of the Partnership's total rental
income during 1998 (including rental income from the Partnership's consolidated
joint venture, the Partnership's share of rental income from two Properties
owned by unconsolidated joint ventures and three Properties owned with
affiliates as tenants-in-common). In 1999, it is anticipated that Golden Corral,
Jack in the Box and Burger King each will contribute more than ten percent of
the Partnership's rental income to which the Partnership is entitled under the
terms of the leases. Any failure of these lessees or 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. During 1998, the tenants of
three Boston Market Properties, Boston Chicken, Inc., BCBM Southwest L.P. and
Boston West L.L.C. filed for bankruptcy. While the tenants have not rejected or
affirmed these three leases, there can be no assurance that some or all of the
leases will not be rejected in the future. The lost revenues resulting from the
rejection of all three leases could have an adverse effect on the results of
operations of the Partnership if the Partnership
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is unable to re-lease these Properties in a timely manner. As of December 31,
1998, no single lessee or group of affiliated lessees leased Properties with an
aggregate carrying value in excess of 20 percent of the total assets of the
Partnership.
Joint Venture and Tenancy in Common Arrangements
In December 1996, the Partnership entered into a joint venture arrangement,
CNL/GC El Cajon Joint Venture, with an unaffiliated entity to purchase and hold
one Property. In addition, during 1997, the Partnership entered into two
additional joint venture arrangements: CNL Mansfield Joint Venture with CNL
Income Fund VII, Ltd., an affiliate of the General Partners to purchase and hold
one Property; and CNL Kingston Joint Venture with CNL Income Fund XIV, Ltd., an
affiliate of the General Partners, to purchase and hold one Property. Each
joint venture arrangement provides for the Partnership and its joint venture
partners to share in all costs and benefits associated with the joint venture in
proportion to each partner's percentage interest in the joint venture. The
Partnership owns an 80 percent interest in CNL/GC El Cajon Joint Venture, a 21
percent interest in CNL Mansfield Joint Venture and a 60.06% interest in CNL
Kingston Joint Venture. The Partnership and its joint venture partners are also
jointly and severally liable for all debts, obligations and other liabilities of
the joint venture. Each of the affiliates is a limited partnership organized
pursuant to the laws of the State of Florida.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either of the joint venturers or by an event of
dissolution. Events of dissolution include the bankruptcy, insolvency or
termination of either of the joint venturer partners, sale of the Property owned
by the joint venture and mutual agreement of the Partnership and its joint
venture partners to dissolve the joint venture.
The Partnership has management control of CNL/GC El Cajon Joint Venture and
shares management control equally with affiliates of the General Partners for
CNL Mansfield Joint Venture and CNL Kingston Joint Venture. The joint venture
agreements restrict any venturer's ability to sell, transfer or assign its joint
venture interest without first offering it for sale to its joint venture
partner, either upon such terms and conditions as to which the venturers may
agree or, in the event the venturers cannot agree, on the same terms and
conditions as any offer from a third party to purchase such joint venture
interest.
Net cash flow from operations of CNL/GC El Cajon Joint Venture, CNL
Mansfield Joint Venture and CNL Kingston Joint Venture is distributed 80
percent, 21 percent and 60.06%, respectively, to the Partnership and the balance
is distributed to each other joint venture partner in accordance with its
percentage ownership in the respective joint venture. Any liquidation proceeds,
after paying joint venture debts and liabilities and funding reserves for
contingent liabilities, will be distributed first to the joint venture partners
with positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter in proportion to each joint venture
partner's percentage interest in the joint venture.
In addition to the above joint venture arrangements, the Partnership
entered into an agreement to hold a Property in Fayetteville, North Carolina, as
tenants-in-common with CNL Income Fund XVI, Ltd., an affiliate of the General
Partners; entered into an agreement to hold a Property in Corpus Christi, Texas,
as tenants-in-common, with CNL Income Fund XI, Ltd., an affiliate of the General
Partners; and entered into an agreement to hold a Property in Akron, Ohio, as
tenants-in-common, with CNL Income Fund XIII, Ltd., an affiliate of the General
Partners. The agreements provide for the Partnership and the affiliates to
share in the profits and losses of the Properties and net cash flow from the
Properties in proportion to each co-tenant's percentage interest. The
Partnership owns a 19.56%, 27.42% and 36.91% interest in the Properties in
Fayetteville, North Carolina, Corpus Christi, Texas and Akron, Ohio,
respectively.
In addition, in January 1999, the Partnership entered into an agreement to
hold an Arby's Property in Zephyrhills, Florida, as tenants-in-common, with CNL
Income Fund IV, Ltd., an affiliate of the General Partners. The agreement
provides for the Partnership and the affiliate to share in the profits and
losses of the Property and net cash flow from the Property, in proportion to
each co-tenant's percentage interest. The Partnership owns a 24 percent
interest in this Property. Also in January 1999, the Partnership entered into
a joint venture arrangement, Ocean Shores
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Joint Venture, with CNL Income Fund X, Ltd., an affiliate of the General
Partners, to purchase and hold one Property. The joint venture arrangement
provides for the Partnership and its joint venture partners to share in all
costs and benefits associated with the joint venture in proportion to each
partner's percentage interest in the joint venture. The Partnership owns a
30.94% interest in the profits and losses of the joint venture.
Each of the affiliates is a limited partnership organized pursuant to the
laws of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow
the Partnership to defer the gain for federal income tax purposes upon the sale
of the property if the proceeds are reinvested in an additional property.
Certain Management Services
CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenant's books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties. CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases. For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one percent of the sum of gross rental
revenues from Properties wholly owned by the Partnership plus the Partnership's
allocable share of gross revenues of joint ventures in which the Partnership is
a co-venturer, but not in excess of competitive fees for comparable services.
The management agreement continues until the Partnership no longer owns an
interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Employees
The Partnership has no employees. The officers of CNL Realty Corporation
and the officers and employees of CNL Fund Advisors, Inc. perform certain
services for the Partnership. In addition, the General Partners have available
to them the resources and expertise of the officers and employees of CNL Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1998, the Partnership owned 28 Properties. Of the 28
Properties, 22 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and three are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses. This schedule was filed with the Partnership's Form 10-K for the year
ended December 31, 1998.
Description of Properties
Land. The Partnership's Property sites range from approximately 15,185 to
91,400 square feet depending upon building size and local demographic factors.
Sites purchased by the Partnership are in locations zoned for commercial use
which have been reviewed for traffic patterns and volume.
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The following table lists the Properties owned by the Partnership as of
December 31, 1998 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with the Partnership's Form 10-K for the year ended December
31, 1998.
