UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21558
CNL INCOME FUND XII, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3078856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($10 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No __
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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes __ No 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:
None
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
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on September 29, 1992, the
Partnership offered for sale up to $45,000,000 of limited partnership interests
(the "Units") (4,500,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
March 12, 1992. The offering terminated on March 15, 1993, at which date the
maximum offering proceeds of $45,000,000 had been received from investors who
were admitted to the Partnership as limited partners ("Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food 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 and to establish a working capital reserve for Partnership purposes.
As of December 31, 1999, the Partnership owned 42 Properties directly
and owned six Properties indirectly through joint venture or tenancy in common
arrangements. During 2000, the Partnership sold its Property in Cleveland,
Tennessee and reinvested the majority of the net sales proceeds in a Krystal
Property in Pooler, Georgia. In addition, during 2000, the Partnership sold its
Property in Bradenton, Florida and reinvested the majority of the net sales
proceeds in a Property in Colorado Springs, Colorado as tenants-in-common with
CNL Income Fund VII, Ltd., a Florida limited partnership and an affiliate of the
General Partners. During the year ended December 31, 2001, the Partnership and
the joint venture partner liquidated Middleburg Joint Venture and the
Partnership received its pro rata share of the liquidation proceeds. The
Partnership reinvested the majority of these proceeds in a joint venture
arrangement, CNL VIII, X, XII Kokomo Joint Venture, with CNL Income Fund VIII,
Ltd. and CNL Income Fund X, Ltd., each of which is a Florida limited partnership
and an affiliate of the General Partners, to purchase and hold one Property. In
addition, during 2001, the Partnership sold its Properties in Rialto, California
and Winter Haven, Florida and reinvested the net sales proceeds in two
Properties, one each in Pasadena and Pflugerville, Texas. During the year ended
December 31, 2002, the Partnership sold its Property in Arlington, Texas to a
third party and reinvested the net sales proceeds from the sale and the
remaining portion of the net sales proceeds from the 2001 sale of the Property
in Winter Haven, Florida in a Property in San Antonio, Texas. In addition,
during 2002, the Partnership sold its Property in Valdosta, Georgia to a third
party and reinvested the net sales proceeds in a Property in Clive, Iowa. As of
December 31, 2002, the Partnership owned 41 Properties directly and held
interests in six Properties owned by joint ventures in which the Partnership is
a co-venturer and one Property owned with an affiliate of the General Partners
as tenants-in-common. The Partnership generally leases the Properties on a
triple-net basis with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities.
The Partnership holds 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 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.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms ranging from 5 to 20 years (the average being 18 years), and expire
between 2004 and 2020. Generally, the leases are on a triple-net basis, with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties provide for minimum base annual
rental payments (payable in monthly installments) ranging from approximately
$48,000 to $228,500. Generally, the leases provide for percentage rent, based on
sales in excess of a specified amount, to be paid annually. In addition, the
majority of the leases provide that, commencing in specified lease years
(generally the sixth lease year), the annual base rent required under the terms
of the lease will increase.
Generally, the leases of the Properties provide for two to five
five-year renewal options subject to the same terms and conditions as the
initial lease. Lessees of 35 of the Partnership's 48 Properties 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 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.
Major Tenants
During 2002, two lessees (or groups of affiliated tenants) of the
Partnership, (i) Jack in the Box Inc. and Jack in the Box Eastern Division, L.P.
(which are affiliated entities under common control of Jack in the Box Inc.)
(hereinafter referred to as "Jack in the Box Inc.") and (ii) Flagstar
Enterprises, Inc., each contributed more than 10% of the Partnership's total
rental revenues (including the Partnership's share of rental revenues from
Properties owned by joint ventures and a Property owned with an affiliate of the
General Partners as tenants-in-common). As of December 31, 2002, Jack in the Box
Inc. was the lessee under leases relating to eight 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,
these two lessees each will continue to contribute more than 10% of the
Partnership's total rental revenues in 2003. In addition, four Restaurant
Chains, Long John Silver's, Hardee's, Jack in the Box and Denny's, each
accounted for more than 10% of the Partnership's total rental revenues during
2002 (including the Partnership's share of rental revenues from Properties owned
by joint ventures and a Property owned with an affiliate of the General Partners
as tenants-in-common). In 2003, it is anticipated that these four Restaurant
Chains each will continue to account for more than 10% of the Partnership's
total rental revenues to which the Partnership is entitled under the terms of
the leases. Any failure of these lessees or Restaurant Chains will materially
affect the Partnership's income if the Partnership is not able to re-lease these
Properties in a timely manner. No single tenant or groups of affiliated tenants
lease Properties with an aggregate carrying value in excess of 20% of the total
assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2002:
Entity Name Year Ownership Partners Property
Des Moines Joint Venture 1992 18.61% CNL Income Fund VII, Ltd. Des Moines, WA
CNL Income Fund XI, Ltd.
Williston Real Estate Joint 1993 59.05% CNL Income Fund X, Ltd. Williston, FL
Venture
Kingsville Real Estate Joint 1993 31.13% CNL Income Fund IV, Ltd. Kingsville, TX
Venture
Columbus Joint Venture 1998 27.72% CNL Income Fund XVI, Ltd. Columbus, OH
CNL Income Fund XVIII, Ltd.
Bossier City Joint Venture 1999 55.00% CNL Income Fund VIII, Ltd. Bossier City, LA
CNL Income Fund XIV, Ltd.
CNL Income Fund VII, Ltd., 2000 57.00% CNL Income Fund VII, Ltd. Colorado Springs,
and CNL Income Fund XII, CO
Ltd. Tenants in Common
CNL VIII, X, XII Kokomo Joint 2001 80.00% CNL Income Fund VIII, Ltd. Kokomo, IN
Venture CNL Income Fund X, Ltd.
Each of the joint ventures or tenancies in common were formed to hold
one Property. Each CNL Income Fund is an affiliate of the General Partners and
is a limited partnership organized pursuant to the laws of the state of Florida.
The Partnership shares management control equally with the affiliates of the
General Partners
The joint venture and tenancy in common arrangements provide for the
Partnership and its joint venture or tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
business entity. The Partnership and its partners are also jointly and severally
liable for all debts, obligations and other liabilities of the joint venture or
tenancy in common. Net cash flow from operations is distributed to each joint
venture or tenancy in common partner in accordance with its respective
percentage interest in the business entity.
CNL VIII, X, XII Kokomo Joint Venture has an initial term of 30 years.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture, Columbus Joint Venture and Bossier City
Joint Venture each have an initial term of 20 years and, after the expiration of
the initial term, continues in existence from year to year unless terminated at
the option of either joint venturer by an event 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 partner to dissolve the joint venture.
