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Deficient management leads INDITEX on the verge of fail BUCHAREST, ROMANIA - Zara wants to cover losses from theft with employees’ money. The management, theft and losses give headaches to the Spanish group INDITEX, the owner of the ZARA chain. Only 10 months before, on July 25th, 2011, the publication Ziarul Financiar announced the fact that “INDITEX takes the manager from the Douglas perfumeries” pointing at Paul Cuza, who previously had the function of General Manager for Parfumerie Douglas SRL. Currently, the Romanian INDITEX group performs salary and structural changes without precedent, which the management team from Bucharest doesn’t want to explain. The problem of the clothes theft is a known phenomenon, especially when it comes to expensive brands such as ZARA or Massimo Dutti. The phenomenon was publicly recognized even by the management of the INDITEX Group Romania, two years before. Probably worried by this fact, Mihai Cioltea, the development manager of the INDITEX Group from Romania, also named by the press as “the Zara man”, stated in 2010 for the economic website InCont the following: “They steal a lot. Only for the stores in Bucharest we have 10 cases of stealing per day, which we discover and, depending on the severity, we call the police”.[...] Read the rest of the article... |
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UNITED STATES
FORM 10-K/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
For the transition period from __________________ to _________________ Commission file number 0-21558
CNL INCOME FUND XII, LTD.
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:
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($10 per Unit)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No __________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Aggregate market value of the voting stock held by nonaffiliates of the registrant: The registrant registered an offering of 4,500,000 units of limited partnership interest (the "Units") on Form S-11 under the Securities Act of 1933, as amended. Since no established market for such Units exists, there is no market value for such Units. Each Unit was originally sold at $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
The Form 10-K of CNL Income Fund XII, Ltd. for the year ended December 31, 1998 is being amended to revise the disclosure under Item 1. Business, Item 2. Properties, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data. PART I Item 1. Business
CNL Income Fund XII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 20, 1991. The general partners of the Partnership are Robert
The Partnership was organized to acquire both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed (the "Properties"), which are leased primarily to operators of national and regional fast-food and family-style restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership from its offering of Units, after deduction of organizational and offering expenses, totalled $39,615,456, and were used to acquire 48 Properties, including interests in three Properties owned by joint ventures in which the Partnership is a co-venturer, to loan $208,855 to the tenant of Kingsville Real Estate Joint Venture (as described in Note 6 to the financial statements in Item 8 of this report) and to establish a working capital reserve for Partnership purposes. During the year ended December 31, 1996, the Partnership sold its Property in Houston, Texas and reinvested the sales proceeds, along with additional funds, in Middleburg Joint Venture. During the year ended December 31, 1998, the Partnership entered into a joint venture arrangement, Columbus Joint Venture, with affiliates of the General Partners, to construct and hold one restaurant Property. In addition, during 1998, the Partnership sold the Property in Monroe, North Carolina. As a result of the above transactions, as of December 31, 1998, the Partnership owned 48 Properties. The 48 properties include five Properties owned by joint ventures in which the Partnership is co-venturer. The Partnership leases the Properties on a triple-net basis with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the Partnership would be merged with and into a subsidiary of APF (the "Merger"). APF is a real estate investment trust whose primary business is the ownership of restaurant properties leased on a long-term, "triple-net" basis to operators of national and regional restaurant chains. APF has agreed to issue shares of its common stock, par value $0.01 per share (the "APF Shares"), as consideration for the Merger. At a special meeting of the partners that is expected to be held in the fourth quarter of 1999, Limited Partners holding in excess of 50% of the Partnership's outstanding limited partnership interests must approve the Merger prior to consummation of the transaction. If the Limited Partners at the special meeting approve the Merger, APF will own the Properties and other assets of the Partnership. In the event that the Limited Partners vote against the Merger, the Partnership will hold its Properties until the General Partners determine that the sale or other disposition of the Properties is advantageous in view of the Partnership's investment objectives. In deciding whether to sell Properties, the General Partners will consider factors such as potential capital appreciation, net cash flow and federal income tax considerations. Certain lessees also have been granted options to purchase Properties, generally at the Property's then fair market value after a specified portion of the lease term has elapsed. The Partnership has no obligation to sell all or any portion of a Property at any particular time, except as may be required under property purchase options granted to certain lessees.
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Leases Although there are variations in the specific terms of the leases, the following is a summarized description of the general structure of the Partnership's leases. The Properties owned by the Partnership and the joint ventures in which the Partnership is a co-venturer provide for initial terms ranging from 14 to 20 years (the average being 19 years), and expire between 2007 and 2018. The leases are generally on a triple-net basis, with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases of the Properties provide for minimum base annual rental payments (payable in monthly installments) ranging from approximately $48,000 to $213,800. The majority of the leases provide for percentage rent, based on sales in excess of a specified amount. In addition, some of the leases provide that, commencing in specified lease years (generally the sixth lease year), the annual base rent required under the terms of the lease will increase. Generally, the leases of the Properties provide for two to four five-year renewal options subject to the same terms and conditions as the initial lease. Certain lessees also have been granted options to purchase Properties at the Property's then fair market value after a specified portion of the lease term has elapsed. Fair market value will be determined through an appraisal by an independent appraisal firm. Under the terms of certain leases, the option purchase price may equal the Partnership's original cost to purchase the Property (including acquisition costs), plus a specified percentage from the date of the lease or a specified percentage of the Partnership's purchase price, if that amount is greater than the Property's fair market value at the time the purchase option is exercised. The leases also generally provide that, in the event the Partnership wishes to sell the Property subject to that lease, the Partnership first must offer the lessee the right to purchase the Property on the same terms and conditions, and for the same price, as any offer which the Partnership has received for the sale of the Property. In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and rejected the leases relating to three of its eight leases and ceased making rental payments to the Partnership under these rejected leases. In December 1998, the Partnership sold one of the vacant Properties and intends to reinvest the net sales proceeds from the sale of this Property in an additional Property. The Partnership will not recognize rental and earned income from the two remaining vacant Properties until new tenants for these Properties are located or until the Properties are sold and the proceeds from such sales are reinvested in additional Properties. As of March 11, 1999, the Partnership has received rental payments on the five leases that were not rejected. While Long John Silver's, Inc. has not rejected or affirmed the remaining five leases, there can be no assurance that some or all of the leases will not be rejected in the future. The lost revenues resulting from the two vacant Properties, as described above, and the possible rejection of the remaining five leases could have an adverse effect on the results of operations of the Partnership, if the Partnership is not able to re-lease these Properties in a timely manner. The General Partners are currently seeking either new tenants or purchasers for the two remaining vacant Properties. During 1994, the leases relating to the Properties in Columbus, Georgia, and Amherst, Ohio were amended to provide for the payment of reduced annual base rent with no scheduled rent increases. However, the lease amendments provided for lower percentage rent breakpoints, as compared to the original lease agreements, a change that was designed to result in higher percentage rent payments at any time that percentage rent became payable. In accordance with a provision in the amendments, as a result of the former tenant assigning the leases to a new tenant during 1998, the rents under the assigned leases reverted back to those required under the original lease agreements. In August 1998, the Partnership entered into a joint venture arrangement, Columbus Joint Venture, with affiliates of the General Partners, to construct and hold one restaurant Property. The lease terms for this Property are substantially the same as the Partnership's other leases as described above in the first two paragraphs of this section. During 1998, the tenant of the Property in Kingsville Real Estate Joint Venture experienced financial difficulties and ceased payment of rents under the terms of its lease agreement. In January 1999, Kingsville Real Estate Joint Ventu re entered into a five year lease with a new tenant.