State Number of Properties
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California 5
Florida 2
Georgia 2
Illinois 3
Indiana 2
Michigan 1
North Carolina 1
Nevada 1
Ohio 1
South Carolina 1
Tennessee 3
Texas 6
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TOTAL PROPERTIES: 28
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Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. The sizes of the buildings owned by the
Partnership ranged from approximately 2,100 to 11,300 square feet. All
buildings on Properties acquired by the Partnership are freestanding and
surrounded by paved parking areas. Buildings are suitable for conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations. As of December 31, 1998, the Partnership had no plans
for renovation of the Properties. Depreciation expense is computed for
buildings and improvements using the straight line method using a depreciable
life of 40 years for federal income tax purposes. As of December 31, 1998, the
aggregate cost of the Properties owned by the Partnership and joint ventures
(including Properties owned through tenancy in common arrangements) for federal
income tax purposes was $22,500,782 and $6,671,518, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 1998 by Restaurant Chain.
Restaurant Chain Number of Properties
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Arby's 3
Black-Eyed Pea 1
Boston Market 4
Burger King 4
Denny's 3
Fazoli's 1
Golden Corral 4
Jack in the Box 4
Popeye's 1
Taco Bell 1
Wendy's 2
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TOTAL PROPERTIES: 28
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The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered by
insurance. In addition, the General Partners have obtained contingent liability
and property coverage for the Partnership. This insurance is intended to reduce
the Partnership's exposure in the unlikely event a tenant's insurance policy
lapses or is insufficient to cover a claim relating to the Property.
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Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food, family-style and casual dining restaurant
chains. The leases are generally on a long-term "triple net" basis, meaning
that the tenant is responsible for repairs, maintenance, property taxes,
utilities and insurance. Generally, a lessee is required, under the terms of
its lease agreement, to make such capital expenditures, as may be reasonably
necessary, to refurbish buildings, premises, signs and equipment, so as to
comply with the lessee's obligations, if applicable, under the franchise
agreement to reflect the current commercial image of its Restaurant Chain.
These capital expenditures are required to be paid by the lessee during the term
of the lease. The terms of the leases of the Properties owned by the
Partnership are described in Item 1. Business - Leases.
At December 31, 1998, 1997, 1996, and 1995, all of the Properties were
occupied. The following is a schedule of the average annual rent for the years
ended December 31:
<TABLE>
<CAPTION>
February 10, 1995
(date of inception)
For the Year Ended December 31: through
1998 1997 1996 December 31, 1995 (2)
----------- ----------- ----------- -----------------------
<S> <C> <C> <C> <C>
Rental Income (1) $2,983,830 $2,762,605 $1,190,656 $ --
Properties 28 28 24 1
Average per Unit $ 106,565 $ 98,664 $ 49,611 $ --
</TABLE>
(1) Rental income includes the Partnership's share of rental income from the
Properties owned through joint venture arrangements and the Properties
owned through tenancy in common arrangements. Rental revenues have been
adjusted, as applicable, for any amounts for which the Partnership has
established an allowance for doubtful accounts.
(2) Operations did not commence until November 4, 1995, the date following the
date on which the Partnership received the minimum offering proceeds of
$1,500,000, and such proceeds were released from escrow. The Property
owned by the Partnership was not operational as of December 31, 1995.
The following is a schedule of lease expirations for leases in place as of
December 31, 1998 for each of the ten years beginning with 1999 and thereafter.
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
1999 -- -- --
2000 -- -- --
2001 -- -- --
2002 -- -- --
2003 -- -- --
2004 -- -- --
2005 -- -- --
2006 -- -- --
2007 -- -- --
2008 -- -- --
Thereafter 28 2,799,614 100.00%
--------- ------------- -------------
Totals 28 2,799,614 100.00%
========= ============= =============
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1998 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases three Golden Corral restaurants. The
initial term of each lease is 15 years (expiring in 2011) and the average
minimum base annual rent is approximately $146,100 (ranging from approximately
$107,600 to $190,000).
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National Restaurant Enterprises, Inc. leases three Burger King restaurants.
The initial term of each lease is 20 years (expiring between 2016 and 2017) and
the average minimum base annual rent is approximately $144,400 (ranging from
approximately $123,200 to $153,600).
DenAmerica Corp. leases two Denny's restaurants, one Mr. Fable's restaurant
and one Black-eyed Pea restaurant. The initial term of each lease is 20 years
(expiring between 2015 and 2016) and the average minimum base annual rent is
approximately $120,300 (ranging from approximately $98,700 to $153,800).
Foodmaker, Inc. leases four Jack in the Box restaurants. The initial term
of each lease is 18 years (expiring between 2014 and 2015) and the average
minimum base annual rent is approximately $93,900 (ranging from approximately
$80,100 to $117,900).
San Diego Food Holdings, Inc. leases one Golden Corral restaurant. The
initial term of the lease is 20 years (expiring 2016) and the minimum base rent
is approximately $248,700.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on 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 restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food, family-style and casual dining
Restaurant Chains. The leases are generally triple-net leases, with the lessees
generally responsible for all repairs and maintenance, property taxes, insurance
and utilities. As of December 31, 1998, the Partnership owned 28 Properties,
either directly or through joint venture or tenancy in common arrangements.
Capital Resources
The Partnership commenced an offering to the public of up to 3,000,000
Units of limited partnership interest. The Partnership's offering of Units
terminated on September 19, 1996, at which time the maximum proceeds of
$30,000,000 (3,000,000 Units) had been received from investors. The Partnership,
therefore, will derive no additional capital resources from the offering.
Net proceeds to the Partnership from its offering of Units, after deduction
of organizational and offering expenses, totalled $26,400,000. During 1996, the
Partnership acquired 23 additional Properties, including one Property owned by a
joint venture in which the Partnership is a co-venturer and one Property, owned
with an affiliate, as tenants-in-common, at a cost of approximately $23,406,500,
including acquisition fees and miscellaneous acquisition expenses. During 1997,
the Partnership used the majority of its remaining net offering proceeds to
acquire two additional Properties, as tenants-in-common, with affiliates of the
General Partners. In addition, during 1997, the Partnership entered into two
joint ventures, CNL Mansfield Joint Venture and CNL Kingston Joint Venture, with
affiliates of the General Partners, to own an approximate 21 percent interest
and 60.06 percent interest, respectively, in two Properties. During 1998, the
Partnership contributed $124,500 to Kingston Joint Venture to pay for additional
construction costs. As a result of the above transactions, as of December 31,
1998, the Partnership had acquired 28 Properties, including three Properties
owned by joint ventures in which the Partnership is a co-venturer and three
Properties owned with affiliates as tenants-in-common, and had paid acquisition
fees totaling $1,350,000 to an affiliate of the General Partners. During 1998,
the Partnership received approximately $306,100 in reimbursements from the
developer upon final
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reconciliation of total construction costs relating to the Properties in Aiken,
South Carolina and Weatherford, Texas, in accordance with the related
development agreements. During January 1999, the Partnership invested these
amounts, along with other net offering proceeds, in a Property in Zephyrhills,
Florida, with an affiliate as tenants-in-common, and entered into a joint
venture arrangement, Ocean Shores Joint Venture, with affiliates of the General
Partners to own a 30.94% interest in the profits and losses of the joint
venture. The remaining net offering proceeds from the Partnership's offering of
Units were reserved for Partnership purposes.