Any liquidation proceeds, after paying joint venture debts and liabilities and
funding reserves for contingent liabilities, will be distributed first to the
joint venture partners with positive capital account balances in proportion to
such balances until such balances equal zero, and thereafter in proportion to
each joint venture partner's percentage interest in the joint venture.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer to assign its joint venture or tenancy in
common interest without first offering it for sale to its partner, either upon
such terms and conditions as to which the parties may agree or, in the event the
parties cannot agree, on the same terms and conditions as any offer from a third
party to purchase such joint venture or tenancy in common interest.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
RAI Restaurants, Inc. (formerly known as CNL Restaurants XVIII, 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. CNL APF Partners, LP assigned its rights in, and
its obligations under, the management agreement with the Partnership to RAI
Restaurants, Inc. ("Advisor") effective January 1, 2002. All of the terms and
conditions of the management agreement, including the payment of fees, remained
unchanged. Under this agreement, the Advisor 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. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership had agreed to pay the Advisor 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.
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.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL American Properties Fund, Inc.
("APF"), the parent company of the Advisor, 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 Financial 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, 2002, the Partnership owned 48 Properties. Of the 48
Properties, 41 are owned by the Partnership in fee simple, six are owned through
joint venture arrangements and one is owned with an affiliate through a tenancy
in common arrangement. See Item 1. Business - Joint Venture and Tenancy in
Common Arrangements. The Partnership is not permitted to encumber its Properties
under the terms of its partnership agreement. Reference is made to the Schedule
of Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 9,200
to 120,000 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.
The following table lists the Properties owned by the Partnership,
either directly or indirectly through joint venture or tenancy in common
arrangements, as of December 31, 2002 by state. More detailed information
regarding the location of the Properties is contained in the Schedule of Real
Estate and Accumulated Depreciation for the year ended December 31, 2002.
State Number of Properties
Alabama 1
Arizona 5
California 1
Colorado 1
Florida 2
Georgia 5
Indiana 1
Iowa 1
Louisiana 2
Mississippi 2
Missouri 2
New Mexico 1
North Carolina 4
Ohio 2
South Carolina 2
Tennessee 4
Texas 11
Washington 1
------
TOTAL PROPERTIES 48
======
Buildings. Each of the Properties owned by the Partnership, either
directly or indirectly through joint venture or tenancy in common arrangements,
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, 2002, 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, 2002, the aggregate cost of the Properties owned by
the Partnership and joint ventures (including the Property owned through a
tenancy in common arrangement) for federal income tax purposes was $33,872,208
and $9,008,446, respectively.
The following table lists the Properties owned by the Partnership,
either directly or indirectly through joint venture or tenancy in common
arrangements, as of December 31, 2002 by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 1
Bennigan's 1
Burger King 1
Denny's 8
Golden Corral 2
Hardee's 11
IHOP 1
Jack in the Box 8
KFC 1
Krispy Kreme 1
Krystal 1
Long John Silver's 6
Taco Cabana 3
Other 3
-----
TOTAL PROPERTIES: 48
=====
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
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.
As of December 31, 2002, 2001, 2000 and 1999 the Properties were 100%
occupied. As of December 31, 1998, the Properties were 96% occupied. The
following is a schedule of the average rent per property for the years ended
December 31:
2002 2001 2000 1999 1998
-------------- ------------- -------------- ------------- -------------
Rental Income (1) $ 4,252,212 $ 4,210,846 $4,102,805 $4,299,590 $4,247,369
Properties 48 48 48 48 48
Average Per Property $ 88,588 $ 87,726 $ 85,475 $ 89,575 $ 88,487
(1) Rental income includes the Partnership's share of rental income from
the Properties owned through joint venture arrangements and tenancy in
common arrangements.
The following is a schedule of lease expirations for leases in place as
of December 31, 2002 for the next ten years and thereafter.
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
- -------------------- ----------------- ------------------- ------------------
2003 -- $ -- --
2004 1 14,942 .33%
2005 -- -- --
2006 -- -- --
2007 1 198,625 4.41%
2008 -- -- --
2009 1 55,233 1.23%
2010 2 108,274 2.41%
2011 6 688,115 15.29%
2012 11 1,066,032 23.68%
Thereafter 26 2,369,807 52.65%
--------- ---------------- -----------------
Total 48 $ 4,501,028 100.00%
========= ================ =================
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2002 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business -Leases.
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 $76,800 (ranging from approximately
$61,500 to $93,300).
Jack in the Box Inc. leases eight 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 $107,500 (ranging from
approximately $83,500 to $135,800).
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliates of
the General Partners, nor any of their respective Properties, is party to, or
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 10, 2003, there were 3,464 holders of record of the Units.
There is no public trading market for the Units, and it is not anticipated that
a public market for the Units will develop. During 2002, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase), may have done so pursuant to such
Plan. The General Partners have the right to prohibit transfers of Units. From
inception through December 31, 2002, the price for any Unit transferred pursuant
to the Plan was $9.50 per Unit. The price paid for any Unit transferred other
than pursuant to the Plan was subject to negotiation by the purchaser and the
selling Limited Partner. The Partnership will not redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 2002 and 2001 other than
pursuant to the Plan, net of commissions.
2002 (1) 2001 (1)
---------------------------------- ------------------------------------
High Low Average High Low Average
--------- -------- ---------- --------- --------- ----------
First Quarter $9.50 $ 6.37 $ 8.12 $6.12 $ 5.60 $ 5.78
Second Quarter 7.09 6.73 6.90 9.50 6.20 7.25
Third Quarter 9.50 6.37 8.76 10.00 6.23 7.18
Fourth Quarter 9.50 6.37 7.74 8.00 6.50 6.94
(1) A total of 53,865 and 35,663 Units were transferred other than pursuant
to the Plan for the years ended December 31, 2002 and 2001,
respectively.
The capital contribution per Unit was $10. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For the years ended December 31 2002 and 2001, the Partnership declared
cash distributions of $3,937,508 and $3,825,008, respectively, to the Limited
Partners. Distributions during the year ended December 31, 2002 included
$112,500 in a special distribution representing cumulative excess operating
reserves. No amounts distributed to partners for the years ended December 31,
2002 and 2001, 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. No distributions have been made to the
General Partners to date.
As indicated in the chart below, distributions were declared at the
close of each of the Partnership's calendar quarters. These amounts include
monthly distributions made in arrears for the Limited Partners electing to
receive such distributions on this basis.
Quarter Ended 2002 2001
------------------ --------------- ---------------
March 31 $ 956,252 $ 956,252
June 30 956,252 956,252
September 30 956,252 956,252
December 31 1,068,752 956,252
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although some Limited Partners, in accordance with their election, receive
monthly distributions, for an annual fee.
(b) Not applicable.