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Major Tenants
During 1998, four lessees (or groups of affiliated lessees) of the
Partnership, (i) Long John Silver's, Inc., (ii) Denny's, Inc. and Quincy's, Inc.
(which are affiliated entities under common control of Advantica Restaurant
Group, Inc.) (hereinafter referred to as "Advantica Restaurant Group, Inc."),
Joint Venture Arrangements The Partnership has entered into the following separate joint venture arrangements: Williston Real Estate Joint Venture with CNL Income Fund X, Ltd., an affiliate of the General Partners, to hold one Property; Des Moines Real Estate Joint Venture with CNL Income Fund VII, Ltd. and CNL Income Fund XI, Ltd., affiliates of the General Partners, to hold one Property; Kingsville Real Estate Joint Venture with CNL Income Fund IV, Ltd., an affiliate of the General Partners, to hold one Property; Middleburg Joint Venture with CNL Income Fund VIII, Ltd., an affiliate of the General Partners, to purchase and hold one Property; and Columbus Joint Venture with CNL Income Fund XVI, Ltd. and CNL Income Fund XVIII, Ltd., affiliates of the General Partners, to hold one Property. Each of the affiliates is a limited partnership organized pursuant to the laws of the State of Florida. The joint venture arrangements provide for the Partnership and its joint venture partners to share in all costs and benefits associated with the joint ventures in accordance with their respective percentage interests in the joint ventures. The Partnership has a 59.05% interest in Williston Real Estate Joint Venture, an 18.61% interest in Des Moines Real Estate Joint Venture, a 31.13% interest in Kingsville Real Estate Joint Venture, an 87.54% interest in Middleburg Joint Venture and a 27.72% interest in Columbus Joint Venture. The Partnership and its joint venture partners are also jointly and severally liable for all debts, obligations and other liabilities of the joint ventures. Each joint venture has an initial term of 20 years and, after the expiration of the initial term, continues in existence from year to year unless terminated at the option of any of the joint venturers or by an even t of dissolution. Events of dissolution include the bankruptcy, insolvency or termination of any joint venturer, sale of the Property owned by the joint venture and mutual agreement of the Partnership and its joint venture partners to dissolve the joint venture. The Partnership shares management control equally with affiliates of the General Partners for each joint venture. The joint venture agreements restrict each venturer's ability to sell, transfer or assign its joint venture interest without first offering it for sale to its joint venture partners, either upon such terms and conditions as to which the venturers may agree or, in the event the venturers cannot agree, on the same terms and conditions as any offer from a third party to purchase such joint venture interest. Net cash flow from operations of Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture, Kingsville Real Estate Joint Venture, Middleburg Joint Venture, and Columbus Joint Venture is distributed 59.05 percent, 18.61%, 31.13% 87.54% and 27.72%, respectively, to the Partnership and the balance is distributed to each of the joint venture partners in accordance with its respective percentage interest in the joint venture. Any liquidation
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proceeds, after paying joint venture debts and liabilities and funding reserves for contingent liabilities, will be distributed first to the joint venture partners with positive capital account balances in proportion to such balances until such balances equal zero, and thereafter in proportion to each joint venture partner's percentage interest in the joint venture. The use of joint venture arrangements allows the Partnership to fully invest its available funds at times at which it would not have sufficient funds to purchase an additional property, or at times when a suitable opportunity to purchase an additional property is not available. The use of joint venture arrangements also provides the Partnership with increased diversification of its portfolio among a greater number of properties. Certain Management Services CNL Fund Advisors, Inc., an affiliate of the General Partners, provides certain services relating to management of the Partnership and its Properties pursuant to a management agreement with the Partnership. Under this agreement, CNL Fund Advisors, Inc. is responsible for collecting rental payments, inspecting the Properties and the tenants' books and records, assisting the Partnership in responding to tenant inquiries and notices and providing information to the Partnership about the status of the leases and the Properties. CNL Fund Advisors, Inc. also assists the General Partners in negotiating the leases. For these services, the Partnership has agreed to pay CNL Fund Advisors, Inc. an annual fee of one percent of the sum of gross rental revenues from Properties wholly owned by the Partnership plus the Partnership's allocable share of gross revenues of joint ventures in which the Partnership is a co-venturer, but not in excess of competitive fees for comparable services. The management agreement continues until the Partnership no longer owns an interest in any Properties unless terminated at an earlier date upon 60 days' prior notice by either party. Employees The Partnership has no employees. The officers of CNL Realty Corporation and the officers and employees of CNL Fund Advisors, Inc. perform certain services for the Partnership. In addition, the General Partners have available to them the resources and expertise of the officers and employees of CNL Group, Inc., a diversified real estate company, and its affiliates, who may also perform certain services for the Partnership. Item 2. Properties As of December 31, 1998, the Partnership owned 48 Properties. Of the 48 Properties, 43 are owned by the Partnership in fee simple and five are owned through joint venture arrangements. See Item 1. Business - Joint Venture Arrangements. The Partnership is not permitted to encumber its Properties under the terms of its partnership agreement. Reference is made to the Schedule of Real Estate and Accumulated Depreciation for a listing of the Properties and their respective costs, including acquisition fees and certain acquisition expenses. This schedule was filed with the Partnership's Form 10-K for the year ended December 31, 1998. Description of Properties Land. The Partnership's Property sites range from approximately 9,200 to 467,400 square feet depending upon building size and local demographic factors. Sites purchased by the Partnership are in locations zoned for commercial use which have been reviewed for traffic patterns and volume.
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The following table lists the Properties owned by the Partnership as of December 31, 1998 by state. More detailed information regarding the location of the Properties is contained in the Schedule of Real Estate and Accumulated Depreciation filed with the Partnership's Form 10-K for the year ended December 31, 1998.
Buildings. Each of the Properties owned by the Partnership includes a building that is one of a Restaurant Chain's approved designs. The buildings generally are rectangular and are constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 2,100 to 11,400 square feet. All buildings on Properties are freestanding and surrounded by paved parking areas. Buildings are suitable for conversion to various uses, although modifications may be required prior to use for other than restaurant operations. As of December 31, 1998, the Partnership had no plans for renovation of the Properties. Depreciation expense is computed for buildings and improvements using the straight line method using a depreciable life of 40 years for federal income tax purposes. As of December 31, 1998, the aggregate cost of the Properties owned by the Partnership and joint ventures for federal income tax purposes was $35,828,091 and $5,272,142, respectively. The following table lists the Properties owned by the Partnership as of December 31, 1998 by Restaurant Chain.
The General Partners consider the Properties to be well-maintained and sufficient for the Partnership's operations.
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The General Partners believe that the Properties are adequately covered by insurance. In addition, the General Partners have obtained contingent liability and property coverage for the Partnership. This insurance is intended to reduce the Partnership's exposure in the unlikely event a tenant's insurance policy lapses or is insufficient to cover a claim relating to the Property. Leases. The Partnership leases the Properties to operators of selected national and regional fast-food restaurant chains. The leases are generally on a long-term "triple net" basis, meaning that the tenant is responsible for repairs, maintenance, property taxes, utilities and insurance. Generally, a lessee is required, under the terms of its lease agreement, to make such capital expenditures as may be reasonably necessary to refurbish buildings, premises, signs and equipment so as to comply with the lessee's obligations, if applicable, under the franchise agreement to reflect the current commercial image of its Restaurant Chain. These capital expenditures are required to be paid by the lessee during the term of the lease. The terms of the leases of the Properties owned by the Partnership are described in Item 1. Business - Leases. As of December 31, 1998, 1997, 1996, 1995 and 1994 the Properties were 96%, 100%, 98%, 100% and 100% occupied, respectively. The following is a schedule of the average annual rent for each of the five years ended December 31:
(1) Rental income includes the Partnership's share of rental income from the Properties owned through joint venture arrangements. Rental revenues have been adjusted, as applicable, for any amounts for which the Partnership has established an allowance for doubtful accounts. The following is a schedule of lease expirations for leases in place as of December 31, 1998 for each of the ten years beginning with 1999 and thereafter.