Until Properties were acquired by the Partnership, all Partnership proceeds
were held in short-term, highly liquid investments which the General Partners
believed to have appropriate safety of principal. This investment strategy
provided high liquidity in order to facilitate the Partnership's use of these
funds to acquire Properties at such time as Properties suitable for acquisition
were located.
Currently, the Partnership's primary source of capital is cash from
operations (which includes cash received from tenants, distributions from the
joint ventures and interest received, less cash paid for expenses). Cash from
operations was $2,520,919, $2,495,114, and $1,232,948 for the years ended
December 31, 1998, 1997, and 1996, respectively. The increase in cash from
operations during 1998 and 1997, each as compared to the previous year, is
primarily a result of changes in the Partnership's working capital and changes
in income and expenses as described in "Results of Operations" below.
None of the Properties owned by the Partnership, or the joint ventures or
tenancy in common arrangements in which the Partnership owns an interest, is or
may be encumbered. Subject to certain restrictions on borrowing, however, the
Partnership may borrow funds but will not encumber any of the Properties in
connection with any such borrowing. The Partnership will not borrow for the
purpose of returning capital to the Limited Partners. The Partnership will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Partnership. The General Partners further have represented that
they will use their reasonable efforts to structure any borrowing so that it
will not constitute "acquisition indebtedness" for federal income tax purposes
and also will limit the Partnership's outstanding indebtedness to three percent
of the aggregate adjusted tax basis of its Properties. In addition, the
Partnership will not borrow unless it first obtains an opinion of counsel that
such borrowing will not constitute acquisition indebtedness. Affiliates of the
General Partners from time to time incur certain operating expenses on behalf of
the Partnership for which the Partnership reimburses the affiliates without
interest.
Currently, rental income from the Partnership's Properties and cash
reserves are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks, CDs
and money market accounts with less than a 30-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or to make
distributions to partners. At December 31, 1998, the Partnership had $1,492,343
invested in such short-term investments as compared to $1,238,799 at December
31, 1997. The increase in the amount invested in short-term investments during
1998, as compared to 1997, is primarily attributable to the Partnership
receiving construction reimbursements during 1998, as described above. As of
December 31, 1998, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately four
percent annually. The funds remaining at December 31, 1998, after payment of
distribution and other liabilities, will be used to meet the Partnership's
working capital and other needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash and
leasing them under triple-net leases to operators who generally meet specified
financial standards minimizes the Partnership's operating expenses. The General
Partners believe that the leases will generate cash flow in excess of operating
expenses.
Due to low operating expenses and ongoing cash flow, the General Partners
do not believe that working capital reserves are necessary at this time. In
addition, because all leases of the Partnership's Properties are on a triple-net
basis, it is not anticipated that a permanent reserve for maintenance and
repairs is necessary at this time. To the extent, however, that the Partnership
has insufficient funds for such purposes, the General Partners will contribute
to the
9
<PAGE>
Partnership an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs. The General Partners have the right to cause the
Partnership to maintain reserves if, in their discretion, they determine such
reserves are required to meet the Partnership's working capital needs.
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 the operating expenses of the Partnership, to the extent that the
General Partners determine that such funds are available for distribution.
Based on cash from operations, the Partnership declared distributions to the
Limited Partners of $2,400,000, $2,287,500, and $1,166,689 for the years ended
December 31, 1998, 1997, and 1996, respectively. This represents distributions
of $0.80, $0.76, and $0.55 per Unit for the years ended December 31, 1998, 1997,
and 1996, respectively. No amounts distributed or to be distributed to the
Limited Partners for the years ended December 31, 1998, 1997, and 1996, are
required to be or have been treated by the Partnership as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Partnership intends to continue to make
distributions of cash available for distribution to Limited Partners on a
quarterly basis.
During the year ended December 31, 1996, affiliates of the General Partners
incurred on behalf of the Partnership $231,885 for certain organizational and
offering expenses. In addition, during the years ended December 31, 1997, and
1996, the affiliates incurred on behalf of the Partnership $11,262, and $69,835,
respectively, for certain acquisition expenses and during the years ended
December 31, 1998, 1997 and 1996, the affiliates incurred on behalf of the
Partnership $64,521, $59,451, and $64,906, respectively, for certain operating
expenses. As of December 31, 1998 and 1997, the Partnership owed $14,448 and
$2,875, respectively, to related parties for such amounts, accounting and
administrative services and management fees. As of March 11, 1999, the
Partnership had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, decreased to $688,094 at December 31, 1998,
from $865,877 at December 31, 1997, partially as a result of a decrease in
deferred rental income and 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
The Partnership owned and leased 22 wholly owned Properties during 1998,
1997 and 1996. In addition, during 1996, the Partnership owned and leased one
Property through a joint venture arrangement in which the Partnership is a co-
venturer, and owned and leased one Property with an affiliate of the General
Partners, as tenants-in-common. During 1997 and 1998, the Partnership was a co-
venturer in three joint ventures that each owned and leased one Property and
also owned and leased three Properties with affiliates of the General Partners,
as tenants-in-common. As of December 31, 1998, the Partnership owned, either
directly or through joint venture arrangements, 28 Properties (including one
Property in Troy, Ohio exchanged for one Property in Inglewood, California),
which are subject to long-term, triple-net leases. The leases of the Properties
provide for minimum base annual rental payments (payable in monthly
installments) ranging from approximately $63,000 to $248,700. All of the leases
provide for percentage rent based on sales in excess of a specified amount. In
addition, the majority of the leases provide that, commencing in specified lease
years (generally the sixth lease year), the annual base rent required under the
terms of the lease will increase. For further description of the Partnership's
leases and Properties, see Item 1. Business - Leases and Item 2. Properties,
respectively.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
and its consolidated joint venture, CNL/GC El Cajon Joint Venture, earned
$2,813,442, $2,642,743, and $1,185,279, respectively, in rental income from
operating leases and earned income from direct financing leases. The increase
in rental and earned income during 1998, as compared to 1997, is primarily
attributable to the fact that two Properties were operational for only a partial
year during 1997, as compared to a full year during 1998, due to acquisitions by
the Partnership during 1997. The increase during 1997, as compared to 1996, is
partially attributable to the fact that Properties acquired during 1996 were
operational for a full year during 1997, as compared to a partial year during
1996. The increase is partially offset by 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, as described
10
<PAGE>
above in "Capital Resources", which reduced the depreciable base of the
Property. In addition, for the years ended December 31, 1998, 1997, and 1996,
the Partnership earned $140,595, $100,918, and $4,834, respectively,
attributable to net income earned by unconsolidated joint ventures in which the
Partnership is a co-venturer. The increase in net income earned by
unconsolidated joint ventures during 1998 and 1997, each as compared to the
previous year, is primarily attributable to the Partnership investing in two
Properties with affiliates of the General Partners as tenants-in-common and in
two joint ventures in which the Partnership is a co-venturer, during 1997, as
described above in "Capital Resources," and the fact the Properties were
operational for the full year during 1998, as compared to a partial year during
1997.