Item 6. Selected Financial Data
2002 2001 2000 1999 1998
------------- -------------- ------------- -------------- -------------
Year ended December 31:
Continuing Operations (4):
Revenues $3,690,280 $3,705,082 $3,909,923 $3,907,627 $4,003,059
Equity in earnings of
joint ventures 409,465 364,478 373,694 344,964 95,142
Income from continuing
operations (1) 3,209,078 3,133,332 3,653,711 3,508,478 2,790,122
Discontinued Operations (4):
Revenues 72,298 169,361 169,376 171,008 177,858
Income from discontinued
operations (2) 566,478 134,918 166,505 136,565 143,415
Net income 3,775,556 3,268,250 3,820,216 3,645,043 2,933,537
Net income (loss) per Unit:
Continuing operations $ 0.71 $ 0.70 $ 0.81 $ 0.78 $ 0.62
Discontinued operations 0.13 0.03 0.04 0.03 0.03
------------- -------------- ------------- -------------- -------------
Total $ 0.84 $ 0.73 $ 0.85 $ 0.81 $ 0.65
============= ============== ============= ============== =============
Cash distributions declared (3) $3,937,508 $3,825,008 $3,825,008 $3,825,008 $3,960,008
Cash distributions declared
per Unit (3) 0.88 0.85 0.85 0.85 0.88
At December 31:
Total assets $39,827,704 $39,836,611 $40,319,220 $40,440,927 $40,634,898
Partners' capital 38,487,374 38,649,326 39,206,084 39,210,876 39,390,841
(1) Income from continuing operations for the years ended December 31,
2001, 2000 and 1999, includes $349,516, $254,405 and $74,714 from gains
on sales of assets. Income from continuing operations for the year
ended December 31, 1998 includes $104,374 from a loss on sale of
assets. Income from continuing operations for the years ended 2002,
2001, 2000 and 1998 includes $6,584, $362,265, $155,281 and $206,535,
respectively, for provisions for write-down of assets.
(2) Income from discontinued operations for the year ended December 31,
2002 includes $501,083 from gain on sale of discontinued operations.
(3) Distributions for the years ended December 31, 2002 and 1998, include a
special distribution to the Limited Partners of $112,500 and $135,000,
respectively, which represented cumulative excess operating reserves.
(4) Certain items in the prior years' financial statements have been
reclassified to conform to 2002 presentation. These reclassifications
had no effect on net income. The results of operations relating to
Properties that were either disposed of or were classified as held for
sale as of December 31, 2002 are reported as discontinued operations.
The results of operations relating to Properties that were identified
for sale of December 31, 2001 but sold subsequently are reported as
continuing operations.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
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, to be 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. The leases of
the Properties provide for minimum base annual rental amounts (payable in
monthly installments) ranging from approximately $48,000 to $228,500. Generally,
the leases provide for percentage rent based on sales in excess of a specified
amount. In addition, a majority of the leases provide that, commencing in
specified lease years (ranging from the third to the sixth lease year), the
annual base rent required under the terms of the lease will increase. As of
December 31, 2002, 2001 and 2000, the Partnership owned 41 Properties directly
and held interests in seven Properties either through joint venture or tenancy
in common arrangements.
Capital Resources
Cash from operating activities was $3,939,391, $3,934,568 and
$3,867,350, for the years ended December 31, 2002, 2001, and 2000, respectively.
Cash from operating activities during 2002, as compared to 2001, remained flat.
The increase in cash from operating activities during 2001 as compared to 2000
was primarily a result of changes in the Partnership's working capital.
Other sources and uses of cash included the following during the years
ended December 31, 2002, 2001 and 2000.
In March 2000, the Partnership sold its Property in Cleveland,
Tennessee to a third party and received net sales proceeds of approximately
$791,500, resulting in a gain of approximately $147,600. In April 2000, the
Partnership used these net sales proceeds along with net sales proceeds received
from the 1999 sale of its Property in Morganton, North Carolina to reinvest in a
Property in Pooler, Georgia. The transaction relating to the sale of the
Property in Cleveland, Tennessee and the reinvestment of the net sales proceeds
qualified as a like-kind exchange transaction for federal income tax purposes.
In July 2000, the Partnership sold its Property in Bradenton, Florida
to a third party and received net sales proceeds of approximately $1,227,900,
resulting in a gain of approximately $106,800. In August 2000, the Partnership
reinvested the net sales proceeds from the sale in an additional Property in
Colorado Springs, Colorado, as tenants-in-common with CNL Income Fund VII, Ltd.,
a Florida limited partnership and an affiliate of the General Partners. The
Partnership owns a 57% interest in the profits and losses of this Property. The
transaction relating to the sale of the Property in Bradenton, Florida and the
reinvestment of the net sales proceeds qualified as a like-kind exchange
transaction for federal income tax purposes.
In March 2001, Middleburg Joint Venture, in which the Partnership owned
an 87.54% interest, sold its Property to the tenant in accordance with the
option under its lease agreement to purchase the Property, for $1,900,000. Due
to the fact that the joint venture had recorded accrued rental income,
representing non-cash amounts that the joint venture had recognized as income
since the inception of the lease relating to the straight-lining of future
scheduled rent increases in accordance with generally accepted accounting
principles, a loss of approximately $61,900 was recorded by the joint venture in
March 2001. In April 2001, Middleburg Joint Venture was dissolved in accordance
with the joint venture agreement. No gain or loss on the dissolution of the
joint venture was incurred. The Partnership received approximately $1,663,300 as
a return of capital representing its 87.54% share of the liquidation proceeds of
the joint venture. In April 2001, the Partnership used these proceeds to invest
in a joint venture arrangement, CNL VIII, X, XII Kokomo Joint Venture, to
acquire a Property in Kokomo, Indiana with CNL Income Fund VIII, Ltd. and CNL
Income Fund X, Ltd., each of which is a Florida limited partnership and an
affiliate of the General Partners. The Partnership accounts for its investment
using the equity method since the joint venture agreement requires the consent
of all partners on key decisions affecting the operations of the underlying
Property. The joint venture acquired this Property from CNL BB Corp., an
affiliate of the General Partners. The affiliate had purchased and temporarily
held title to the Property in order to facilitate the acquisition of the
Property by the joint venture. The purchase price paid by the joint venture
represented the costs incurred by the affiliate to acquire and carry the
Property. As of December 31, 2002, the Partnership had contributed approximately
$1,689,600 to acquire the restaurant Property for an 80% interest in the profits
and losses of the joint venture.