(1) Excludes two Properties which were vacant at December 31, 1998. Leases with Major Tenants. The terms of each of the leases with the Partnership's major tenants as of December 31, 1998 (see Item 1. Business - Major Tenants), are substantially the same as those described in Item 1. Business -Leases.
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Flagstar Enterprises, Inc. leases 11 Hardee's restaurants. The initial term of each lease is 20 years (expiring between 2012 and 2013) and the average minimum base annual rent is approximately $74,300 (ranging from approximately $54,900 to $93,300). Long John Silver's, Inc. leases five Long John Silver's restaurants. The initial term of each lease is 20 years (expiring in 2013) and the average minimum base annual rent is approximately $78,000 (ranging from approximately $68,900 to $86,800). Advantica Restaurant Group, Inc. leases three Denny's restaurants and one Quincy's restaurant. The initial term of each lease is 20 years (expiring in 2012) and the average minimum base annual rent is approximately $111,600 (ranging from approximately $76,800 to $144,200). Foodmaker, Inc. leases ten Jack in the Box restaurants. The initial term of each lease is 18 years (expiring between 2010 and 2011) and the average minimum base annual rent is approximately $107,600 (ranging from approximately $83,500 to $135,300). Competition The fast-food and family-style restaurant business is characterized by intense competition. The restaurants on the Partnership's Properties compete with independently owned restaurants, restaurants which are part of local or regional chains, and restaurants in other well-known national chains, including those offering different types of food and service. PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership was organized on August 20, 1991, to acquire for cash, either directly or through joint venture arrangements, both newly constructed and existing restaurant Properties, as well as land upon which restaurant Properties were to be constructed, which are leased primarily to operators of selected national and regional fast-food and family-style Restaurant Chains. The leases are generally triple-net leases, with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. As of December 31, 1998, the Partnership owned 48 Properties, either directly or through joint venture arrangements. Capital Resources The Partnership's primary source of capital for the years ended December 31, 1998, 1997, and 1996, was cash from operations (which includes cash received from tenants, distributions from joint ventures and interest received, less cash paid for expenses). Cash from operations was $4,116,780, $3,806,988, and $3,951,689 for the years ended December 31, 1998, 1997, and 1996, respectively. The increase in cash from operations during 1998, as compared to 1997, is primarily a result of changes in the Partnership's working capital, and the decrease in cash from operations during 1997, as compared to 1996, is primarily a result of changes in income and expenses as described in "Results of Operations" below and changes in the Partnership's working capital during each of the respective years. Other sources and uses of capital included the following during the years ended December 31, 1998, 1997 and 1996. In April 1996, the Partnership sold its Property in Houston, Texas to an unrelated third party for $1,640,000. As a result of this transaction, the Partnership recognized a loss of $15,355 for financial reporting purposes primarily due to acquisition fees and miscellaneous acquisition expenses that the Partnership had allocated to this Property. In May 1996, the Partnership reinvested the sales proceeds from this sale, along with additional funds, in Middleburg Joint Venture. The Partnership has an 87.54% interest in the profits and losses of Middleburg Joint Venture and the remaining interest in this joint venture is held by an affiliate of the Partnership which has the same General Partners.
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In March 1997, the Partnership entered into a new lease for the Property in Tempe, Arizona. In connection therewith, the Partnership incurred $55,000 in renovation costs which were completed in May 1997. In August 1998, the Partnership entered into a joint venture arrangement, Columbus Joint Venture, with affiliates of the general partners, to construct and hold one restaurant Property. As of December 31, 1998, the Partnership had contributed approximately $115,000 to purchase land and pay for construction costs relating to the joint venture and owned a 27.72% interest in the profits and losses of this joint venture. When funding is completed, the Partnership expects to have an approximate 28 percent interest in the profits and losses of the joint venture. In December 1998, the Partnership sold its Property in Monroe, North Carolina, to an unrelated third party, and received net sales proceeds of $483,549. As a result of this transaction, the Partnership recognized a loss of $104,374 for financial reporting purposes. The Partnership intends to reinvest these net sales proceeds in an additional Property. None of the Properties owned by the Partnership, or the joint ventures in which the Partnership owns an interest, is or may be encumbered. Subject to certain restrictions on borrowing, however, the Partnership may borrow funds but will not encumber any of the Properties in connection with any such borrowing. The Partnership will not borrow for the purpose of returning capital to the Limited Partners. The Partnership will not borrow under arrangements that would make the Limited Partners liable to creditors of the Partnership. The General Partners further have represented that they will use their reasonable efforts to structure any borrowing so that it will not constitute "acquisition indebtedness" for federal income tax purposes and also will limit the Partnership's outstanding indebtedness to three percent of the aggregate adjusted tax basis of its Properties. Affiliates of the General Partners from time to time incur certain operating expenses on behalf of the Partnership for which the Partnership reimburses the affiliates without interest. Currently, rental income from the Partnership's Properties and net sales proceeds from the sale of Properties, pending reinvestment in additional Properties, are invested in money market accounts or other short-term highly liquid investments such as demand deposit accounts at commercial banks, CDs and money market accounts with less than a 30-day maturity date, pending the Partnership's use of such funds to pay Partnership expenses or to make distributions to partners. At December 31, 1998, the Partnership had $2,362,980 invested in such short-term investments as compared to $1,706,415 at December 31, 1997. The increase in cash and cash equivalents during 1998, is primarily due to the receipt of $483,549 in net sales proceeds from the 1998 sale of the Property in Monroe, North Carolina. As of December 31, 1998, the average interest rate earned on the rental income deposited in demand deposit accounts at commercial banks was approximately three percent annually. The funds remaining at December 31, 1998, after payment of distributions and other liabilities, will be used to meet the Partnership's working capital and other needs. Short-Term Liquidity The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership. The Partnership's investment strategy of acquiring Properties for cash and leasing them under triple-net leases to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. The General Partners believe that the leases will continue to generate cash flow in excess of operating expenses. Due to low operating expenses and ongoing cash flow, the General Partners believe that the Partnership has sufficient working capital reserves at this time. In addition, because all leases of the Partnership's Properties are on a triple-net basis, it is not anticipated that a permanent reserve for maintenance and repairs will be established at this time. To the extent, however, that the Partnership has insufficient funds for such purposes, the General Partners will contribute to the Partnership an aggregate amount of up to one percent of the offering proceeds for maintenance and repairs. The General Partners have the right, but not the obligation, to make additional capital contributions if they deem it appropriate in connection with the operations of the Partnership.