During the year ended December 31, 1998, five lessees of the Partnership
and its consolidated joint venture, Golden Corral Corporation, National
Restaurant Enterprises, Inc., DenAmerica Corp., Foodmaker, Corp. and San Diego
Food Holdings, Inc., each contributed more than ten percent of the Partnership's
total rental income (including rental and earned income from the Partnership's
consolidated joint venture and the Partnership's share of rental income from two
Properties owned by unconsolidated joint venture and three Properties owned with
separate affiliates as tenants-in-common). As of December 31, 1998, Golden
Corral Corporation and National Restaurant Enterprises, Inc., were each lessee
under leases relating to three restaurants, DenAmerica Corp. and Foodmaker,
Inc., were each the lessee under leases relating to four restaurants and San
Diego Food Holdings, Inc. was the lessee under a lease relating to one
restaurant. It is anticipated that based on the minimum rental payments required
by the leases, Golden Corral Corporation, National Restaurant Enterprises, Inc.,
DenAmerica Corp., Foodmaker, Inc., and San Diego Food Holdings, Inc. each will
contribute more than ten percent of the Partnership's total rental income in
1999. In addition, four Restaurant Chains, Golden Corral, Burger King, Jack in
the Box and Boston Market each accounted for more than ten percent of the
Partnership's total rental income during the year ended December 31, 1998,
(including rental and earned income from the Partnership's consolidated joint
venture, the Partnership's share of rental income from two Properties owned by
unconsolidated joint ventures and three Properties owned with separate
affiliates of the General Partners as tenants-in-common). In 1999, it is
anticipated that Golden Corral, Jack in the Box, and Burger King, each will
contribute more than ten percent of the Partnership's rental income to which the
Partnership is entitled under the terms of the leases. Any failure of these
lessees or 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. During 1998, the tenants of three Boston Market Properties filed for
bankruptcy. While the tenant has not rejected or affirmed these three leases,
there can be no assurance that some or all of the leases will not be rejected in
the future. The lost revenues resulting from the rejection of all three leases
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.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
also earned $51,240, $69,779 and $244,406, respectively, in interest income from
investments in money market accounts or other short-term, highly liquid
investments. The decrease in interest income during 1998 and 1997, each as
compared to the previous year, is primarily attributable to the decrease in the
amount of funds invested in short-term, liquid investments due to the payment
during 1997, of construction costs accrued at December 31, 1996, the acquisition
of Properties as tenants-in-common with affiliates, and as a result of acquiring
interests in joint ventures as described above in "Capital Resources."
Operating expenses, including depreciation and amortization expense, were
$551,890, $569,157, and $348,744 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998 as
compared to 1997 is partially attributable to a decrease in administrative
expenses, which includes services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; limited partner
distributions and reporting; and investor relations. The decrease is also
attributable to a decrease in depreciation expense as a result of the
reimbursement from the developer of construction costs relating to the
Properties in Aiken, South Carolina and Weatherford, Texas as described above in
"Capital Resources", which reduced the depreciable base of the Property. The
decrease in operating expenses during 1998 as compared to 1997, is partially off
set by, and the increase during 1997 as compared to 1996, is partially
attributable to the Partnership incurring taxes relating to the filing of
various state tax returns during 1998 and 1997. The increase during 1997, as
compared to 1996, is primarily attributable to the fact that the Properties
acquired during 1996 were operational for a full year in 1997, as compared to a
partial year during 1996.
The decrease during 1998 as compared to 1997, is partially offset by the
fact that the Partnership incurred $14,139 in transaction costs 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. If
the Limited Partners reject the
11
<PAGE>
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 April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities." The Statement, which is effective for fiscal years beginning after
December 15, 1998, requires that an entity expense the costs of start-up
activities and organization costs as they are incurred. The Partnership will
adopt this Statement in 1999. While historically these costs have been
amortized over five years, the General Partners believe that adoption of this
Statement will not have a material effect on the Partnership's financial
position or results of operations.
The Partnership's leases as of December 31, 1998, are triple-net leases and
contain provisions that the General Partners believe mitigate the adverse effect
of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in restaurant sales volume due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also may cause capital appreciation of the
Partnership's Properties. Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.
Proposed Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF. As consideration for the Merger, APF has agreed to issue
3,014,377 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 $29,681,344 as of December 31, 1998. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former Limited Partners. At a special meeting of the Limited
Partners that is expected to be held in the fourth quarter of 1999, Limited
Partners holding in excess of 50% of the Partnership's outstanding limited
partnership interests must approve the Merger prior to consummation of the
transaction. If the Limited Partners at the special meeting approve the Merger,
APF will own the Properties and other assets of the Partnership. The General
Partners intend to recommend that the Limited Partners of the Partnership
approve the Merger. In connection with their recommendation, the General
Partners will solicit the consent of the Limited Partners at the special
meeting.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to the
failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information technology
systems. The General Partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership. The information technology
system of the General Partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
12
<PAGE>
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 consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the systems used by the Partnership
could have a potential year 2000 problem.
The information system of the General Partners' affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the non-
information technology systems providers of the affiliates.
In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year 2000
compliant or will be year 2000 compliant prior to the year 2000. Although the
Y2K Team continues to receive positive responses from the companies with which
the Partnership has third party relationships regarding their year 2000
compliance, the General Partners cannot be assured that the third parties have
adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. The Y2K Team is in the process of evaluating the
responses and expects to complete this process by October 31, 1999. The
Partnership has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades of the hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the General Partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the General Partners and their affiliates. The General
Partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The General Partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a
13
<PAGE>
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 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.
14
<PAGE>
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 8. Financial Statements and Supplementary Data
15
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
Page
----
Report of Independent Accountants 17
Financial Statements:
Balance Sheets 18
Statements of Income 19
Statements of Partners' Capital 20
Statements of Cash Flows 21
Notes to Financial Statements 24
16
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund XVII, Ltd.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund XVII, Ltd. (a Florida limited partnership) at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under item 14(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 23, 1999, except for the second paragraph of Note 11 for which the date
is March 11, 1999.
