<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended September 30, 1999
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from _______________________ to ______________________
Commission file number
0-24095
---------------------------------------
CNL Income Fund XVIII, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3295394
- -------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- -------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
CONTENTS
Part I Page
----
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 15
Part II
Other Information 16-19
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
------
Land and buildings on operating leases, less
accumulated depreciation of $803,084 and
$512,853 in 1999 and 1998, respectively
and allowance for loss on land of $197,466
in 1999 and 1998 $ 22,611,573 $ 22,876,012
Net investment in direct financing leases 5,874,250 5,937,312
Investment in joint ventures 687,608 160,395
Cash and cash equivalents 1,330,011 1,839,613
Receivables, less allowance for doubtful
accounts of $6,361 and $62,189 in 1999 and
1998, respectively 14,931 --
Due from related party 11,019 --
Prepaid expenses 7,780 3,653
Organization costs, less accumulated
amortization of $10,000 and $4,411 in 1999 and
1998, respectively -- 5,589
Accrued rental income 341,063 230,999
Other assets 59,161 59,044
--------------- ---------------
$ 30,937,396 $ 31,112,617
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 6,964 $ 2,558
Accrued real estate taxes payable 1,315 --
Distributions payable 700,000 700,000
Due to related parties 20,806 32,775
Rents paid in advance 34,417 7,351
Deferred rental income 58,000 101,436
--------------- ---------------
Total liabilities 821,502 844,120
Contingencies (Note 5)
Partners' capital 30,115,894 30,268,497
--------------- ---------------
$ 30,937,396 $ 31,112,617
=============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 602,890 $ 611,530 $ 1,832,395 $ 1,758,037
Earned income from direct financing leases 160,698 170,108 483,699 470,287
Interest and other income 15,306 14,189 60,534 114,967
------------- ------------- -------------- --------------
778,894 795,827 2,376,628 2,343,291
------------- ------------- -------------- --------------
Expenses:
General operating and administrative 33,138 46,347 105,134 117,608
Professional services 11,269 4,184 32,669 14,164
Management fees to related party 7,743 7,651 22,808 21,180
Real estate taxes 1,315 23,500 3,945 23,500
State and other taxes -- -- 14,139 8,605
Depreciation and amortization 96,699 89,370 295,820 268,305
------------- ------------- -------------- --------------
150,164 171,052 474,515 453,362
------------- ------------- -------------- --------------
Income Before Equity in Earnings of
Unconsolidated Joint Ventures 628,730 624,775 1,902,113 1,889,929
Equity in Earnings of Unconsolidated
Joint Ventures 16,515 -- 45,282 --
------------- ------------- -------------- --------------
Net Income $ 645,245 $ 624,775 $ 1,947,395 $ 1,889,929
============= ============= ============== ==============
Allocation of Net Income:
General partners $ (547) $ (752) $ (1,525) $ (678)
Limited partners 645,792 625,527 1,948,920 1,890,607
------------- ------------- -------------- --------------
$ 645,245 $ 624,775 $ 1,947,395 $ 1,889,929
============= ============= ============== ==============
Net Income Per Limited Partner Unit $ 0.18 $ 0.18 $ 0.56 $ 0.54
============= ============= ============== ==============
Weighted Average Number of Limited
Partner Units Outstanding 3,500,000 3,500,000 3,500,000 3,496,435
============= ============= ============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
General partners:
Beginning balance $ (2,010) $ (428)
Net loss (1,525) (1,582)
------------------ ------------------
(3,535) (2,010)
------------------ ------------------
Limited partners:
Beginning balance 30,270,507 29,847,008
Contributions -- 854,241
Syndication costs -- (76,882)
Net income 1,948,920 2,303,904
Distributions ($0.60 and $0.76 per
weighted average limited partner
unit, respectively) (2,099,998) (2,657,764)
------------------ ------------------
30,119,429 30,270,507
------------------ ------------------
Total partners' capital $ 30,115,894 $30,268,497
================== ==================
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 2,144,938 $ 2,158,678
---------------- ----------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating leases (25,792) (2,219,314)
Investment in direct financing leases -- (876,076)
Investment in joint ventures (526,138) (166,025)
Increase in other assets (117) (51,600)
---------------- ----------------
Net cash used in investing activities (552,047) (3,313,015)
---------------- ----------------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf of the Partnership (2,495) (37,135)
Contributions from limited partners -- 854,241
Distributions to limited partners (2,099,998) (1,768,400)
Payment of syndication costs -- (161,141)
Other -- (10,000)
---------------- ----------------
Net cash used in financing activities (2,102,493) (1,122,435)
---------------- ----------------
Net Decrease in Cash and Cash Equivalents (509,602) (2,276,772)
Cash and Cash Equivalents at Beginning of Period 1,839,613 4,143,327
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 1,330,011 $ 1,866,555
================ ================
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition costs on
behalf of the Partnership as follows: $ -- $ 35,864
================ ================
Distributions declared and unpaid at end of period $ 700,000 $ 700,000
================ ================
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
1. Basis of Presentation:
---------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1999, may not be
indicative of the results that may be expected for the year ending
December 31, 1999. Amounts as of December 31, 1998, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund XVIII, Ltd. (the "Partnership") for the year ended December
31, 1998.