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The Partnership generally distributes cash from operations remaining after the payment of the operating expenses of the Partnership, to the extent that the General Partners determine that such funds are available for distribution. Based on cash from operations, the Partnership declared distributions to the Limited Partners of $3,960,008 for the year ended December 31, 1998, and $3,825,008 for each of the years ended December 31, 1997 and 1996. This represents a distribution of $0.88 per Unit for the year ended December 31, 1998, and $0.85 per Unit for each of the years ended December 31, 1997 and 1996. No amounts distributed or to be distributed to the Limited Partners for the years ended December 31, 1998, 1997, and 1996, are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the Limited Partners' return on their adjusted capital contributions. The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis. During 1998, 1997, and 1996, affiliates of the General Partners incurred on behalf of the Partnership $130,847, $97,078, and $118,929, respectively, for certain operating expenses. As of December 31, 1998 and 1997, the Partnership owed $24,025 and $6,887, respectively, to affiliates for such amounts and accounting and administrative services. As of March 11, 1999, the Partnership had reimbursed the affiliates all such amounts. Other liabilities including distributions payable increased to $1,220,032 at December 31, 1998, from $1,006,791 at December 31, 1997, primarily as the result of the Partnership's accruing a special distribution of accumulated, excess operating reserves payable to the Limited Partners of $135,000 at December 31, 1998. The increase was also partially a result of an increase in rents paid in advance at December 31, 1998. The General Partners believe that the Partnership has sufficient cash on hand to meet its current working capital needs. Long-Term Liquidity The Partnership has no long-term debt or other long-term liquidity requirements. Results of Operations During the years ended December 31, 1996, the Partnership owned and leased 45 wholly owned Properties (including one Property in Houston, Texas, which was sold in April 1996). During 1998 and 1997, the Partnership owned and leased 44 wholly owned Properties (including one Property in Monroe, North Carolina, which was sold in December 1998). During 1996 and 1997, the Partnership was a co-venturer in four separate joint ventures that each owned and leased one Property, and during 1998, the Partnership was a co-venturer in five separate joint ventures that each owned and leased one Property. As of December 31, 1998, the Partnership owned, either directly or through joint venture arrangements, 48 Properties which are, in general, subject to long-term, triple-net leases. The leases of the Properties provide for minimum base annual rental payments (payable in monthly installments) ranging from approximately $48,000 to $213,800. The majority of the leases provide for percentage rent based on sales in excess of a specified amount. In addition, some of the leases provide that, commencing in specified lease years (generally the sixth lease year), the annual base rent required under the terms of the lease will increase. For further description of the Partnership's leases and Properties, see Item 1. Business - Leases and Item 2. Properties, respectively. During the years ended December 31, 1998, 1997, and 1996, the Partnership earned $3,862,390, $4,102,842, and $4,165,640, respectively, in rental income from operating leases (net of adjustments to accrued rental income) and earned income from direct financing leases from Properties wholly owned by the Partnership. Rental and earned income decreased approximately $136,300 during 1998, as compared to 1997, primarily due to the fact that in June 1998, Long John Silver's, Inc., filed for bankruptcy and rejected the leases relating to three of its eight leases. As a result, the tenant ceased making rental payments on the three rejected leases. As of March 11, 1999, the Partnership has continued receiving rental payments relating to the five leases not rejected by the tenant. In conjunction with the three rejected leases, during 1998, the Partnership wrote off approximately $224,900 of accrued rental income (non-cash accounting adjustments relating to the straight-lining of future scheduled rent increases over the lease term in accordance with generally accepted accounting principles). In December 1998, the Partnership sold one of the vacant Properties, as described above in "Capital Resources," and intends to reinvest the net sales proceeds from the sale of this Property in an additional Property. The Partnership will not recognize any rental and earned income from these two vacant Properties until new tenants for these Properties are located, or until the Properties are sold and the proceeds from such sales are reinvested in additional Properties. While Long John Silver's, Inc. has not rejected or affirmed the remaining five leases, there can be no assurance that some or all of the leases will not be rejected in the future. The lost revenues resulting from the two vacant Properties, as described above, and the possible rejection of the
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remaining five leases could have an adverse effect on the results of operations of the Partnership, if the Partnership is not able to re-lease these Properties in a timely manner. The General Partners are currently seeking either new tenants or buyers for the two remaining, vacant Properties. The decrease in rental and earned income during 1997, as compared to 1996, is primarily attributable to a decrease of approximately $51,800 during the year ended December 31, 1997 as a result of the sale of the Property in Houston, Texas, in April 1996, as discussed above in "Capital Resources." In addition, rental and earned income also decreased approximately $23,500 during 1997 as a result of the fact that the tenant of the Property in Tempe, Arizona, declared bankruptcy and ceased operations of the restaurant business located on the Property in June 1996. As a result of the termination of this lease, during the year ended December 31, 1996, the Partnership reclassified this lease from a direct financing lease to an operating lease. In March 1997, the Partnership entered into a new lease for the Property in Tempe, Arizona with a new tenant to operate the Property for which rental payments commenced in July 1997. The decrease in rental and earned income during 1997, as compared to 1996, was partially offset by an increase in rental income earned from the new tenant during 1997. During the years ended December 31, 1998, 1997, and 1996, the Partnership also earned $23,433, $54,330, and $67,652, respectively, in contingent rental income. The decrease in contingent rental income during 1998 and 1997, each as compared to the previous year, is primarily attributable to decreased gross sales of certain restaurant Properties requiring the payments of contingent rental income. In addition, for the years ended December 31, 1998, 1997, and 1996, the Partnership earned $95,142, $277,325, and $200,499, respectively, attributable to net income earned by joint ventures in which the Partnership is a co- venturer. The decrease in net income earned by joint ventures during 1998, as compared to 1997, is primarily due to the fact that Kingsville Real Estate Joint Venture (in which the Partnership owns a 31.13% interest in the profits and losses of the joint venture) established an allowance for doubtful accounts of approximately $116,700 during 1998. The tenant of this Property experienced financial difficulties and ceased payment of rents under the terms of their lease agreement. No such allowance was established during the year ended December 31, 1997. In addition, during 1998, the joint venture established an allowance for loss on land and net investment in the direct financing lease for its Property in Kingsville, Texas of approximately $316,000. The allowance represents the difference between the Property's carrying value at December 31, 1998 and the estimated net realizable value of the Property. In January 1999, Kingsville Real Estate Joint Venture entered into a new lease for this Property with a new tenant. The increase in net income earned by joint ventures during 1997, as compared to 1996, is primarily due to the fact that the Partnership invested in Middleburg Joint Venture in May 1996, as described above in "Capital Resources." During the year ended December 31, 1998, four of the Partnership's lessees (or group of affiliated lessees), (i) Long John Silver's, Inc., (ii) Foodmaker, Inc., (iii) Denny's Inc. and Quincy's, Inc. (which are affiliated under common control of Advantica Restaurant Group, Inc.), and (iv) Flagstar Enterprises, Inc., each contributed more than ten percent of the Partnership's total rental income (including the Partnership's share of rental income from five Properties owned by joint ventures). As of December 31, 1998, Long John Silver's, Inc. was the lessee under leases relating to five restaurants (excluding the three leases rejected by the tenant, as described above), Foodmaker, Inc. was the lessee under leases relating to ten restaurants, Advantica Restaurant Group, Inc. was the lessee under leases relating to four restaurants, and Flagstar Enterprises, Inc. was the lessee under leases relating to 11 restaurants. It is anticipated that based on the minimum rental payments required by the leases, Foodmaker, Inc., Advantica Restaurant Group, Inc., and Flagstar Enterprises, Inc. each will continue to contribute more than ten percent of the Partnership's total rental income during 1999. In addition, during the year ended December 31, 1998, four Restaurant Chains, Long John Silver's, Hardee's, Jack in the Box, and Denny's, each accounted for more than ten percent of the Partnership's total rental income (including the Partnership's share of rental income from five Properties owned by joint ventures). During 1998, Long John Silver's Inc. filed for bankruptcy, as described above. In 1999, it is anticipated that Jack in the Box, Denny's, and Hardee's each will continue to account for more than ten percent of the Partnership's total rental income to which the Partnership is entitled under the terms of the leases. Any failure of these lessees or Restaurant Chains could materially affect the Partnership's income if the Partnership is not able to re-lease the Properties in a timely manner. During the years ended December 31, 1998, 1997, and 1996, the Partnership also earned $70,227, $87,719, and $119,267, respectively, in interest and other income. The decrease in interest and other income during 1998, as compared to 1997, is primarily a result of the Partnership establishing an allowance for doubtful accounts during 1998,