17
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1998 1997
------------- -------------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation $20,648,128 $21,328,869
Net investment in direct financing leases 2,980,811 3,056,783
Investment in joint ventures 1,443,064 1,328,067
Cash and cash equivalents 1,492,343 1,238,799
Receivables, less allowance for doubtful
accounts of $1,283 and $14,333 33,963 613
Organization costs, less accumulated
amortization of $6,309 and $4,309 3,691 5,691
Accrued rental income 644,643 357,246
Other assets 119,062 104,411
----------------- ----------------
$27,365,705 $27,420,479
================= ================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 3,598 $ 2,922
Accrued construction costs payable -- 38,834
Distributions payable 600,000 600,000
Due to related parties 14,448 2,875
Rents paid in advance 20,578 55,762
Deferred rental income 63,918 64,690
----------------- ----------------
Total liabilities 702,542 765,083
Minority interest 432,802 419,193
Partners' capital 26,230,361 26,236,203
----------------- ----------------
$27,365,705 $27,420,479
================= ================
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases $2,447,938 $2,323,256 $1,054,534
Earned income from direct financing
leases 365,504 319,487 130,745
Interest 51,240 69,779 244,406
Other income 3,403 1,128 9,984
-------------- ---------- -----------
2,868,085 2,713,650 1,439,669
-------------- ---------- -----------
Expenses:
General operating and administrative 110,537 128,168 144,728
Professional services 19,504 21,877 14,326
Management fee to related party 26,690 25,377 10,482
State and other taxes 11,811 6,443 --
Depreciation and amortization 369,209 387,292 179,208
Transaction costs 14,139 -- --
-------------- ---------- -----------
551,890 569,157 348,744
-------------- ---------- -----------
Income Before Minority Interest in Income
of Consolidated Joint Venture and
Equity in Earnings of Unconsolidated
Joint Ventures 2,316,195 2,144,493 1,090,925
Minority Interest in Income of Consolidated
Joint Venture (62,632) (41,854) --
Equity in Earnings of Unconsolidated Joint
Ventures 140,595 100,918 4,834
-------------- ---------- -----------
Net Income $2,394,158 $2,203,557 $1,095,759
============== ========== ===========
Allocation of Net Income:
General partners $ (59) $ (839) $ (709)
Limited partners 2,394,217 2,204,396 1,096,468
-------------- ---------- -----------
$2,394,158 $2,203,557 $1,095,759
============== ========== ===========
Net Income Per Limited Partner Unit $ 0.80 $ 0.73 $ 0.52
============== ========== ===========
Weighted Average Number of
Limited Partner Units Outstanding 3,000,000 3,000,000 2,121,253
============== ========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------------------------- ----------------------------------
Accumulated
Contributions Earnings Contributions Distributions
----------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $1,000 $ (3) $ 5,696,921 $ (28,275)
Contributions from limited partners -- -- 24,303,079 --
Distributions to limited partners
($0.55 per limited partner unit) -- -- -- (1,166,689)
Syndication costs -- -- -- --
Net income -- (709) -- --
----------------- ----------- -------------- -------------
Balance, December 31, 1996 1,000 (712) 30,000,000 (1,194,964)
Distributions to limited partners
($0.76 per limited partner unit) -- -- -- (2,287,500)
Net income -- (839) -- --
----------------- ----------- -------------- -------------
Balance, December 31, 1997 1,000 (1,551) 30,000,000 (3,482,464)
Distributions to limited partners
($0.80 per limited partner unit) -- -- -- (2,400,000)
Net income -- (59) -- --
----------------- ----------- -------------- -------------
Balance, December 31, 1998 $1,000 $(1,610) $30,000,000 $(5,882,464)
================= =========== ============== =============
<CAPTION>
Limited Partners
---------------------------
Accumulated Syndication
Earnings Costs Total
----------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 8,354 $(1,035,764) $ 4,642,233
Contributions from limited partners -- -- 24,303,079
Distributions to limited partners
($0.55 per limited partner unit) -- -- (1,166,689)
Syndication costs -- (2,554,236) (2,554,236)
Net income 1,096,468 -- 1,095,759
----------- ------------ ------------
Balance, December 31, 1996 1,104,822 (3,590,000) 26,320,146
Distributions to limited partners
($0.76 per limited partner unit) -- -- (2,287,500)
Net income 2,204,396 -- 2,203,557
----------- ------------ ------------
Balance, December 31, 1997 3,309,218 (3,590,000) 26,236,203
Distributions to limited partners
($0.80 per limited partner unit) -- -- (2,400,000)
Net income 2,394,217 -- 2,394,158
----------- ------------ ------------
Balance, December 31, 1998 $5,703,435 $(3,590,000) $26,230,361
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------- ----------- ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 2,493,780 $ 2,502,057 $ 1,149,196
Distributions from unconsolidated joint
ventures 145,839 106,346 4,985
Cash paid for expenses (169,940) (183,068) (165,639)
Interest received 51,240 69,779 244,406
--------------- ----------- ------------
Net cash provided by operating activities 2,520,919 2,495,114 1,232,948
--------------- ----------- ------------
Cash Flows from Investing Activities:
Additions to land and buildings on
operating -- (1,740,491) (19,735,346)
leases
Reimbursements of construction costs from
developer 306,100 -- --
Investment in direct financing leases -- (1,130,497) (1,784,925)
Investment in joint ventures (124,452) (1,135,681) (201,501)
Other -- -- 410
--------------- ----------- ------------
Net cash provided by (used in) investing
activities 181,648 (4,006,669) (21,721,362)
--------------- ----------- ------------
Cash Flows From Financing Activities:
Reimbursement of acquisition and syndication
costs paid by related parties on behalf of
the Partnership -- (25,444) (326,483)
Contributions from limited partners -- -- 24,303,079
Contributions from holder of minority -- 278,170 140,676
interest
Distributions to limited partners (2,400,000) (2,177,584) (703,681)
Distributions to holder of minority interest (49,023) (41,507) --
Payment of syndication costs -- -- (2,407,317)
--------------- ----------- ------------
Net cash provided by (used in) financing
activities (2,449,023) (1,966,365) 21,006,274
--------------- ----------- ------------
Net Increase (Decrease) in Cash and Cash 253,544 (3,477,920) 517,860
Equivalents
Cash and Cash Equivalents at Beginning of Year 1,238,799 4,716,719 4,198,859
--------------- ----------- ------------
Cash and Cash Equivalents at End of Year $ 1,492,343 $ 1,238,799 $ 4,716,719
=============== =========== ============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------- ----------- -----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $2,394,158 $2,203,557 $1,095,759
--------------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 358,063 376,973 176,995
Amortization 11,146 10,319 2,213
Minority interest in income of
consolidated joint venture 62,632 41,854 --
Equity in earnings of unconsolidated
joint ventures, net of distributions 5,244 5,428 151
Decrease (increase) in receivables (33,350) 39,518 (40,131)
Increase in prepaid expenses (510) -- --
Decrease in net investment in direct
financing leases 34,640 30,454 16,345
Increase in accrued rental income (287,397) (293,699) (167,216)
Increase (decrease) in accounts
payable and accrued expenses 676 (63) 2,985
Increase (decrease) in due to related
parties, excluding acquisition
and syndication costs paid on
behalf of the Partnership 11,573 (97) 2,596
Decrease (increase) in rents paid in
advance (35,184) 2,993 52,769
Increase (decrease) in deferred
rental income (772) 77,877 90,482
--------------- ----------- -----------
Total adjustments 126,761 291,557 137,189
--------------- ----------- -----------
Net Cash Provided by Operating Activities $2,520,919 $2,495,114 $1,232,948
=============== =========== ===========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------- --------- ---------
<S> <C> <C> <C>
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Related parties paid certain acquisition
and syndication costs on behalf of
the Partnership as follows:
Acquisition costs $ -- $ 11,262 $ 69,836
Syndication costs -- -- 231,885
------------- --------- ---------
$ -- $ 11,262 $301,721
============= ========= =========
Land and building under operating lease
exchanged for land and building under
operating lease $899,654 $ -- $ --
============= ========= =========
Distributions declared and unpaid at
December 31 $600,000 $600,000 $490,084
============= ========= =========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund XVII, Ltd. (the
-----------------------------------
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food, family-style and casual dining restaurant chains. Under
the terms of a registration statement filed with the Securities and
Exchange Commission, the Partnership was authorized to sell a maximum of
3,000,000 units ($30,000,000) of limited partnership interest. A total of
3,000,000 units ($30,000,000) of limited partnership interest were sold.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
General Partner. The general partners have responsibility for managing the
day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the acquisition
--------------------------------
of land and buildings at cost, including acquisition and closing costs.