Effective January 1, 1999, the Partnership adopted Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities." The
Statement requires that an entity expense the costs of start-up
activities and organization costs as they are incurred. Adoption of
this statement did not have a material effect on the Partnership's
financial position or results of operations.
2. Investment in Joint Ventures:
----------------------------
In February 1999, the Partnership entered into a joint venture
arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI,
Ltd., an affiliate of the general partners, to own and lease one
restaurant property. As of September 30, 1999, the Partnership had
contributed approximately $330,500 to the joint venture and owned a
57.2% interest in this joint venture.
In August 1998, the Partnership formed Columbus Joint Venture with CNL
Income Fund XII, Ltd. and CNL Income Fund XVI, Ltd., affiliates of the
general partners. During the nine months ended September 30, 1999, the
Partnership made additional contributions of approximately $195,700 to
Columbus Joint Venture pay construction costs. As of September 30,
1999, the Partnership owned a 39.93% interest in this joint venture.
5
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
2. Investment in Joint Ventures - Continued:
----------------------------------------
The Partnership accounts for its investments in these joint ventures
using the equity method since the Partnership shares control with
affiliates. The following presents the combined, condensed financial
information for the joint ventures at:
September 30, December 31,
1999 1998
--------------- --------------
Land and buildings under
an operating lease and
construction in progress,
less accumulated depreciation $ 1,146,666 $ 875,700
Net investment in direct
financing lease 321,804 --
Accrued rental income 14,508 --
Cash 7,775 3,935
Prepaid expenses 336 --
Liabilities 20,716 477,945
Partners' capital 1,470,373 401,690
Revenue 112,381 --
Net income 96,891 --
The Partnership recognized income totaling $16,515 and $45,282 for the
quarter and nine months ended September 30, 1999, respectively, from
these joint ventures. As of December 31, 1998, the property owned by
Columbus Joint Venture was not operational.
3. Related Party Transactions:
--------------------------
On September 1, 1999, CNL American Properties Fund, Inc. ("APF"), an
affiliate of the general partners, acquired CNL Fund Advisors, Inc.
("CFA"), an affiliate who provides certain services relating to
management of the Partnership and its properties pursuant to a
management agreement with the Partnership. As a result of this
acquisition, CFA became a wholly owned subsidiary of APF; however, the
terms of the management agreement between the Partnership and CFA
remain unchanged and in effect.
4. Merger Transaction:
------------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). Subsequent to entering into the Merger agreement, the
general partners received a number of comments from brokers who sold
the Partnership's units concerning the loss of passive income treatment
in the event the Partnership merged with APF. On June 3, 1999, the
general partners, on behalf
6
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
4. Merger Transaction - Continued:
------------------------------
of the Partnership, and APF agreed that it would be in the best
interests of the Partnership and APF that APF not attempt to acquire
the Partnership in the acquisition. Therefore, on June 4, 1999, APF
entered into a termination agreement with the general partners of the
Partnership.