11
of approximately $17,300 for past due accrued interest income amounts that relate to the loan with the tenant of the Property in Kingsville Real Estate Joint Venture due to financial difficulties the tenant is experiencing. In January 1999, Kingsville Real Estate Joint Venture entered into a new lease with a new tenant, and in conjunction therewith, the General Partners agreed to cease collection efforts on the past due amounts. The decrease in interest and other income during 1997, as compared to 1996, is primarily attributable to the Partnership granting certain easement rights during 1996, to the owner of the Property adjacent to the Partnership's Property in Black Mountain, North Carolina, in exchange for $25,000. In addition, the decrease in interest and other income during 1997, as compared to 1996, is offset by an increase attributable to the Partnership recognizing approximately $7,900 in other income due to the fact that the former tenant of the Property in Tempe, Arizona, paid past due real estate taxes relating to the Property and the Partnership reversed such amounts during 1997 that it had previously accrued as payable during 1996. Operating expenses, including depreciation and amortization expense, were $806,746, $570,002, and $594,660, for the years ended December 31, 1998, 1997, and 1996, respectively. The increase in operating expenses during 1998, as compared to 1997, is primarily attributable to the fact that the Partnership recorded bad debt expense for past due principal and interest amounts relating to the loan with the tenant of the Property in Kingsville Real Estate Joint Venture due to financial difficulties the tenant is experiencing. In January 1999, Kingsville Real Estate Joint Venture entered into a new lease with a new tenant, and the General Partners ceased collection efforts on the past due amounts. In addition, the increase in operating expenses during 1998, is partially attributable to the fact that the Partnership accrued insurance and real estate tax expenses as a result of Long John Silver's, Inc. filing for bankruptcy and rejecting the leases relating to three of its eight leased Properties in June 1998, as described above. In addition, the increase in operating expenses during 1998, is partially attributable to an increase in depreciation expense due to the fact that during 1998, the Partnership reclassified these assets from net investment in direct financing leases to land and buildings on operating leases. In December 1998, the Partnership sold one of the vacant Properties and intends to reinvest the net sales proceeds it received from the sale of this Property in an additional Property. The Partnership will continue to incur certain expenses, such as real estate taxes, insurance, and maintenance relating to the two remaining, vacant Properties until new tenants or buyers are located. The Partnership is currently seeking either new tenants or purchasers for these two Properties. In addition, the increase in operating expenses during 1998, is partially a result of the Partnership incurring $24,282 in transaction costs relating to the General Partners retaining financial and legal advisors to assist them in evaluating and negotiating the proposed Merger with APF, as described below. If the Limited Partners reject the Merger, the Partnership will bear the portion of the transaction costs based upon the percentage of "For" votes and the General Partners will bear the portion of such transaction costs based upon the percentage of "Against" votes and abstentions. The decrease in operating expenses during 1997, as compared to 1996, is partially attributable to the fact that during 1996, the Partnership recorded current and past due real estate taxes relating to the Property in Tempe, Arizona, due to financial difficulties the tenant was experiencing. As described above, the amounts accrued during 1996 were reversed and recorded as other income during 1997. No real estate taxes were recorded during 1997 relating to the Property in Tempe, Arizona, due to the fact that the new tenant is responsible for the real estate taxes under the terms of the new lease. In addition, the decrease in operating expenses during 1997, as compared to 1996, is partially attributable to a decrease in accounting and administrative expenses associated with operating the Partnership and its Properties. In addition, the decrease in operating expenses during 1997, is partially attributable to the Partnership incurring certain expenses, such as insurance and legal fees during 1996, due to the former tenant of the Property in Tempe, Arizona declaring bankruptcy during 1996. As a result of the sales of the Properties in Monroe, North Carolina and Houston, Texas, as described above in "Capital Resources," the Partnership recognized losses of $104,374 and $15,355 for financial reporting purposes for the years ended December 31, 1998 and 1996, respectively. No Properties were sold during 1997. During the year ended December 31, 1998, the Partnership recorded a provision for loss on building in the amount of $206,535 for financial reporting purposes relating to the Long John Silver's Property in Morganton, North
12
Carolina. The tenant of this Property filed for bankruptcy and ceased payment of rents under the terms of its lease agreement, as described above. The allowance represents the difference between the carrying value of the Property at December 31, 1998 and the estimated net realizable value for this Property. The Partnership's leases as of December 31, 1998, are, in general, triple- net leases and contain provisions that the General Partners believe mitigate the adverse effect of inflation. Such provisions include clauses requiring the payment of percentage rent based on certain restaurant sales above a specified level and/or automatic increases in base rent at specified times during the term of the lease. Management expects that increases in restaurant sales volumes due to inflation and real sales growth should result in an increase in rental income over time. Continued inflation also may cause capital appreciation of the Partnership's Properties. Inflation and changing prices, however, also may have an adverse impact on the sales of the restaurants and on potential capital appreciation of the Properties. Proposed Merger On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with APF, pursuant to which the Partnership would be merged with and into a subsidiary of APF. As consideration for the Merger, APF has agreed to issue 4,768,496 APF Shares. In order to assist the General Partners in evaluating the proposed merger consideration, the General Partners retained Valuation Associates, a nationally recognized real estate appraisal firm, to appraise the Partnership's restaurant property portfolio. Based on Valuation Associates' appraisal, the fair value of the Partnership's property portfolio and other assets was $46,951,127 as of December 31, 1998. The APF Shares are expected to be listed for trading on the New York Stock Exchange concurrently with the consummation of the Merger, and, therefore, would be freely tradable at the option of the former Limited Partners. At a special meeting of the Limited Partners that is expected to be held in the fourth quarter of 1999, Limited Partners holding in excess of 50% of the Partnership's outstanding limited partnership interests must approve the Merger prior to consummation of the transaction. If the Limited Partners at the special meeting approve the Merger, APF will own the Properties and other assets of the Partnership. The General Partners intend to recommend that the Limited Partners of the Partnership approve the Merger. In connection with their recommendation, the General Partners will solicit the consent of the Limited Partners at the special meeting. Year 2000 Readiness Disclosure Overview of Year 2000 Problem The year 2000 problem concerns the inability of information and non- information technology systems to properly recognize and process date sensitive information beyond January 1, 2000. The failure to accurately recognize the year 2000 could result in a variety of problems from data miscalculations to the failure of entire systems. Information and Non-Information Technology Systems The Partnership does not have any information or non-information technology systems. The General Partners and their affiliates provide all services requiring the use of information and non-information technology systems pursuant to a management agreement with the Partnership. The information technology system of the General Partners' affiliates consists of a network of personal computers and servers built using hardware and software from mainstream suppliers. The non-information technology systems of the affiliates are primarily facility related and include building security systems, elevators, fire suppressions, HVAC, electrical systems and other utilities. The affiliates have no internally generated programmed software coding to correct, because substantially all of the software utilized by the affiliates is purchased or licensed from external providers. The maintenance of non-information technology systems at the Partnership's restaurant properties is the responsibility of the tenants of such properties in accordance with the terms of the Partnership's leases. The Y2K Team In early 1998, the General Partners and their affiliates formed a Year 2000 committee (the "Y2K Team") for the purpose of identifying, understanding and addressing the various issues associated with the year 2000 problem. The Y2K Team consists of the General Partners and members from their affiliates, including