Land and buildings are leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating
expenses relating to the property, including property taxes, insurance,
maintenance and repairs. The leases are accounted for using either the
direct financing or the operating methods. Such methods are described
below:
Direct financing method - The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(see Note 4). Unearned income is deferred and amortized to income over
the lease terms so as to produce a constant periodic rate of return on
the Partnership's net investment in the leases.
Operating method - Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as
rentals are earned and depreciation is charged to operations as
incurred. Buildings are depreciated on the straight-line method over
their estimated useful lives of 30 years. When scheduled rentals
(including rental payments, if any, required during the construction
of a property) vary during the lease term, income is recognized on a
straight-line basis so as to produce a constant periodic rent over the
lease term commencing on the date the property is placed in service.
24
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date. In contrast, deferred rental income represents the
aggregate amount of scheduled rental payments to date (including
rental payments due during construction and prior to the property
being placed in service) in excess of income recognized on a
straight-line basis over the lease term commencing on the date the
property is placed in service. Whenever a tenant defaults under the
terms of its lease, or events or changes in circumstance indicate that
the tenant will not lease the property through the end of the lease
term, the Partnership either reserves or writes off the cumulative
accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases,
plus any accrued rental income, or deferred rental income, will be removed
from the accounts and gains or losses from sales will be reflected in
income. The general partners of the Partnership review properties for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through operations.
The general partners determine whether an impairment in value has occurred
by comparing the estimated future undiscounted cash flows, including the
residual value of the property, with the carrying cost of the individual
property. Although the general partners have made their best estimate of
the factors based on current conditions, it is reasonably possible that
change could occur in the near term which could adversely affect the
general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write downs. If an
impairment is indicated, the assets are adjusted to their fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance
for doubtful accounts, which is netted against receivables, and to decrease
rental or other income or increase bad debt expense for the current period,
although the Partnership continues to pursue collection of such amounts. If
amounts are subsequently determined to be uncollectible, the corresponding
receivable and allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership 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.
25
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
The Partnership's investments in CNL Kingston Joint Venture and CNL
Mansfield Joint Venture, and a property in Corpus Christi, Texas, a
property in Akron, Ohio, and a property in Fayetteville, North Carolina,
for which each property is held as tenants-in-common, are accounted for
using the equity method since the Partnership shares control with
affiliates which have the same general partners.
Cash and Cash Equivalents - The Partnership considers all highly liquid
-------------------------
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks, certificates of deposit and money market funds (some of
which are backed by government securities). Cash equivalents are stated at
cost plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks, certificates of deposit and money market funds may exceed
federally insured levels; however, the Partnership has not experienced any
losses in such accounts. The Partnership limits investment of temporary
cash investments to financial institutions with high credit standing;
therefore, the Partnership believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Organization Costs - Organization costs are being amortized over five years
------------------
using the straight-line method. In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities." The Statement, which is effective for
fiscal years beginning after December 15, 1998, requires that an entity
expense the costs of start-up activities and organization costs as they are
incurred. The Partnership will adopt this statement in 1999. The general
partners believe that adoption of this statement will not have a material
effect on the Partnership's financial position or results of operations.
Income Taxes - Under Section 701 of the Internal Revenue Code, all income,
------------
expenses and tax credit items flow through to the partners for tax
purposes. Therefore, no provision for federal income taxes is provided in
the accompanying financial statements. The Partnership is subject to
certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment (Note 6).
26
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Weighted Average Number of Limited Partner Units Outstanding - Net income
------------------------------------------------------------
and distributions per limited partner unit are calculated based upon the
weighted average number of units of limited partnership interest
outstanding during the period the Partnership was operational.
Use of Estimates - The general partners of the Partnership have made a
----------------
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounted principles. The more significant areas requiring the use of
management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
Reclassification - Certain items in the prior years' financial statements
----------------
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases:
------
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards No.
13, "Accounting for Leases." Some of the leases are classified as operating
leases and some of the leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the building
portions of the property leases are accounted for as direct financing
leases while the land portion of the leases are operating leases. Leases
are generally for 15 to 20 years and provide for minimum and contingent
rentals. In addition, the tenant pays all property taxes and assessments,
fully maintains the interior and exterior of the building and carries
insurance coverage for public liability, property damage, fire and extended
coverage. The lease options generally allow tenants to renew the leases for
two to five successive five-year periods subject to the same terms and
conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
27
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
1998 1997
--------------- ---------------
Land $10,359,513 $10,357,191
Buildings 11,164,432 11,525,646
--------------- ---------------
21,523,945 21,882,837
Less accumulated depreciation (875,817) (553,968)
$20,648,128 $21,328,869
=============== ===============
In June 1998, the tenant of the property in Troy, Ohio, exercised its
option under the terms of its lease agreement to substitute the existing
property for a replacement property. In conjunction therewith, the
Partnership exchanged the Boston Market property in Troy, Ohio, with a
Boston Market property in Inglewood, California. The lease for the
property in Troy, Ohio, was amended to allow the property in Inglewood,
California to continue under the terms of the original lease. All closing
costs were paid by the tenant. The Partnership accounted for this as a
nonmonetary exchange of similar assets and recorded the acquisition of the
property in Inglewood, California, at the net book value of the property in
Troy, Ohio. No gain or loss was recognized due to this being accounted for
as a nonmonetary exchange of similar assets.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended
December 31, 1998, 1997, and 1996, the Partnership recognized $287,397,
$293,699, and $167,216, respectively, of such rental income.
28
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
1999 $ 2,140,644
2000 2,153,281
2001 2,246,506
2002 2,303,258
2003 2,316,816
Thereafter 27,421,272
---------------
$38,581,777
===============
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during the
initial lease terms. In addition, this table does not include any amounts
for future contingent rentals which may be received on the leases based on
a percentage of the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
-----------------------------------------
The following lists the components of the net investment in direct
financing leases at December 31:
1998 1997
------------ ------------
Minimum lease payments
receivable $ 7,145,730 $ 7,636,851
Estimated residual values 765,563 775,896
Less unearned income (4,930,482) (5,355,964)
------------- -----------
Net investment in direct
financing leases $ 2,980,811 $ 3,056,783
============= ===========
29
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
4. Net Investment in Direct Financing Leases - Continued:
-----------------------------------------------------
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
1999 $ 407,310
2000 407,310
2001 407,310
2002 407,310
2003 407,310
Thereafter 5,109,180
--------------
$7,145,730
==============
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future
periods (see Note 3).