5. Contingencies:
-------------
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partners in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates in
connection with the proposed Merger. On September 23, 1999, the judge
assigned to the two lawsuits entered an order consolidating the two
cases. Pursuant to this order, the plaintiffs in these cases filed a
consolidated and amended complaint on November 8, 1999. The various
defendants, including the general partners, have 45 days to respond to
that consolidated compliant. The general partners and APF believe that
the lawsuits are without merit and intend to defend vigorously against
the claims. See Part II - Item 1. Legal Proceedings.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund XVIII, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on February 10, 1995, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, as well as land upon which restaurants were to be
constructed (collectively, the "Properties"), which are leased primarily to
operators of selected national and regional fast-food, family-style and casual
dining restaurant chains. The leases generally are triple-net leases, with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities. As of September 30, 1999, the Partnership owned 25 Properties,
which included interests in two Properties owned by joint ventures in which the
Partnership is a co-venturer.
Capital Resources
- -----------------
The Partnership's primary source of capital is cash from operations
(which includes cash received from tenants, distributions from joint ventures
and interest and other income received, less cash paid for expenses). Cash from
operations was $2,144,938 and $2,158,678 for the nine months ended September 30,
1999 and 1998, respectively. The decrease in cash from operations for the nine
months ended September 30, 1999, as compared to the nine months ended September
30, 1998, was primarily a result of changes in the Partnership's working
capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1999.
In August 1998, the Partnership formed Columbus Joint Venture with CNL
Income Fund XII, Ltd. and CNL Income Fund XVI, Ltd., affiliates of the general
partners. During the nine months ended September 30, 1999, the Partnership made
additional contributions of approximately $195,700 to Columbus Joint Venture to
pay property construction costs. As of September 30, 1999, the Partnership owned
a 39.93% interest in this joint venture.
In February 1999, the Partnership entered into a joint venture
arrangement, CNL Portsmouth Joint Venture, with CNL Income Fund XI, Ltd., an
affiliate of the general partners, to own and lease one restaurant property. As
of September 30, 1999, the Partnership had contributed approximately $330,500 to
the joint venture and owned a 57.2% interest in this joint venture.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, certificates of deposit and money
market accounts with less than a 30-day maturity date, pending the Partnership's
use of such funds to pay Partnership expenses or to make distributions to
partners. At September 30, 1999, the Partnership had $1,330,011 invested in such
short-term investments, as compared to $1,839,613 at December 31, 1998. The
decrease in cash and cash equivalents at September 30, 1999 was primarily
attributable to the Partnership investing in CNL Portsmouth Joint Venture and
making additional capital contributions to Columbus Joint Venture, as described
above. The funds remaining at September 30, 1999, after the payment of
distributions and other liabilities, will be used to meet the Partnership's
working capital and other needs.
8
<PAGE>
Short-Term Liquidity
- --------------------
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on cash from operations, the Partnership declared distributions to limited
partners of $2,099,998 and $1,957,764 for the nine months ended September 30,
1999 and 1998, respectively ($700,000 for each of the quarters ended September
30, 1999 and 1998). This represents distributions of $0.60 per unit and $0.56
per weighted average limited partner unit for the nine months ended September
30, 1999 and 1998, respectively ($0.20 per unit for each of the quarters ended
September 30, 1999 and 1998). No distributions were made to the general partners
for the quarters and nine months ended September 30, 1999 and 1998. No amounts
distributed to the limited partners for the nine months ended September 30, 1999
and 1998 are required to be or have been treated by the Partnership as a return
of capital for purposes of calculating the limited partners' return on their
adjusted capital contributions. The Partnership intends to continue to make
distributions of cash available for distribution to the limited partners on a
quarterly basis.
Total liabilities of the Partnership, including distributions payable,
decreased to $821,502 at September 30, 1999, from $844,120 at December 31, 1998.
The general partners believe that the Partnership has sufficient cash on hand to
meet its current working capital needs.
Long-Term Liquidity
- -------------------
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
- ---------------------
During the nine months ended September 30, 1999 and 1998, the
Partnership owned and leased 23 wholly owned Properties to operators of
fast-food and family-style restaurant chains. During the nine months ended
September 30, 1999 and 1998, the Partnership earned $2,316,094 and $2,228,324,
respectively, in rental income from operating leases and earned income from
direct financing leases from these Properties, $763,588 and $781,638 of which
was earned during the quarters ended September 30, 1999 and 1998, respectively.