13
representatives from senior management, information systems, telecommunications, legal, office management, accounting and property management. Assessing Year 2000 Readiness The Y2K Team's initial step in assessing year 2000 readiness consists of identifying any systems that are date-sensitive and, accordingly, could have potential year 2000 problems. The Y2K Team has conducted inspections, interviews and tests to identify which of the systems used by the Partnership could have a potential year 2000 problem. The information system of the General Partners' affiliates is comprised of hardware and software applications from mainstream suppliers. Accordingly, the Y2K Team has contacted and is evaluating documentation from the respective vendors and manufacturers to verify the year 2000 compliance of their products. The Y2K Team has also requested and is evaluating documentation from the non-information technology systems providers of the affiliates. In addition, the Y2K Team has requested and is evaluating documentation from other companies with which the Partnership has material third party relationships. Such third parties, in addition to the providers of information and non-information technology systems, consist of the Partnership's transfer agent and financial institutions. The Partnership depends on its transfer agent to maintain and track investor information and its financial institutions for availability of cash. As of September 15, 1999, the Y2K Team had received responses from approximately 60% of the third parties. All of the responses were in writing. Of the third parties responding, all indicated that they are currently year 2000 compliant or will be year 2000 compliant prior to the year 2000. Although the Y2K Team continues to receive positive responses from the companies with which the Partnership has third party relationships regarding their year 2000 compliance, the General Partners cannot be assured that the third parties have adequately considered the impact of the year 2000. In addition, the Y2K Team has requested documentation from the Partnership's tenants. The Y2K Team is in the process of evaluating the responses and expects to complete this process by October 31, 1999. The Partnership has also instituted a policy of requiring any new tenants to indicate that their systems are year 2000 compliant or are expected to be year 2000 compliant prior to the year 2000. Achieving Year 2000 Compliance The Y2K Team has identified and completed upgrades of the hardware equipment that was not year 2000 compliant. In addition, the Y2K Team has identified and completed upgrades of the software applications that were not year 2000 compliant, although the General Partners cannot be assured that the upgrade solutions provided by the vendors have addressed all possible year 2000 issues. The cost for these upgrades and other remedial measures is the responsibility of the General Partners and their affiliates. The General Partners do not expect that the Partnership will incur any costs in connection with year 2000 remedial measures. Assessing the Risks to the Partnership of Non-Compliance and Developing Contingency Plans Risk of Failure of Information and Non-Information Technology Systems Used by the Partnership The General Partners believe that the reasonably likely worst case scenario with regard to the information and non-information technology systems used by the Partnership is the failure of one or more of these systems as a result of year 2000 problems. Because the Partnership's major source of income is rental payments under long-term triple-net leases, any failure of information or non- information technology systems used by the Partnership is not expected to have a material impact on the results of operations of the Partnership. Even if such systems failed, the payment of rent under the Partnership's leases would not be affected. In addition, the Y2K Team is expected to correct any Y2K problems within the control of the General Partners and their affiliates before the year 2000.
14
The Y2K Team has determined that a contingency plan to address this risk is not necessary at this time. However, if the Y2K Team identifies additional risks associated with the year 2000 compliance of the information or non-information technology systems used by the Partnership, the Y2K Team will develop a contingency plan if deemed necessary at that time. Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records The General Partners believe that the reasonably likely worst case scenario with regard to the Partnership's transfer agent is that the transfer agent will fail to achieve year 2000 compliance of its systems and will not be able to accurately maintain the records of the Partnership. This could result in the inability of the Partnership to accurately identify its Limited Partners for purposes of distributions, delivery of disclosure materials and transfer of units. The Y2K Team has received certification from the Partnership's transfer agent of its year 2000 compliance. Despite the positive response from the transfer agent, the General Partners cannot be assured that the transfer agent has addressed all possible year 2000 issues. The Y2K Team has developed a contingency plan pursuant to which the General Partners and their affiliates would maintain the records of the Partnership manually, in the event that the systems of the transfer agent are not year 2000 compliant. The General Partners and their affiliates would have to allocate resources to internally perform the functions of the transfer agent. The General Partners do not anticipate that the additional cost of these resources would have a material impact on the results of operations of the Partnership. Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to Achieve Year 2000 Compliance The General Partners believe that the reasonably likely worst case scenario with regard to the Partnership's financial institutions is that some or all of its funds on deposit with such financial institutions may be temporarily unavailable. The Y2K Team has received responses from 93% of the Partnership's financial institutions indicating that their systems are currently year 2000 compliant or are expected to be year 2000 compliant prior to the year 2000. Despite the positive responses from the financial institutions, the General Partners cannot be assured that the financial institutions have addressed all possible year 2000 issues. The loss of short-term liquidity could affect the Partnership's ability to pay its expenses on a current basis. The General Partners do not anticipate that a loss of short-term liquidity would have a material impact on the results of operations of the Partnership. Based upon the responses received from the Partnership's financial institutions and the inability of the Y2K Team to identify a suitable alternative for the deposit of funds that is not subject to potential year 2000 problems, the Y2K Team has determined not to develop a contingency plan to address this risk. Risks of Late Payment or Non-Payment of Rent by Tenants The General Partners believe that the reasonably likely worst case scenario with regard to the Partnership's tenants is that some of the tenants may make rental payments late as the result of the failure of the tenants to achieve year 2000 compliance of their systems used in the payment of rent, the failure of the tenant's financial institutions to achieve year 2000 compliance, or the temporary disruption of the tenants' businesses. The Y2K Team is in the process of requesting responses from the Partnership's tenants indicating the extent to which their systems are currently year 2000 compliant or are expected to be year 2000 compliant prior to the year 2000. The General Partners cannot be assured that the tenants have addressed all possible year 2000 issues. The late payment of rent by one or more tenants would affect the results of operations of the Partnership in the short-term. The General Partners are also aware of predictions that the year 2000 problem, if uncorrected, may result in a global economic crisis. The General Partners are not able to determine if such predictions are true. A widespread disruption of the economy could affect the ability of the Partnership's tenants to pay rent and, accordingly, could have a material impact on the results of operations of the Partnership. Because payment of rent is under the control of the Partnership's tenants, the Y2K Team is not able to develop a contingency plan to address these risks. In the event of late payment or non-payment of rent, the General Partners will assess the remedies available to the Partnership under its lease agreements.
15
Item 8. Financial Statements and Supplementary Data
16
CNL INCOME FUND XII, LTD.
CONTENTS
17
Report of Independent Accountants
To the Partners
In our opinion, the financial statements listed in the index appearing under item 14(a)(1) present fairly, in all material respects, the financial position of CNL Income Fund XII, Ltd. (a Florida limited partnership) at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules listed in the index appearing under item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
18
CNL INCOME FUND XII, LTD.
BALANCE SHEETS
See accompanying notes to financial statements.
19
CNL INCOME FUND XII, LTD.