5. Investment in Joint Ventures:
----------------------------
In October 1996, the Partnership acquired an approximate 20 percent
interest in a property in Fayetteville, North Carolina, as tenants-in-
common, with an affiliate of the general partners. 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.
In January 1997, the Partnership acquired an approximate 27 percent
interest in a property in Corpus Christi, Texas, and an approximate 37
percent interest in a property in Akron, Ohio, each as tenants-in-common,
with affiliates of the general partners. The Partnership accounts for its
investment in these properties using the equity method since the
Partnership shares control with affiliates, and amounts relating to these
investments are included in investment in joint ventures.
In February 1997, the Partnership entered into a joint venture arrangement,
CNL Mansfield Joint Venture, with an affiliate of the Partnership which has
the same general partners, to hold one restaurant property in Mansfield,
Texas. As of December 31, 1997, the Partnership had contributed $163,964
to the joint venture to acquire the restaurant property. As of December
31, 1998, the Partnership owned a 21 percent interest in the profits and
losses of the joint venture. The Partnership accounts for its investment
in this joint venture under the equity method since the Partnership shares
control with the affiliate.
30
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
----------------------------------------
In September 1997, the Partnership entered into a joint venture
arrangement, CNL Kingston Joint Venture, with an affiliate of the
Partnership which has the same general partners, to construct and hold one
restaurant property. As of December 31, 1998, the Partnership had
contributed $311,048 to CNL Kingston Joint Venture to fund construction
costs relating to the property owned by the joint venture. As of December
31, 1998, the Partnership owned a 60.06% 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.
CNL Mansfield Joint Venture and CNL Kingston Joint Venture, and the
Partnership and affiliates, as tenants-in-common in three separate tenancy-
in-common arrangements, each own and lease one property to an operator of
national fast-food or family-style restaurants. The following presents the
combined, condensed financial information for the joint ventures and the
properties held as tenants-in-common with affiliates at December 31:
1998 1997
--------------- ---------------
Land and buildings on operating
lease, less accumulated
depreciation $4,412,584 $4,495,671
Cash 2,352 8,936
Accrued rental income 134,121 65,395
Other assets 87 1,931
Liabilities 11,918 228,896
Partners' capital 4,537,226 4,343,037
Revenues 554,934 453,481
Net income 458,588 375,257
5. Investment in Joint Ventures - Continued:
----------------------------------------
The Partnership recognized income totalling $140,595, $100,918, and $4,834
for the years ended December 31, 1998, 1997, and 1996 from these joint
ventures and the properties held as tenants-in-common with affiliates.
6. Syndication Costs:
-----------------
Syndication costs consisting of legal fees, commissions, a due diligence
expense reimbursement fee, printing and other expenses incurred in
connection with the offering totalled $3,590,000. These offering expenses
were charged to the limited partners' capital accounts to reflect the net
capital proceeds of the offering.
31
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
7. Allocations and Distributions:
-----------------------------
Generally, distributions of net cash flow, as defined in the limited
partnership agreement of the Partnership, are made 95 percent to the
limited partners and five percent to the general partners; provided,
however, that for any particular year, the five percent of net cash flow to
be distributed to the general partners will be subordinated to receipt by
the limited partners in that year of an eight percent noncumulative,
noncompounded return on their aggregate invested capital contributions (the
"Limited Partners' 8% Return").
Generally, net income (determined without regard to any depreciation and
amortization deductions and gains and losses from the sale of properties)
is allocated between the limited partners and the general partners first,
in an amount not to exceed the net cash flow distributed to the partners
attributable to such year in the same proportions as such net cash flow is
distributed; and thereafter, 99 percent to the limited partners and one
percent to the general partners. All deductions for depreciation and
amortization are allocated 99 percent to the limited partners and one
percent to the general partners.
Net sales proceeds from the sale of a property not in liquidation of the
Partnership generally will be distributed first to the limited partners in
an amount sufficient to provide them with the return of their invested
capital contributions, plus their cumulative Limited Partners' 8% Return.
The general partners will then receive a return of their capital
contributions and, to the extent previously subordinated and unpaid, a five
percent interest in all net cash flow distributions. Any remaining net
sales proceeds will be distributed 95 percent to the limited partners and
five percent to the general partners.
Any gain from the sale of a property, not in liquidation of the
Partnership, is in general, allocated in the same manner as net sales
proceeds are distributable. Any loss is, in general, allocated first, on a
pro rata basis to the partners with positive balances in their capital
accounts; and thereafter, 95 percent to the limited partners and five
percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will
be used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves
that may be deemed necessary for any anticipated or unforeseen liabilities
or obligations of the Partnership, iii) third, to pay all of the
Partnership's liabilities, if any, to the general and limited partners, iv)
fourth, after allocations of net income, gains and/or losses, to distribute
to the partners with positive capital accounts balances, in proportion to
such balances, up to amounts sufficient to reduce such positive balances to
zero, and v) thereafter, any funds remaining shall then be distributed 95
percent to the limited partners and five percent to the general partners.
32
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
7. Allocations and Distributions - Continued:
-----------------------------------------
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $2,400,000, $2,287,500,
and $1,166,689, respectively. No distributions have been made to the
general partners to date.
33
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. Income Taxes:
------------
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Net income for financial reporting purposes $2,394,158 $2,203,557 $1,095,759
Depreciation for financial reporting purposes
in excess of (less than) depreciation for
tax reporting purposes (1,069) 25,005 13,226
Direct financing leases recorded as operating
leases for tax reporting purposes 34,640 30,454 16,345
Equity in earnings of unconsolidated joint
ventures for financial reporting purposes in
excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes (13,489) (3,650) (479)
Minority interest in timing differences of
consolidated joint venture 23,280 217 --
Capitalization of transaction costs for tax
reporting purposes 14,139 -- --
Capitalization of administrative expenses for
tax reporting purposes -- 1,557 11,940
Amortization for tax reporting purposes (in
excess of) less than amortization for
financial reporting purposes 1,539 1,667 (2,025)
Accrued rental income (287,397) (293,699) (167,216)
Deferred rental income (9,208) 80,635 90,482
Rents paid in advance (35,184) 2,993 52,769
Allowance for doubtful accounts (13,050) 9,865 4,163
Other 5,680 -- --
-------------- ---------- -----------
Net income for federal income tax purposes $2,114,039 $2,058,601 $1,114,964
============== ========== ===========
</TABLE>
34
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions:
--------------------------
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL
Securities Corp. and majority stockholder of CNL Fund Advisors, Inc. James
M. Seneff, Jr. is director and chief executive officer of CNL Securities
Corp. and is director, chairman of the board of directors and chief
executive officer of CNL Fund Advisors, Inc. The other individual general
partner, Robert A. Bourne, is director and president of CNL Securities
Corp., is director, vice chairman of the board of directors and treasurer
of CNL Fund Advisors, Inc. and served as president of CNL Fund Advisors,
Inc. through October 31, 1997.
For the year ended December 31, 1996, the Partnership incurred $2,065,762
in syndication costs due to CNL Securities Corp. for services in connection
with selling limited partnership interests. A substantial portion of this
amount ($1,913,661) was paid as commissions to other broker-dealers.