The increase in rental and earned income during the nine months ended September
30, 1999, as compared to the nine months ended September 30, 1998, was partially
attributable to the fact that Properties acquired during the nine months ended
September 30, 1998, generated revenues for the entire nine month period ended
September 30, 1999, as compared to generating revenues for a partial nine month
period ended September 30, 1998.
9
<PAGE>
The increase in rental and earned income for the nine months ended
September 30, 1999 was also partially attributable to the fact that during the
nine months ended September 30, 1999, the Partnership collected and recognized
as income approximately $47,400 for some of the past due rental amounts for
which the Partnership had previously established an allowance for doubtful
accounts relating to the Partnership's Property in Stow, Ohio.
The increase in rental and earned income for the nine months ended
September 30, 1999 was partially offset by, and the decrease in rental and
earned income for the quarter ended September 30, 1999, was primarily
attributable to, the fact that three tenants filed for bankruptcy in 1998. One
of these tenants rejected the lease relating to one of the Partnership's
Properties and ceased making rental payments to the Partnership for this lease.
The Partnership will not recognize any rental and earned income from this
Property until a new tenant for the Property is located, or until the Property
is sold and the proceeds from such sale are reinvested in an additional
Property. The general partners are currently seeking either a new tenant or
purchaser for the rejected Property. The Partnership has continued to receive
rental payments on the two other Properties leased by these tenants. While the
tenants have not rejected or affirmed the remaining two leases, there can be no
assurance that either or both of the leases will not be rejected in the future.
The lost revenues resulting from the one lease that was rejected, as described
above, and the possible rejection of the remaining two 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.
During the quarter and nine months ended September 30, 1999, the
Partnership owned and leased two Properties indirectly through joint venture
arrangements. In connection with these joint venture arrangements, the
Partnership earned $16,515 and $45,282 during the quarter and nine months ended
September 30, 1999, respectively. The Partnership did not own any Properties
through joint venture arrangements during the quarter and nine months ended
September 30, 1998.
During the quarter and nine months ended September 30, 1999 and 1998,
the Partnership also earned $60,534 and $114,967, respectively, in interest and
other income, $15,306 and $14,189 of which was earned during the quarters ended
September 30, 1999 and 1998, respectively. The decrease in interest and other
income during the nine months ended September 30, 1999, was primarily
attributable to a decrease in interest income due to a decrease in the amount of
funds invested in short-term, liquid investments due to the Partnership
investing in two separate joint ventures subsequent to September 30, 1998.
In addition, the decrease in interest and other income during the nine
months ended September 30, 1999 was partially offset by the fact that the
Partnership reversed $14,982 in transaction costs during the nine months ended
September 30, 1999. These represented amounts that had previously been expensed
related to the general partners retaining financial and legal advisors to assist
them in evaluating and negotiating the proposed merger with APF, as described
below. The general partners and APF agreed that it would be in the best interest
of the Partnership that it not be acquired in the acquisition due to the limited
partners' loss of passive income in the acquisition as described below. As a
result of this decision, the general partners have agreed to reimburse the
Partnership for these costs.
10
<PAGE>
Operating expenses, including depreciation and amortization expense,
were $474,515 and $453,362 for the nine months ended September 30, 1999 and
1998, respectively, $150,164 and $171,052 of which was incurred during the
quarters ended September 30, 1999 and 1998, respectively. The increase in
operating expenses during the nine months ended September 30, 1999, was
primarily attributable to an increase in depreciation expense as the result of
the fact that Properties acquired during the nine months ended September 30,
1998, were fully operational for the entire nine month period ended September
30, 1999, as compared to a partial period during the nine months ended September
30, 1998.
The increase in operating expenses for the nine months ended September
30, 1999 was also partially due to the fact that the Partnership incurred
approximately $15,200 in legal fees as a result of a tenant filing for
bankruptcy and rejecting the lease relating to its Property, as described above.
The Partnership will continue to incur certain expenses, such as real estate
taxes, maintenance, and legal fees, relating to this Property whose lease was
rejected until a replacement tenant or purchaser is located. The Partnership is
currently seeking either a replacement tenant or purchaser for this Property.
Merger Transaction
- ------------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
Subsequent to entering into the Merger agreement, the general partners received
a number of comments from brokers who sold the Partnership's units concerning
the loss of passive income treatment in the event the Partnership merged with
APF. On June 3, 1999, the general partners, on behalf of the Partnership, and
APF agreed that it would be in the best interests of the Partnership and APF
that APF not attempt to acquire the Partnership in the acquisition.