In September 2001, the Partnership sold its Property in Rialto,
California to a third party and received net sales proceeds of approximately
$1,382,400 resulting in a gain of approximately $345,300. In October 2001, the
Partnership sold its Property in Winter Haven, Florida and received net sales
proceeds of approximately $1,090,300 resulting in a gain of approximately
$4,200. In December 2001, the Partnership invested the majority of the net sales
proceeds from the sales of these Properties in two Properties, one each in
Pasadena and Pflugerville, Texas. The Partnership acquired these Properties from
CNL Funding 2001-A, LP, an affiliate of the General Partners. The affiliate had
purchased and temporarily held title to the Properties in order to facilitate
the acquisition of the Properties by the Partnership. The purchase price paid by
the Partnership represented the costs incurred by the affiliate to acquire and
carry the Properties. These transactions, relating to the sales of the
Properties and the reinvestment of the proceeds qualified as like-kind exchange
transactions for federal income tax purposes.
In April 2002, the Partnership sold its Property in Arlington, Texas to
a third party and received net sales proceeds of approximately $1,248,200
resulting in a gain on disposal of discontinued operations of $334,000. In June
2002, the Partnership reinvested the majority of the remaining proceeds from the
2001 sale of the Property in Winter Haven, Florida and the net sales proceeds
from the sale of its Property in Arlington, Texas, in a Property in San Antonio,
Texas at an approximate cost of $1,287,700. The Partnership acquired this
Property from CNL Funding 2001-A, LP, a Delaware limited partnership and an
affiliate of the General Partners. CNL Funding 2001-A, LP had purchased and
temporarily held title to the Property in order to facilitate the acquisition of
the Property by the Partnership. The purchase price paid by the Partnership
represented the costs incurred by CNL Funding 2001-A, LP to acquire and carry
the Property.
In August 2002, the Partnership sold its Property in Valdosta, Georgia
to a third party and received net sales proceeds of approximately $623,700
resulting in a gain on disposal of discontinued operations of approximately
$167,100. In September 2002, the Partnership used the proceeds from the sale of
this Property to acquire a Property in Clive, Iowa from CNL Net Lease Investors,
L.P. ("NLI"), a California Limited Partnership, at an approximate cost of
$716,800. The sale of the Property and the reinvestment of the net sales
proceeds qualified as a like-kind exchange transaction for federal income tax
purposes. During 2002, and prior to the Partnership's acquisition of this
Property, CNL Financial LP Holding, LP ("CFN"), a Delaware Limited Partnership,
and CNL Net Lease Investors GP Corp. ("GP Corp"), a Delaware corporation,
purchased the limited partner's interest and general partner's interest,
respectively, of NLI. Prior to this transaction, an affiliate of the
Partnership's General Partners owned a 0.1% interest in NLI and served as a
General Partner of NLI. The original general partners of NLI waived their rights
to benefit from this transaction. The acquisition price paid by CFN for the
limited partner's interest was based on the portfolio acquisition price. The
Partnership acquired the Property in Clive, Iowa at CFN's cost and did not pay
any additional compensation to CFN for the acquisition of the Property. Each CNL
entity is an affiliate of the Partnership's General Partners.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangement 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 any net
sales proceeds from the sale of Properties are invested in money market accounts
or other short-term highly liquid investments such as demand deposit accounts at
commercial banks, money market accounts and certificates of deposit with less
than a 90-day maturity date, pending the Partnership's use of such funds to pay
Partnership expenses, to make distributions to partners or to reinvest in
additional Properties. At December 31, 2002, the Partnership had $1,263,592
invested in such short-term investments as compared to $1,281,855 at December
31, 2001. The decrease in cash and cash equivalents at December 31, 2002 was due
to the Partnership reinvesting the remaining proceeds from the 2001 sale of the
Property in Winter Haven, Florida in a Property in San Antonio, Texas during
2002. As of December 31, 2002, the average interest rate earned on the rental
income deposited in demand deposit accounts at commercial banks was
approximately one percent annually. The funds remaining at December 31, 2002,
after payment of distributions and other liabilities, will be used to meet the
Partnership's working capital needs.
Short-Term Liquidity
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 Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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.
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 Partnership generally distributes cash from operating activities
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 current cash from operations, the Partnership declared
distributions to the Limited Partners of $3,937,508 for the year ended December
31, 2002 and $3,825,008, for each of the years ended December 31, 2001 and 2000.
Distributions during the year ended December 31, 2002 included $112,500 in a
special distribution representing cumulative excess operating reserves. This
represents a distribution of $0.88 per Unit for the year ended December 31, 2002
and $0.85 per Unit for the years ended December 31, 2001 and 2000. No
distributions were made to the General Partners during the years ended December
31, 2002, 2001 and 2000. No amounts distributed to the Limited Partners for the
years ended December 31, 2002, 2001, and 2000, 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 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income and did not receive any distributions
during the year ended December 31, 2002, 2001 and 2000.
As of December 31, 2002 and 2001, the Partnership owed $20,984 and
$25,885, respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 15, 2003, the Partnership had reimbursed
the affiliates for these amounts. Other liabilities including distributions
payable increased to $1,319,346 at December 31, 2002, from $1,161,400 at
December 31, 2001, primarily as a result of an increase in distributions payable
since the Partnership accrued $112,500 for a special distribution of excess
operating reserves and due to rents paid in advance and deposits. The General
Partners believe that the Partnership has sufficient cash on hand to meet its
working capital needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Accounting Standard No. 13, "Accounting for Leases" ("FAS 13"), and
have been accounted for using either the direct financing or the operating
method. FAS 13 requires management to estimate the economic life of the leased
property, the residual value of the leased property and the present value of
minimum lease payments to be received from the tenant. In addition, management
assumes that all payments to be received under its leases are collectible.
Changes in management's estimates or assumption regarding collectibility of
lease payments could result in a change in accounting for the lease at the
inception of the lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities periodically for impairment at least once a year or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The assessment is based on the carrying amount
of the Property or investment at the date it is tested for recoverability
compared to the sum of the estimated future cash flows expected to result from
its operation and sale through the expected holding period. If an impairment is
indicated, the asset is adjusted to its estimated fair value.
When the Partnership makes the decision to sell or commits to a plan to
sell a Property within one year, its operating results are reported as
discontinued operations.
Results of Operations
Comparison of year ended December 31, 2002 to year ended December 31, 2001
Total rental revenues were $3,650,343 during the year ended December
31, 2002 as compared to $3,599,423 for the same period of 2001. The increase in
rental revenues during 2002 was primarily due to the Partnership reinvesting the
majority of the net sales proceeds from the 2001 sales of the Properties in
Rialto, California and Winter Haven, Florida in Properties in Pflugerville and
Pasadena, Texas in December 2001. The increase in rental revenues was also
partially attributable to the Partnership reinvesting the proceeds from the sale
of the Property in Arlington, Texas in a Property in San Antonio, Texas. The
increase in rental revenues was partially offset because during 2002, the
Partnership stopped recording rental revenues relating to the Property in Tempe,
Arizona. The tenant of the Property is experiencing financial difficulties and
has ceased payment of rent to the Partnership. The lost revenues from this
Property will have an adverse effect on the results of operations if the
Partnership is unable to lease the Property in a timely manner.