In addition, for the year ended December 31, 1996, the Partnership incurred
$121,515 as a due diligence expense reimbursement fee due to CNL Securities
Corp. This fee equals 0.5% of the limited partner contributions of
$30,000,000. The majority of this fee was reallowed to other broker-
dealers for payment of bona fide due diligence expenses.
Additionally, the Partnership incurred $1,093,639 for the year ended
December 31, 1996 in acquisition fees due to CNL Fund Advisors, Inc. for
services in finding, negotiating and acquiring properties on behalf of the
Partnership. In total, these fees represent 4.5% of the limited partner
capital contributions of $30,000,000.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. acted as manager of the Partnership's properties pursuant to
a management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay CNL Fund Advisors, Inc. an annual, management fee
of one percent of the sum of gross revenues from properties wholly owned by
the Partnership and the Partnership's allocable share of gross revenues
from joint ventures. The management fee, which will not exceed fees which
are competitive for similar services in the same geographic area, may or
may not be taken, in whole or in part as to any year, in the sole
discretion of CNL Fund Advisors, Inc. All or any portion of the management
fee not taken as to any fiscal year shall be deferred without interest and
may be taken in such other fiscal year as CNL Fund Advisors, Inc. shall
determine. The Partnership incurred management fees of $26,690, $25,377,
and $10,482 for the years ended December 31, 1998, 1997, and 1996.
35
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions - Continued:
--------------------------------------
During the years ended December 31, 1998, 1997, and 1996, Affiliates
provided accounting and administrative services to the Partnership
(including accounting and administrative services in connection with the
offering of units) on a day-to-day basis. The expenses incurred for these
services were classified as follows:
1998 1997 1996
------------ -------- ---------
Syndication costs $ -- $ -- $177,683
General operating and
administrative expenses 91,124 90,700 96,729
$91,124 $90,700 $274,412
============ ======== =========
The due to related parties at December 31, 1998 and 1997 totalled $14,448
and $2,875 respectively.
During 1996, the Partnership acquired from affiliates of the general
partners three properties, one of which was held with another affiliate as
tenants-in-common, for an aggregate purchase price of $1,667,140. The
affiliates of the general partners had purchased and temporarily held title
to these properties in order to facilitate the acquisition of these
properties by the Partnership. The purchase prices paid by the Partnership
represented the costs incurred by the affiliates of the general partners to
acquire the properties, including closing costs.
During 1997, the Partnership and affiliates of the general partners
acquired two properties as tenants-in-common for an aggregate purchase
price of $718,932 from CNL BB Corp., an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to these properties
in order to facilitate the acquisition of the properties by the Partnership
and the affiliates. The purchase price paid by the Partnership and the
affiliates represented the costs incurred by CNL BB Corp. to acquire and
carry the property, including closing costs.
36
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
10. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income
(including rental and earned income from the Partnership's consolidated
joint venture, the Partnership's share of rental income from the
unconsolidated joint ventures and the three properties held as tenants-in-
common with affiliates of the general partners) for each of the years ended
December 31:
1998 1997 1996
------------------------------------
Golden Corral Corporation $461,527 $467,275 $286,307
DenAmerica Corp. 432,423 427,800 250,535
National Restaurant
Enterprises, Inc. 421,988 376,461 197,882
Foodmaker, Inc. 349,514 326,007 N/A
San Diego Food Holdings, Inc. 316,038 N/A N/A
RTM Indianapolis, Inc.
and RTM Southwest,
Texas, Inc. N/A N/A 133,200
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent
of the Partnership's total rental and earned income (including rental and
earned income from the Partnership's consolidated joint venture, the
Partnership's share of total rental income from the unconsolidated joint
ventures and the three properties held as tenants-in-common with affiliates
of the general partners) for each of the years ended December 31:
1998 1997 1996
------------------------------------
Golden Corral Family
Steakhouse Restaurants $777,565 $680,316 $286,307
Burger King 459,036 410,876 197,882
Jack in the Box 349,514 326,007 N/A
Boston Market 309,576 299,744 N/A
Arby's N/A N/A 133,200
Denny's N/A N/A 250,535
The information denoted by N/A indicates that for each period presented,
the tenant or group of affiliated tenants and the chains did not represent
more than ten percent of the Company's total rental, earned income and
interest income.
37
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
10. Concentration of Credit Risk - Continued:
----------------------------------------
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any of these lessees or restaurant chains
could significantly impact the results of operations of the Partnership if
the Partnership is not able to re-lease the properties in a timely manner.
During 1998, the tenants of three Boston Market properties filed for
bankruptcy. While the tenant has not rejected or affirmed these three
leases, there can be no assurance that some or all of the leases will not
be rejected in the future. The lost revenues resulting from the rejection
of all three leases could have an adverse effect on the results of
operations of the Partnership if the Partnership is unable to re-lease
these Properties in a timely manner.
11. Subsequent Events:
-----------------
In January 1999, the Partnership invested in a property in Zephyrhills,
Florida, with an affiliate of the general partners as tenants-in-common.
The Partnership contributed approximately $169,100 for a 24 percent
interest in the property. The Partnership will account for its investment
in this property using the equity method since the Partnership will share
control with affiliates. In addition, in January 1999, the Partnership
used a portion of these amounts to enter into a joint venture arrangement,
Ocean Shores Joint Venture, with an affiliate of the general partners to
hold one restaurant property. The Partnership contributed approximately
$360,000 to the joint venture to acquire the restaurant property. The
Partnership owns a 30.94% interest in the profits and losses of the joint
venture and will account for its investment in this joint venture under the
equity method since the Partnership shares control with the affiliate.
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
3,014,377 shares of its common stock, par value $0.01 per shares (the "APF
Shares"). In order to assist the general partners in evaluating the
proposed merger consideration, the general partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise
the Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the fair value of the Partnership's property
portfolio and other assets was $29,681,344 as of December 31, 1998.
38
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
11. Subsequent Events - Continued:
-----------------------------
The APF Shares are expected to be listed for trading on the New York Stock
Exchange concurrently with the consummation of the Merger, and, therefore,
would be freely tradable at the option of the former limited partners. At
a special meeting of the partners, limited partners holding in excess of
50% of the Partnership's outstanding limited partnership interests must
approve the Merger prior to consummation of the transaction. The general
partners intend to recommend that the limited partners of the Partnership
approve the Merger. In connection with their recommendation, the general
partners will solicit the consent of the limited partners at the special
meeting. If the limited partners reject the Merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such
transaction costs based upon the percentage of "Against" votes and
abstentions.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
October, 1999.
CNL INCOME FUND XVII, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
--------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
--------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
------------------------
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert A. Bourne Vice President, Secretary, October 28, 1999
- - -------------------------------- Treasurer and Director
Robert A. Bourne (Principal Financial and
Accounting Officer)
/s/ James M. Seneff, Jr. President and Director October 28, 1999
- - -------------------------------- (Principal Executive
James M. Seneff, Jr. Officer)