STATEMENTS OF INCOME
See accompanying notes to financial statements.
20
CNL INCOME FUND XII, LTD.
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
See accompanying notes to financial statements.
21
CNL INCOME FUND XII, LTD.
STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
22
CNL INCOME FUND XII, LTD.
STATEMENTS OF CASH FLOWS - CONTINUED
See accompanying notes to financial statements.
23
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund XII, Ltd. (the "Partnership") is a Florida limited partnership that was organized for the purpose of acquiring both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed, which are leased primarily to operators or franchisees of national and regional fast-food and family-style restaurant chains. The general partners of the Partnership are CNL Realty Corporation (the "Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General Partner. The general partners have responsibility for managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the acquisition
of land and buildings at cost, including acquisition and closing costs.
Land and buildings are leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating
expenses relating to the property, including property taxes, insurance,
maintenance and repairs. The leases are accounted for using either the
direct financing or the operating methods. Such methods are described
below:
Direct financing method - The leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the asset) (Note 4). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the leases. Operating method - Land and building leases accounted for using the operating method are recorded at cost, revenue is recognized as rentals are earned and depreciation is charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives of 30 years. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the lease term commencing on the date the property is placed in service.
24
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
Accrued rental income represents the aggregate amount of income recognized on a straight-line basis in excess of scheduled rental payments to date. Whenever a tenant defaults under the terms of its lease, or events or changes in circumstance indicate that the tenant will not lease the property through the end of the lease term, the Partnership either reserves or writes-off the cumulative accrued rental income balance. When the properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, are removed from the accounts and gains or losses from sales are reflected in income. The general partners of the Partnership review properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through operations. The general partners determine whether an impairment in value has occurred by comparing the estimated future undiscounted cash flows, including the residual value of the property, with the carrying cost of the individual property. If an impairment is indicated, the assets are adjusted to their fair values. Although the general partners have made their best estimate of these factors based on current conditions, it is reasonably possible that changes could occur in the near term which could adversely affect the general partners' estimate of net cash flows expected to be generated from its properties and the need for asset impairment write-downs. When the collection of amounts recorded as rental or other income is considered to be doubtful, an adjustment is made to increase the allowance for doubtful accounts, which is netted against receivables, and to decrease rental or other income or increase bad debt expense for the current period, although the Partnership continues to pursue collection of such amounts. If amounts are subsequently determined to be uncollectible, the corresponding receivable and allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership's investments in Des Moines
Real Estate Joint Venture, Williston Real Estate Joint Venture, Kingsville
Real Estate Joint Venture, Middleburg Joint Venture and Columbus Joint
Venture are accounted for using the equity method since the Partnership
shares control with affiliates which have the same general partners.
25
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
Cash and Cash Equivalents - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds (some of which are backed by government securities). Cash equivalents are stated at cost plus accrued interest, which approximates market value. Cash accounts maintained on behalf of the Partnership in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Partnership has not experienced any losses in such accounts. The Partnership limits investment of temporary cash investments to financial institutions with high credit standing; therefore, the Partnership believes it is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs - Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes - Under Section 701 of the Internal Revenue Code, all income, expenses and tax credit items flow through to the partners for tax purposes. Therefore, no provision for federal income taxes is provided in the accompanying financial statements. The Partnership is subject to certain state taxes on its income and property. Additionally, for tax purposes, syndication costs are included in Partnership equity and in the basis of each partner's investment. For financial reporting purposes, syndication costs are netted against partners' capital and represent a reduction of Partnership equity and a reduction in the basis of each partner's investment.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. The more significant areas requiring the use of
management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
26
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
2. Leases:
The Partnership leases its land and buildings to operators of national and regional fast-food and family-style restaurants. The leases are accounted for under the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases." Some of the leases have been classified as operating leases and some of the leases have been classified as direct financing leases. For the leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portions of the majority of the leases are operating leases. Substantially all leases are for 14 to 20 years and provide for minimum and contingent rentals. In addition, the tenant pays all property taxes and assessments, fully maintains the interior and exterior of the building and carries insurance coverage for public liability, property damage, fire and extended coverage. The lease options generally allow tenants to renew the leases for two to four successive five-year periods subject to the same terms and conditions as the initial lease. Most leases also allow the tenant to purchase the property at fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at December 31:
In March 1997, the Partnership entered into a new lease for the property in Tempe, Arizona. In connection therewith, the Partnership incurred $55,000 in renovation costs which were completed in May 1997.
27
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
In December 1998, the Partnership sold its property in Monroe, North Carolina, and received net sales proceeds of $483,549, resulting in a loss of $104,374 for financial reporting purposes. Some leases provide for escalating guaranteed minimum rents throughout the lease term. Income from these scheduled rent increases is recognized on a straight-line basis over the terms of the leases. For the years ended December 31, 1998, 1997 and 1996, the Partnership recognized $28,230 (net of $6,323 in reserves and $224,867 in write-offs), $533,121, and $518,502, respectively, of such rental income. The following is a schedule of the future minimum lease payments to be received on noncancellable operating leases at December 31, 1998:
Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the initial lease terms. In addition, this table does not include any amounts for future contingent rentals which may be received on the leases based on a percentage of the tenant's gross sales. During the year ended December 31, 1998, the Partnership established an allowance for loss on building of $206,535, relating to the Long John Silver's property in Morganton, North Carolina. The tenant of this property filed for bankruptcy and ceased payment of rents under the terms of its lease agreement. The allowance represents the difference between the carrying value of the property at December 31, 1998, and the current estimated net realizable value for this property.
28
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing leases at December 31:
The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 1998:
The above table does not include future minimum lease payments for renewal periods or for contingent rental payments that may become due in future periods (see Note 3). During the year ended December 31, 1998, three of the Partnership's leases with Long John Silver's, Inc. were rejected in connection with the tenant filing for bankruptcy. As a result, the Partnership reclassified these assets from net investment in direct financing leases to land and buildings on operating leases. In accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases," the Partnership recorded the reclassified assets at the lower of original cost, present fair value, or present carrying value. No loss on termination of direct financing leases was recorded for financial reporting purposes.
29
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures:
As of December 31, 1998, the Partnership had a 59.05%, an 18.61%, a 31.13%, and an 87.54% interest in the profits and losses of Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture, Kingsville Real Estate Joint Venture, and Middleburg Joint Venture, respectively. The remaining interests in these joint ventures are held by affiliates of the Partnership which have the same general partners. In August 1998, the Partnership entered into a joint venture agreement, Columbus Joint Venture, with affiliates of the general partners, to construct and hold one restaurant property. As of December 31, 1998, the Partnership contributed amounts to purchase land and pay construction costs relating to the joint venture. The Partnership has agreed to contribute additional amounts to the joint venture for construction costs. As of December 31, 1998 the Partnership owned a 27.72% interest in the profits and losses of this joint venture. When funding is complete, the Partnership expects to have an approximate 28 percent interest in the profits and losses of the joint venture. The Partnership accounts for its investment in this joint venture under the equity method since the Partnership shares control with affiliates. Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture, Kingsville Real Estate Joint Venture, Middleburg Joint Venture, and Columbus Joint Venture each own and lease one property to an operator of national fast-food or family-style restaurants. The following presents the joint ventures' combined, condensed financial information at December 31:
30
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996 5. Investment in Joint Ventures - Continued:
The Partnership recognized income totalling $95,142, $277,325, and $200,499 for the years ended December 31, 1998, 1997, and 1996, respectively, from these joint ventures.