Notwithstanding this agreement, representatives of APF stated that they may
attempt, depending on market conditions, seek to acquire the Partnership after
APF was listed on the New York Stock Exchange. Therefore, on June 4, 1999, APF
entered into a termination agreement with the general partners of the
Partnership.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to
add three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partners in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. On September 23, 1999, the
judge assigned to the two lawsuits entered an order consolidating the two cases.
Pursuant to this order, the plaintiffs in these cases filed a consolidated and
amended complaint on November 8, 1999. The various defendants, including the
general partners, have 45 days to respond to that consolidated compliant. The
general partners and APF believe that the lawsuits are without merit and intend
to defend vigorously against the claims. See Part II - Item 1. Legal
Proceedings.
11
<PAGE>
Year 2000 Readiness Disclosure
- ------------------------------
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information
technology systems. The general partners and their affiliates provide all
services requiring the use of information and non-information technology systems
pursuant to a management agreement with the Partnership. The information
technology system of the general partners' affiliates consists of a network of
personal computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the general partners and their affiliates formed a Year
2000 committee (the "Y2K Team") for the purpose of identifying, understanding
and addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the general partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consisted
of identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The 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
12
<PAGE>
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 30, 1999, the Y2K Team had received responses from
approximately 62 percent of the third parties. All of the responses were in
writing. Of the third parties responding, all indicated that they are currently
year 2000 compliant or will be year 2000 compliant prior to the year 2000.
Although the Y2K Team continues to receive positive responses from the companies
with which the Partnership has third party relationships regarding their year
2000 compliance, the general partners cannot be assured that the third parties
have adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. As of September 30, 1999, the Y2K Team had received
responses from approximately 40 percent of the tenants. All of the responses
were in writing. Of the tenant's responding, all indicated that they are
currently year 2000 compliant or will be year 2000 compliant prior to the year
2000. The general partners cannot be assured that the tenants have adequately
considered the impact of the year 2000. The Partnership has also instituted a
policy of requiring any new tenants to indicate that their systems are year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades for its hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the general partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the general partners and their affiliates. The general
partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The general partners believe that the reasonably likely worst case
scenario with regard to the information and non-information technology systems
used by the Partnership is the failure of one or more of these systems as a
result of year 2000 problems. Because the Partnership's major source of income
is rental payments under long-term triple-net leases, any failure of information
or non-information technology systems used by the Partnership is not expected to
have a material impact on the results of operations of the Partnership. Even if
such systems failed, the payment of rent under the Partnership's leases would
not be affected. In addition, the Y2K Team is expected to correct any Y2K
problems within the control of the general partners and their affiliates before
the year 2000.
The Y2K Team has determined that a contingency plan to address this
risk is not necessary at this time. However, if the Y2K Team identifies
additional risks associated with the
13
<PAGE>
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
14
<PAGE>
2000. The general partners cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants would
affect the results of operations of the Partnership in the short-term.
The general partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The general
partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's
tenants, the Y2K Team is not able to develop a contingency plan to address these
risks. In the event of late payment or non-payment of rent, the general partners
will assess the remedies available to the Partnership under its lease
agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not applicable.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
On May 11, 1999, four limited partners in several CNL Income
Funds served a derivative and purported class action lawsuit
filed April 22, 1999 against the general partners and APF in
the Circuit Court of the Ninth Judicial Circuit of Orange
County, Florida, alleging that the general partners breached
their fiduciary duties and violated provisions of certain of
the CNL Income Fund partnership agreements in connection with
the proposed Merger. The plaintiffs are seeking unspecified
damages and equitable relief. On July 8, 1999, the plaintiffs
filed an amended complaint which, in addition to naming three
additional plaintiffs, includes allegations of aiding and
abetting and conspiring to breach fiduciary duties, negligence
and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended,
the caption of the case is Jon Hale, Mary J. Hewitt, Charles
---------------------------------
A. Hewitt, Gretchen M. Hewitt Bernard J. Schulte, Edward M.
-----------------------------------------------------------
and Margaret Berol Trust, and Vicky Berol v. James M. Seneff,
-------------------------------------------------------------
Jr., Robert A. Bourne, CNL Realty Corporation, and CNL
------------------------------------------------------
American Properties Fund, Inc., Case No. CIO-99-0003561.