In May 2002, Cypress Restaurants of Georgia, Inc., a lessee, filed for
Chapter 7 bankruptcy protection. In October 2002, the Partnership re-leased the
one Property leased by this tenant to a new tenant with lease terms
substantially the same as the Partnership's other leases.
The Partnership also earned $27,271 in contingent rental income for the
year ended December 31, 2002 as compared to $19,927 for the same period of 2001.
The increase in contingent rental income was due to an increase in gross sales
of certain restaurant Properties, the leases of which require the payment of
contingent rent.
For the year ended December 31, 2002, the Partnership earned $409,465
as compared to $364,478 during the same period of 2001 attributable to the net
income earned by unconsolidated joint ventures in which the Partnership is a
co-venturer. The increase in net income earned by joint ventures during 2002 was
primarily attributable to the fact that in April 2001, the Partnership invested
in a joint venture arrangement, CNL VIII, X, XII Kokomo Joint Venture, with CNL
Income Fund VIII, Ltd. and CNL Income Fund X, Ltd., each of which is a Florida
limited partnership and an affiliate of the General Partners. The increase in
net income earned by unconsolidated joint ventures during 2002 was partially
offset by the fact that in March 2001, Middleburg Joint Venture, in which the
Partnership owned an 87.54% interest, sold its Property to the tenant. The
Partnership dissolved the joint venture in accordance with the joint venture
agreement.
During the year ended December 31, 2002, two lessees (or groups of
affiliated tenants) of the Partnership Jack in the Box Inc. and Jack in the Box
Eastern Division, L.P. (which are affiliated entities under common control of
Jack in the Box Inc. (hereinafter referred to as "Jack in the Box Inc.") and
Flagstar Enterprises, Inc., each contributed more than 10% of the Partnership's
total rental revenues (including the Partnership's share of rental revenues from
Properties owned by joint ventures and a Property owned with an affiliate of the
General Partners as tenants-in-common). As of December 31, 2002, Jack in the Box
Inc. was the lessee under leases relating to eight 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,
that these tenants will each continue to contribute more than 10% of the
Partnership's total rental revenues during 2003. In addition, during the year
ended December 31, 2002, four Restaurant Chains, Long John Silver's, Hardee's,
Jack in the Box, and Denny's, each accounted for more than 10% of the
Partnership's total rental revenues (including the Partnership's share of rental
revenues from Properties owned by joint ventures and a Property owned with an
affiliate of the General Partners as tenants-in-common). In 2003, it is
anticipated that these four Restaurant Chains each will continue to account for
more than 10% of the Partnership's total rental revenues to which the
Partnership is entitled under the terms of the leases. Any failure of these
lessees or Restaurant Chains will materially affect the Partnership's income if
the Partnership is not able to re-lease the Properties in a timely manner.
During the year ended December 31, 2002, the Partnership also earned
$12,666 as compared to $85,732 for the same period of 2001 in interest and other
income. Interest and other income were lower during 2002 due to a decrease in
the average cash balance as a result of the reinvestment of sales proceeds
received in 2001 and due to a decline in interest rates.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $890,667 for the year ended December
31, 2002 as compared to $1,285,744 for the same period of 2001. Operating
expenses were higher during 2001 as a result of the Partnership recording a
provision for write-down of assets of $362,265 relating to the Properties in
Winter Haven, Florida and Albany, Georgia. The provision represented the
difference between the net carrying value of the Properties and their estimated
fair value. The tenant of the Property in Winter Haven, Florida ceased rental
payments to the Partnership and vacated the Property. The tenant of the Property
in Albany, Georgia terminated its lease with the Partnership. The Partnership
sold the Property in Winter Haven, Florida in December 2001 and re-leased the
Property in Albany, Georgia in January 2001 to a new tenant with lease terms
substantially the same as the Partnership's other leases. In addition, operating
expenses were higher during 2001, because the Partnership incurred certain
expenses, such as repairs and maintenance, insurance and real estate taxes in
connection with the Property in Winter Haven, Florida before it was sold. This
Property was sold in December 2001 and the Partnership will not continue to
incur expenses related to this Property. The decrease in operating expenses
during 2002 was also attributable to a decrease in the costs incurred for
administrative expenses for servicing the Partnership and its Properties.
Depreciation expense increased due to the acquisitions of the Properties in San
Antonio, Texas and Clive, Iowa. Although these Properties replaced two
properties that were sold in 2002, the expenses related to disposed Properties
are reported as discontinued operations in the financial statements as required
by a newly adopted accounting pronouncement, as described below.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement requires that a long-lived asset
be tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying amount of
a long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when the
carrying amount of a long-lived asset exceeds its fair value. If an impairment
is recognized, the adjusted carrying amount of a long-lived asset is its new
cost basis. The statement also requires that the results of operations of a
component of an entity that either has been disposed of or is classified as held
for sale be reported as a discontinued operation if the disposal activity was
initiated subsequent to the adoption of the Standard.
During the year ended December 31, 2002, the Partnership identified and
sold two Properties that met the criteria of this standard and were classified
as Discontinued Operations in the accompanying financial statements. The
Partnership sold its properties in Arlington, Texas and Valdosta, Georgia
resulting in an aggregate gain of approximately $501,000. The proceeds from the
sales were reinvested in two Properties.
Comparison of year ended December 31, 2001 to year ended December 31, 2000
Total rental revenues were $3,599,423 during the year ended December
31, 2001 as compared to $3,788,712 for the same period of 2000. The decrease in
rental revenues during 2001 was partially due to the sale of two Properties
during 2001 and the sale of two Properties during 2000. The decrease was also
partially attributable to the fact that the Partnership stopped recording rental
revenue relating to its Property in Columbus, Georgia. In 2001, the tenant of
this Property filed for Chapter 11 bankruptcy protection. In addition, rental
revenues were higher during 2000 because the Partnership collected and
recognized as income approximately $122,800 in past due rental amounts relating
to the Properties whose leases were rejected in connection with Long John
Silvers, Inc. filing for bankruptcy in 1998.
The Partnership also earned $19,927 in contingent rental income for the
year ended December 31, 2001 as compared to $5,156 for the same period of 2000.
The increase in contingent rental income was due to an increase in gross sales
of certain restaurant Properties, the leases of which require the payment of
contingent rent.