6. Receivables:
During 1993, the Partnership loaned $208,855 to the tenant of the property owned by Kingsville Real Estate Joint Venture in connection with the purchase of equipment for the restaurant property. The loan, which bore interest at a rate of ten percent, was payable over 84 months and was collateralized by the restaurant equipment. Receivables at December 31, 1997, included $188,642 relating to this loan, including accrued interest of $7,488. During the year ended December 31, 1998, the Partnership established an allowance for doubtful accounts of $205,965, which represented the entire amount outstanding under the loan plus accrued interest, due to the uncertainty of collectibility of this note. No amounts relating to this loan are included in receivables at December 31, 1998.
31
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains and losses from the sale of properties, are allocated 99 percent to the limited partners and one percent to the general partners. Distributions of net cash flow are made 99 percent to the limited partners and one percent to the general partners; provided, however, that the one percent of net cash flow to be distributed to the general partners is subordinated to receipt by the limited partners of an aggregate, ten percent, cumulative, noncompounded annual return on their invested capital contributions (the "Limited Partners' 10% Return"). Generally, net sales proceeds from the sale of properties not in liquidation of the Partnership, to the extent distributed, will be distributed first to the limited partners in an amount sufficient to provide them with their Limited Partners' 10% Return, plus the return of their adjusted capital contributions. The general partners will then receive, to the extent previously subordinated and unpaid, a one percent interest in all prior distributions of net cash flow and a return of their capital contributions. Any remaining sales proceeds will be distributed 95 percent to the limited partners and five percent to the general partners. Any gain from the sale of a property not in liquidation of the Partnership is, in general, allocated in the same manner as net sales proceeds are distributable. Any loss from the sale of a property is, in general, allocated first, on a pro rata basis, to partners with positive balances in their capital accounts; and thereafter, 95 percent to the limited partners and five percent to the general partners. Generally, net sales proceeds from a liquidating sale of properties, will be used in the following order: i) first to pay and discharge all of the Partnership's liabilities to creditors, ii) second, to establish reserves that may be deemed necessary for any anticipated or unforeseen liabilities or obligations of the Partnership, iii) third, to pay all of the Partnership's liabilities, if any, to the general and limited partners, iv) fourth, after allocations of net income, gains and/or losses, to distribute to the partners with positive capital accounts balances, in proportion to such balances, up to amounts sufficient to reduce such positive balances to zero, and v) thereafter, any funds remaining shall then be distributed 95 percent to the limited partners and five percent to the general partners. During the year ended December 31, 1998, the Partnership declared distributions to the limited partners of $3,960,008, and during each of the years ended December 31, 1997 and 1996, the Partnership declared distributions to the limited partners of $3,825,008. No distributions have been made to the general partners to date.
32
CNL INCOME FUND XII, LTD.
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:
33
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund Advisors, Inc. The other individual general partner, Robert A. Bourne, serves as treasurer, director and vice chairman of the board of CNL Fund Advisors. During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain services for the Partnership, as described below. During the years ended December 31, 1998, 1997, and 1996, the Affiliates acted as manager of the Partnership's properties pursuant to a management agreement with the Partnership. In connection therewith, the Partnership agreed to pay the Affiliate a management fee of one percent of the sum of gross revenues from properties owned by the Partnership and the Partnership's allocable share of gross revenues from joint ventures. The management fee, which will not exceed fees which are competitive for similar services in the same geographic area, may or may not be taken, in whole or in part as to any year, in the sole discretion of the Affiliate. The Partnership incurred management fees of $41,537, $40,218, and $40,244 for the years ended December 31, 1998, 1997, and 1996, respectively. The Affiliate is also entitled to receive a deferred, subordinated real estate disposition fee, payable upon the sale of one or more properties based on the lesser of one-half of a competitive real estate commission or three percent of the sales price if the Affiliate provides a substantial amount of services in connection with the sale. However, if the net sales proceeds are reinvested in a replacement property, no such real estate disposition fees will be incurred until such replacement property is sold and the net sales proceeds are distributed. The payment of the real estate disposition fee is subordinated to receipt by the limited partners of their aggregate 10% Preferred Return, plus their adjusted capital contributions. No deferred, subordinated real estate disposition fees have been incurred since inception. During the years ended December 31, 1998, 1997, and 1996, the Affiliate provided accounting and administrative services to the Partnership on a day-to-day basis. The Partnership incurred $107,911, $92,866, and $97,722 for the years ended December 31, 1998, 1997, and 1996, respectively, for such services.
34
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions - Continued:
The due to related parties at December 31, 1998 and 1997, totalled $24,025 and $6,887, respectively.
10. Concentration of Credit Risk:
The following schedule presents rental and earned income from individual lessees, or affiliated groups of lessees, each representing more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of rental and earned income from joint ventures) for each of the years ended December 31:
In addition, the following schedule presents total rental and earned income from individual restaurant chains, each representing more than ten percent of the Partnership's total rental and earned income (including the Partnership's share of rental and earned income from joint ventures) for each of the years ended December 31:
35
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
10. Concentration of Credit Risk - Continued:
The information denoted by N/A indicates that for each period presented, the tenant or group of affiliated tenants and the chain did not represent more than ten percent of the Partnership's total rental and earned income. Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant concepts, default by any of these lessees or restaurant chains could significantly impact the results of operations of the Partnership if the Partnership is not able to re-lease the properties in a timely manner. In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and rejected the leases relating to three of its eight leases and ceased making rental payments to the Partnership. In December 1998, the Partnership sold one of the vacant properties and intends to reinvest the net sales proceeds from the sale of this property in an additional property. The Partnership will not recognize rental and earned income from these two remaining properties until new tenants for these properties are located or until the properties are sold and the proceeds from such sales are reinvested in additional properties. While Long John Silver's, Inc. has not rejected or affirmed the remaining five leases, there can be no assurance that some or all of the leases will not be rejected in the future. The lost revenues resulting from the two remaining vacant properties, as described above, and the possible rejection of the remaining five leases could have an adverse effect on the results of operations of the Partnership, if the Partnership is not able to re-lease these properties in a timely manner. The general partners are currently seeking either new tenants or purchasers for the two remaining vacant properties.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the Partnership would be merged with and into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF has agreed to issue 4,768,496 shares of its common stock, par value $0.01 per shares (the "APF Shares"). In order to assist the general partners in evaluating the proposed merger consideration, the general partners retained Valuation Associates, a nationally recognized real estate appraisal firm, to appraise the fair value of the Partnership's restaurant property portfolio. Based on Valuation Associates' appraisal, the Partnership's property portfolio and other assets was $46,951,127 as of December 31, 1998. Legg Mason Wood Walker, Incorporated has rendered a
36
CNL INCOME FUND XII, LTD.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
11. Subsequent Event - Continued:
fairness opinion that the APF Share consideration, payable by APF, is fair
to the Partnership from a financial point of view. The APF Shares are
expected to be listed for trading on the New York Stock Exchange
concurrently with the consummation of the Merger, and, therefore, would be
freely tradable at the option of the former limited partners. At a special
meeting of the partners, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. The general partners
intend to recommend that the limited partners of the Partnership approve
the Merger. In connection with their recommendation, the general partners
will solicit the consent of the limited partners at the special meeting. If
the limited partners reject the Merger, the Partnership will bear the
portion of the transaction costs based upon the percentage of "For" votes
and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of October, 1999. CNL INCOME FUND XII, LTD.
By: CNL REALTY CORPORATION
By: ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
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.
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