-------------------------------
On June 22, 1999, a limited partner of several CNL Income
Funds served a purported class action lawsuit filed April 29,
1999 against the general partners and APF, Ira Gaines,
-----------
individually and on behalf of a class of persons similarly
----------------------------------------------------------
situated, v. CNL American Properties Fund, Inc., James M.
---------------------------------------------------------
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, CNL
----------------------------------------------------------
Fund Advisors, Inc., CNL Financial Corporation a/k/a CNL
--------------------------------------------------------
Financial Corp., CNL Financial Services, Inc. and CNL Group,
------------------------------------------------------------
Inc., Case NO. CIO-99-3796, in the Circuit Court of the Ninth
-----
Judicial Circuit of Orange County, Florida, alleging that the
general partners breached their fiduciary duties and that APF
aided and abetted their breach of fiduciary duties in
connection with the proposed Merger. The plaintiff is seeking
unspecified damages and equitable relief.
On September 23, 1999, Judge Lawrence Kirkwood entered an
order consolidating the two cases under the caption In re: CNL
----------
Income Funds Litigation, Case No. 99-3561. Pursuant to this
------------------------------------------
order, the plaintiffs in these cases filed a consolidated and
amended complaint on November 8, 1999, and the various
defendants, including the general partners, have 45 days to
respond to that consolidated complaint.
Item 2. Changes in Securities. Inapplicable.
----------------------
Item 3. Default upon Senior Securities. Inapplicable.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Inapplicable.
Item 5. Other Information. Inapplicable.
------------------
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
**2.1 Agreement and Plan of Merger by and between
the Registrant and CNL American Properties
Fund, Inc. ("APF") dated March 11, 1999
(filed as Appendix B to the Prospectus
Supplement for the Registrant, constituting
a part of the Registration Statement of APF
on Form S-4, File No. 74329)
**3.1 Affidavit and Certificate of Limited
Partnership of CNL Income Fund XVIII, Ltd.
(Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-11, No.
33-90998-01, incorporated herein by
reference.)
**3.2 Amended and Restated Agreement of Limited
Partnership of CNL Income Fund XVIII, Ltd.
(Included as Exhibit 4.2 to Form 10-K filed
with the Securities and Exchange Commission
on March 21, 1996, and incorporated herein
by reference.)
**4.1 Affidavit and Certificate of Limited
Partnership of CNL Income Fund XVIII, Ltd.
(Filed as Exhibit 3.2 to Registrant's
Registration Statement on Form S-11, No.
33-90998-01 incorporated herein by
reference.)
**4.2 Amended and Restated Agreement of Limited
Partnership of CNL Income Fund XVIII, Ltd.
(Included as Exhibit 4.2 to Form 10-K filed
with the Securities and Exchange Commission
on March 21, 1996, and incorporated herein
by reference.)
**4.3 Form of Agreement between CNL Income Fund
XVII, Ltd. and MMS Escrow and Transfer
Agency, Inc. and between CNL Income Fund
XVIII, Ltd. and MMS Escrow and Transfer
Agency, Inc. relating to the Distribution
Reinvestment Plans (Filed as Exhibit 4.4 to
the Registrant's Registration Statement on
Form S-11, No. 33-90998, incorporated herein
by reference.)
**5.1 Opinion of Baker & Hostetler as to the
legality of the securities being registered
by CNL Income Fund XVIII, Ltd. (Filed as
Exhibit 5.2 to Amendment No. Three to the
Registrant's Registration Statements on Form
S-11, No. 33-90998, incorporated herein by
reference.)
**8.1 Opinion of Baker & Hostetler regarding
certain material tax issues relating to CNL
Income Fund XVIII, Ltd. (Filed as Exhibit
8.1 to Amendment No. Three to the
Registrant's Registration Statement on Form
S-11, No. 33-90998, incorporated herein by
reference.)
17
<PAGE>
**8.2 Opinion of Baker & Hostetler regarding
certain material issues relating to the
Distribution Reinvestment Plan of CNL Income
Fund XVIII, Ltd. (Filed as Exhibit 8.4 to
Amendment No. Three to the Registrant's
Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**8.3 Amended Opinion of Baker & Hostetler
regarding certain material issues relating
to CNL Income Fund XVIII, Ltd. (Filed as
Exhibit 8.5 to Post-Effective Amendment No.