For the year ended December 31, 2001, the Partnership earned $364,478
as compared to $373,694 during the same period of 2000 attributable to the net
income earned by unconsolidated joint ventures in which the Partnership is a
co-venturer. The decrease in net income earned by these joint ventures, during
2001 as compared to 2000, was primarily due to the fact that in March 2001
Middleburg Joint Venture, in which the Partnership owned an 87.54% interest,
sold its Property at a loss of approximately $61,900. The Partnership dissolved
the joint venture, as described above. In April 2001, the Partnership used a
portion of the liquidating distribution from the joint venture to invest in CNL
VIII, X, XII Kokomo Joint Venture with affiliates of the General Partners, as
described above.
During the year ended December 31, 2001, the Partnership also earned
$85,732 as compared to $116,055 for the same period of 2000 in interest and
other income. Interest and other income were higher during 2000 primarily due to
interest earned on net sales proceeds from the sale of two Properties in 2000
pending reinvestment in additional properties. In addition, interest and other
income were higher in 2000 due to interest earned on the mortgage note held in
connection with the 1999 sale of the Property in Morganton, North Carolina.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $1,285,744 for the year ended December
31, 2001 as compared to $884,311 for the same period of 2000. Operating expenses
were higher during 2001 as a result of the Partnership recording a provision for
write-down of assets of $362,265 relating to the Properties in Winter Haven,
Florida and Albany, Georgia, as described above. In addition, the increase in
operating expenses during 2001, was partially attributable to an increase in the
costs incurred for administrative expenses for servicing the Partnership and its
Properties and to an increase in state taxes in states in which the Partnership
conducts business. During 2001, the Partnership terminated the leases relating
to its Properties in Winter Haven, Florida and Albany, Georgia, as described
above, and reclassified the assets from investment in direct financing leases to
real estate properties with operating leases, which resulted in increased
depreciation expense. In addition, the Partnership incurred certain expenses
such as legal fees, real estate taxes, insurance and maintenance relating to the
Property in Winter Haven, Florida, as described above.
During 2000, the Partnership recorded a provision for write-down of
assets in the amount of $155,281 relating to two Denny's Properties. The
provision represented the difference between the carrying value of the
Properties and their estimated fair value. In addition, during 2000, the
Partnership incurred $38,677 in transaction costs related to the General
Partners retaining financial and legal advisors to assist them in evaluating and
negotiating the proposed merger with APF. The merger negotiations were
terminated in March 2001.
During the year ended December 31, 2001, the Partnership recognized
gains of $349,516 related to the sales of the Properties in Rialto, California
and Winter Haven, Florida as compared to $254,405 during 2000 related to the
sales of the Properties in Cleveland Tennessee and Bradenton, Florida.
The restaurant industry has been relatively resilient during this
volatile time with steady performance during 2002. However, the industry remains
in a state of cautious optimism. Restaurant operators expect their business to
be better in 2003, according to a nationwide survey conducted by the National
Restaurant Association, but are concerned by the budget deficits being
experienced by many states and the potential of new taxes on the industry to
alleviate the situation.
The Partnership's leases as of December 31, 2002, are generally
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. Inflation, overall, has had a minimal effect on
the results of operations of the Partnership. Continued inflation 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.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and strengthen
existing accounting guidance that addresses when a company should include the
assets, liabilities and activities of another entity in its financial
statements. To improve financial reporting by companies involved with variable
interest entities (more commonly referred to as special-purpose entities or
off-balance sheet structures), FIN 46 requires that a variable interest entity
be considered by a company if that company is subject to a majority risk of loss
from the variable interest entity's activities or entitled to receive a majority
of the entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Consolidation of variable
interests entities will provide more complete information about the resources,
obligations, risks and opportunities of the consolidated company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Management believes
adoption of this standard may result in either consolidation or additional
disclosure requirements with respect to the Partnership's unconsolidated joint
ventures or Properties held with affiliates of the General Partners as
tenants-in-common, which are currently accounted for under the equity method.
However, such consolidation is not expected to significantly impact the
Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 18
Financial Statements:
Balance Sheets 19
Statements of Income 20
Statements of Partners' Capital 21
Statements of Cash Flows 22-23
Notes to Financial Statements 24-36
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XII, Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of CNL Income Fund XII, Ltd. (a Florida limited
partnership) at December 31, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under item 15(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 auditing standards generally
accepted in the United States of America, 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 our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 31, 2003
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
--------------- ----------------
ASSETS
Real estate properties with operating leases, net $22,884,036 $21,325,862
Net investment in direct financing leases 7,958,519 8,143,626
Real estate held for sale -- 1,376,319
Investment in joint ventures 4,434,559 4,577,565
Cash and cash equivalents 1,263,592 1,281,855
Certificates of deposit 541,162 545,107
Receivables, less allowance for doubtful accounts of $49,248
and $51,016, respectively 460 5,584
Due from related parties -- 25,037
Accrued rental income, less allowance for doubtful accounts
of $9,061 in 2002 and 2001 2,675,582 2,486,119
Other assets 69,794 69,537
---------------
----------------
$39,827,704 $39,836,611
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 7,127 $ 22,119
Real estate taxes payable 18,488 7,037
Distributions payable 1,068,752 956,252
Due to related parties 20,984 25,885
Rents paid in advance and deposits 224,979 175,992
--------------- ----------------
Total liabilities 1,340,330 1,187,285
Partners' capital 38,487,374 38,649,326
--------------- ----------------
$39,827,704 $39,836,611
=============== ================
See accompanying notes to financial statements.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2002 2001 2000
----------------- ---------------- ----------------
Revenues:
Rental income from operating leases $ 2,734,625 $ 2,603,276 $ 2,626,789
Earned income from direct financing leases 915,718 996,147 1,161,923
Contingent rental income 27,271 19,927 5,156
Interest and other income 12,666 85,732 116,055
----------------- ---------------- ----------------
3,690,280 3,705,082 3,909,923
----------------- ---------------- ----------------
Expenses:
General operating and administrative 294,733 342,405 217,243
Property expenses 45,624 77,303 9,544
Management fees to related parties 42,279 40,719 42,538
State and other taxes 49,763 49,739 20,833
Depreciation and amortization 451,684 413,313 400,195
Provision for write-down of assets 6,584 362,265 155,281
Transaction costs -- -- 38,677
----------------- ---------------- ----------------
890,667 1,285,744 884,311
----------------- ---------------- ----------------
Income Before Gain on Sale of Assets and Equity in
Earnings of Joint Ventures 2,799,613 2,419,338 3,025,612
Gain on Sale of Assets -- 349,516 254,405
Equity in Earnings of Joint Ventures 409,465 364,478 373,694
----------------- ---------------- ----------------
Income from Continuing Operations 3,209,078 3,133,332 3,653,711
----------------- ---------------- ----------------
Discontinued Operations (Note 5)
Income from discontinued operations 65,395 134,918 166,505
Gain on disposal of discontinued operations 501,083 -- --
----------------- ---------------- ----------------
566,478 134,918 166,505
----------------- ---------------- ----------------
Net Income $ 3,775,556 $ 3,268,250 $ 3,820,216
================= ================ ================
Net Income Per Limited Partner Unit
Continuing Operations $ 0.71 $ 0.70 $ 0.81
Discontinued Operations 0.13 0.03 0.04
----------------- ---------------- ----------------
Total $ 0.84 $ 0.73 $ 0.85
================= ================ ================
Weighted Average Number of Limited Partner Units
Outstanding 4,500,000 4,500,000 4,500,000
================= ================ ================
See accompanying notes to financial statements.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2002, 2001 and 2000
General Partners Limited Partners
------------------------------- -------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs
--------------- ------------- ------------- -------------- ------------ -------------
Balance, December 31, 1999 $ 1,000 $ 258,109 $ 45,000,000 $ (26,125,051) $ 25,451,362 $ (5,374,544)
Distributions to limited
partners ($0.85 per
limited partner unit) -- -- -- (3,825,008) -- --
Net income -- -- -- -- 3,820,216 --
-------------- ------------- --------------- --------------- -------------- -------------
Balance, December 31, 2000 1,000 258,109 45,000,000 (29,950,059) 29,271,578 (5,374,544)
Distributions to limited
partners ($0.85 per
limited partner unit) -- -- -- (3,825,008) -- --
Net income -- -- -- -- 3,268,250 --
-------------- ------------- --------------- --------------- -------------- -------------
Balance, December 31, 2001 1,000 258,109 45,000,000 (33,775,067) 32,539,828 (5,374,544)
Distributions to limited
partners ($0.88 per
limited partner unit) -- -- -- (3,937,508) -- --
Net income -- -- -- -- 3,775,556 --
-------------- ------------- --------------- --------------- -------------- -------------
Balance, December 31, 2002 $ 1,000 $ 258,109 $ 45,000,000 $ (37,712,575) $ 36,315,384 $ (5,374,544)
============== ============= =============== =============== ============== =============
See accompanying notes to financial statements.
Total
--------
$ 39,210,876
(3,825,008)
3,820,216
- -------------
39,206,084
(3,825,008)
3,268,250
- -------------
38,649,326
(3,937,508)
3,775,556
- -------------
$ 38,487,374
=============
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2002 2001 2000
---------------- ---------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents:
Net income $ 3,775,556 $ 3,268,250 $ 3,820,216
---------------- ---------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 452,725 442,404 397,718
Amortization of net investment in direct
financing leases 185,107 148,849 197,885
Amortization 5,348 5,352 5,348
Equity in earnings of joint ventures, net of
distributions 143,006 122,377 11,191
Gain on sale of assets (501,083) (349,516) (254,405)
Provisions for write-down of assets 6,584 362,265 155,281
Decrease (increase) in receivables 5,175 188,549 (118,217)
Increase in interest receivable 3,944 (33,830) --
Decrease (increase) in other assets (5,604) 6,947 (17,351)
Increase in accrued rental income (196,898) (304,245) (190,569)
Decrease in accounts payable and real estate
taxes payable (3,541) (19,057) (99,690)
Increase (decrease) in due to related parties (4,901) 3,077 (52,101)
Increase (decrease) in due from related parties 24,986 3,017 (22,832)
Increase in rents paid in advance and deposits 48,987 90,129 34,876
---------------- ---------------- ---------------
Total adjustments 163,835 666,318 47,134
---------------- ---------------- ---------------
Net Cash Provided by Operating Activities $ 3,939,391 $ 3,934,568 $ 3,867,350
---------------- ---------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of real estate properties 1,871,865 2,472,661 2,019,357
Additions to real estate properties with
operating leases (2,004,511) (2,478,795) (1,009,067)
Liquidating distribution from joint venture -- 1,663,260 --
Investment in joint ventures -- (1,689,609) (1,268,896)
Collection on mortgage note receivable -- 43,760 6,916
Investment in certificates of deposit -- -- (500,000)
---------------- ---------------- ---------------
Net cash provided by (used in) investing
activities (132,646) 11,277 (751,690)
---------------- ---------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (3,825,008) (3,825,008) (3,825,008)
---------------- ---------------- ---------------
Net cash used in financing activities (3,825,008) (3,825,008) (3,825,008)
---------------- ---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents (18,263) 120,837 (709,348)
Cash and Cash Equivalents at Beginning of Year 1,281,855 1,161,018 1,870,366
---------------- ---------------- ---------------
Cash and Cash Equivalents at End of Year $ 1,263,592 $ 1,281,855 $ 1,161,018
================ ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31,
2002 2001 2000
---------------- ---------------- ---------------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Distributions declared and unpaid at
December 31 $ 1,068,752 $ 956,252 $ 956,252
================ ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
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% 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
acquisitions of real estate properties at cost, including acquisition
and closing costs. Real estate properties 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. During
the years ended December 2002, 2001, and 2000 tenants paid directly to
real estate taxing authorities of approximately $540,000, $516,800, and
$408,000, respectively, in real estate taxes in accordance with the
terms of their triple net leases with the Partnership.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using either the
direct financing or the operating methods. Such methods are described
below:
Direct financing method - 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). 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. For the leases classified as direct financing
leases, the building portions of the property leases are
accounted for as direct financing leases while a majority of
the land portion of these leases are operating 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.
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies - Continued:
-------------------------------------------
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.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is made to increase the
allowance for doubtful accounts. 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, Columbus Joint Venture, Bossier
City Joint Venture, CNL VIII, X, XII Kokomo Joint Venture and a
property in Colorado Springs, Colorado held as tenants-in-common with
affiliates of the General Partners are accounted for using the equity
method since each joint venture agreement requires the consent of all
partners on all key decisions affecting the operations of the
underlying property.
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.
Lease Costs - Other assets include brokerage fees associated with
negotiating leases and 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 represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies - Continued:
-------------------------------------------
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.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2002 presentation,
including a change in presentation of the statement of cash flows from
the direct to the indirect method. These reclassifications had no
effect on total partners' capital, net income or cash flows.