Four to the Registrant's Registration
Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**10.1 Management Agreement between CNL Income Fund
XVIII, Ltd. and CNL Fund Advisors, Inc.
(Included as Exhibit 10.1 to Form 10-K filed
with the Securities and Exchange Commission
on March 20, 1997, and incorporated herein
by reference.)
**10.2 Form of Joint Venture Agreement for Joint
Ventures with Unaffiliated Entities (Filed
as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**10.3 Form of Joint Venture Agreement for Joint
Ventures with Affiliated Programs (Filed as
Exhibit 10.3 to the Registrant's
Registration Statement on Form S-11, No.
33-90998, incorporated by reference.)
**10.4 Form of Development Agreement (Filed as
Exhibit 10.5 to Registrant's Registration
Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**10.5 Form of Indemnification and Put Agreement
(Filed as Exhibit 10.6 to the Registrant's
Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**10.6 Form of Unconditional Guarantee of Payment
and Performance (Filed as Exhibit 10.7 to
the Registrant's Registration Statement on
Form S-11, No. 33-90998, incorporated herein
by reference.)
**10.7 Form of Lease Agreement for Existing
Restaurant (Filed as Exhibit 10.8 to the
Registrant's Registration Statement on Form
S-11, No. 33-90998, incorporated herein by
reference.)
**10.8 Form of Lease Agreement for Restaurant to be
Constructed (Filed as Exhibit 10.9 to the
Registrant's Registration Statement on Form
S-11, No. 33-90998, incorporated herein by
reference.)
18
<PAGE>
**10.9 Form of Premises Lease for Golden Corral
Restaurant (Filed as Exhibit 10.10 to the
Registrant's Registration Statement on Form
S-11, No. 33-90998, incorporated herein by
reference.)
**10.10 Form of Agreement between CNL Income Fund
XVII, Ltd. and MMS Escrow and Transfer
Agency, Inc. and between CNL Income Fund
XVIII, Ltd. and MMS Escrow and Transfer
Agency, Inc. relating to the Distribution
Reinvestment Plans (Filed as Exhibit 4.4 to
the Registrant's Registration Statement on
Form S-11, No. 33-90998, incorporated herein
by reference.)
**10.11 Form of Cotenancy Agreement with
Unaffiliated Entity (Filed as Exhibit 10.12
to Amendment No. One to the Registrant's
Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**10.12 Form of Cotenancy Agreement with Affiliated
Entity (Filed as Exhibit 10.13 to Amendment
No. One to the Registrant's Registration
Statement on Form S-11, No. 33-90998,
incorporated herein by reference.)
**10.13 Form of Registered Investor Advisor
Agreement (Filed as Exhibit 10.14 to
Amendment No. One to the Registrant's
Registration Statement on Form S-11, No.
33-90998, incorporated herein by reference.)
**10.14 Termination Agreement by and between CNL
Income Fund XVIII, Ltd. and CNL American
Properties Fund, Inc. ("APF") dated June 4,
1999 (incorporated by reference hereby to
Exhibit 10.55 of Amendment No. 1 to APF's
Registrations Statement on Form S-4, File
No. 333-74329 filed with the Securities and
Exchange Commission under the Securities Act
of 1933, as amended)
** previously filed
27 Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November, 1999.
CNL INCOME FUND XVIII, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
-----------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
-----------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund XVIII, Ltd. at September 30, 1999, and its statement of
income for the nine months then ended and is qualified in its entirety by
reference to the Form 10-Q of CNL Income Fund XVIII, Ltd. for the nine months
ended September 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,330,011
<SECURITIES> 0
<RECEIVABLES> 21,292
<ALLOWANCES> 6,361
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 23,414,657
<DEPRECIATION> 803,084
<TOTAL-ASSETS> 30,937,396
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 30,115,894
<TOTAL-LIABILITY-AND-EQUITY> 30,937,396
<SALES> 0
<TOTAL-REVENUES> 2,376,628
<CGS> 0
<TOTAL-COSTS> 474,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,947,395
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,947,395
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,947,395
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund XVIII, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