Statement of Financial Accounting Standards No. 144 ("FAS 144") -
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement requires that a
long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when
the carrying amount of a long-lived asset exceeds its fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The statement also requires that the
results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
FASB Interpretation No. 46 ("FIN 46") - In January 2003, FASB issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting
guidance that addresses when a company should include the assets,
liabilities and activities of another entity in its financial
statements. To improve financial reporting by companies involved with
variable interest entities (more commonly referred to as
special-purpose entities or off-balance sheet structures), FIN 46
requires that a variable interest entity be considered by a company if
that company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. Consolidation of
variable interests entities will provide more complete information
about the resources, obligations, risks and opportunities of the
consolidated company. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31,
2003, and to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Management believes adoption of this
standard may result in either consolidation or additional disclosure
requirements with respect to the Partnership's unconsolidated joint
ventures or properties held with affiliates of the general partners as
tenants-in-common, which are currently accounted for under the equity
method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
2. Real Estate Properties with Operating Leases:
--------------------------------------------
Real estate properties with operating leases consisted of the following
at December 31:
2002 2001
------------------- -------------------
Land $ 12,724,449 $ 11,801,333
Buildings 13,093,267 12,011,873
------------------- -------------------
25,817,716 23,813,206
Less accumulated depreciation (2,933,680) (2,487,344)
------------------- -------------------
$ 22,884,036 $ 21,325,862
=================== ===================
During 2001, the tenant terminated the lease with the Partnership
relating to its property in Albany, Georgia. As a result, the
Partnership reclassified the building portion of this asset from net
investment in direct financing lease to real estate properties with
operating lease. In accordance with statement of Financial Accounting
Standards No. 13, "Accounting for Leases," the Partnership recorded the
reclassified asset at the lower of original cost, present fair value,
or present carrying value. No loss on reclassification of direct
financing lease was recorded. In connection therewith, the Partnership
entered into a new lease with a new tenant with lease terms
substantially the same as the Partnership's other leases.
In September 2001, the Partnership sold its property in Rialto,
California to a third party and received net sales proceeds of
approximately $1,382,400, resulting in a gain of approximately
$345,300. In October 2001, the Partnership sold its property in Winter
Haven, Florida to a third party and received net sales proceeds of
approximately $1,090,300, resulting in a gain of approximately $4,200.
In December 2001, the Partnership used the net sales proceeds from the
sales of the properties in Rialto, California and a portion of the net
sales proceeds from the sale of the property in Winter Haven, Florida
to invest in two additional properties, one each in Pasadena and
Pflugerville, Texas. The Partnership acquired these properties from CNL
Funding 2001-A, L.P., an affiliate of the general partners.
In June 2002, the Partnership reinvested the proceeds from the sale of
its property in Arlington, Texas and the remaining proceeds from the
2001 sale of the property in Winter Haven, Florida in a property in San
Antonio, Texas. In September 2002, the Partnership reinvested the
proceeds from the sale of a property in Valdosta, Georgia in a property
in Clive, Iowa (see Note 5).
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2002:
2003 $ 2,944,344
2004 2,990,458
2005 3,016,349
2006 3,030,905
2007 3,052,700
Thereafter 18,102,474
----------------
$ 33,137,230
================
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
3. Net Investment in Direct Financing Leases:
-----------------------------------------
The following lists the components of the net investment in direct
financing leases at December 31:
2002 2001
----------------- -----------------
Minimum lease payments receivable $ 12,076,664 $ 13,177,488
Estimated residual values 2,769,298 2,769,298
Less unearned income (6,887,443 ) (7,803,160 )
----------------- -----------------
Net investment in direct financing leases $ 7,958,519 $ 8,143,626
================= =================
The following is a schedule of future minimum lease payments to be
received on the direct financing leases at December 31, 2002:
2003 $ 1,138,184
2004 1,154,081
2005 1,154,081
2006 1,154,081
2007 1,154,081
Thereafter 6,322,156
----------------
$ 12,076,664
================
During 2001, the Partnership established a provision for impairment in
carrying value in the amount of $64,518 for its property in Winter
Haven, Florida as a result of the tenant ceasing restaurant operations
and vacating the property. The provision represented the difference
between the carrying value of the net investment in the direct
financing lease at June 30, 2001 and the estimated fair value of the
property. In July 2001, the Partnership and the tenant terminated its
lease. As a result, the Partnership reclassified the building portion
of the asset from net investment in direct financing leases to real
estate properties with operating leases. In accordance with Statement
of Financial Accounting Standards No. 13, "Accounting for Leases," the
Partnership recorded the reclassified asset at the lower of original
cost, present fair value, or present carrying amount. No loss on
termination of direct financing lease was recorded. In October 2001,
the Partnership sold this property.
4. Investment in Joint Ventures:
----------------------------
As of December 31, 2002, the Partnership had a 59.05%, an 18.61%, a
31.13%, a 27.72%, a 55% and an 80% interest in the profits and losses
of Williston Real Estate Joint Venture, Des Moines Real Estate Joint
Venture, Kingsville Real Estate Joint Venture, Columbus Joint Venture,
Bossier City Joint Venture, and CNL VIII, X, XII Kokomo Joint Venture,
respectively. The remaining interests in these joint ventures are held
by affiliates of the Partnership which have the same general partners.
The Partnership also has a 57% interest in a property in Colorado
Springs, Colorado, with an affiliate of the general partners, as
tenants in common.
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
4. Investment in Joint Ventures - Continued:
----------------------------------------
In March 2001, Middleburg Joint Venture, in which the Partnership owned
an 87.54% interest, sold its property to the tenant, in accordance with
the purchase option under the lease agreement, for $1,900,000 at a loss
of approximately $61,900. The Partnership dissolved the joint venture
in accordance with the Partnership agreement and did not incur a gain
or loss on the dissolution. In April 2001, the Partnership used the
liquidating distribution received from the dissolution of Middleburg
Joint Venture to invest in a joint venture arrangement, CNL VIII, X,
XII Kokomo Joint Venture, with CNL Income Fund VIII, Ltd. and CNL
Income Fund X, Ltd. to purchase and hold one restaurant property. The
joint venture acquired this property from CNL BB Corp., an affiliate of
the general partners. Each of the CNL Income Funds is an affiliate of
the general partners. As of December 31, 2002, the Partnership owned an
80% interest in the profits and losses of the joint venture.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint
Venture, Kingsville Real Estate Joint Venture, Columbus Joint Venture,
Bossier City Joint Venture, CNL VIII, X, XII Kokomo Joint Venture and
the Partnership and affiliates, in a tenancy in common arrangement,
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:
2002 2001
------------------ ------------------
Real estate properties with operating leases, $ 7,337,741 $ 7,580,162
net
Net investment in direct financing leases 633,362 640,381
Cash 37,707 53,152
Receivables 153 951
Accrued rental income 247,903 193,083
Other assets 170 1,444
Liabilities 40,053 27,721
Partners' capital 8,216,983 8,441,452
Years Ended December 31,
2002 2001 2000
-------------- --------------- --------------
Revenues $ 943,283 $ 894,206 $ 779,865
Expenses (179,375 ) (173,420 ) (121,562 )
-------------- --------------- --------------
Net Income $ 763,908 $ 720,786 $ 658,303
============== =============== ==