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, 1997
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 333-9943
CNL AMERICAN REALTY FUND, INC.
(Exact name of registrant as specified in its charter)
Maryland 59-3396369
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 422-1574
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:
None
(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]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of shares of common stock (the
"Shares") on Form S-11 under the Securities Act of 1933, as amended. Since no
established market for such Shares exists, there is no market value for such
Shares. Each Share was originally sold at $10 per Share.
The number of shares of common stock outstanding as of February 18,
1998, was 1,491,067.
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DOCUMENTS INCORPORATED BY REFERENCE:
Registrant incorporates by reference portions of the CNL American
Realty Fund, Inc. Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later than
April 30, 1998.
<PAGE>
PART I
Item 1. Business
CNL American Realty Fund, Inc. (the "Company") is a corporation which
was organized pursuant to the laws of the state of Maryland on June 12, 1996,
and which operates for federal income tax purposes as a real estate investment
trust (a "REIT"). Beginning in July 1997, the Company offered for sale up to
$165,000,000 of shares of common stock (the "Shares") (16,500,000 shares at $10
per share) pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective July 9, 1997. As of December 31,
1997, the Company had received subscription proceeds of $11,325,402 (1,132,540
Shares) from the offering, including $1,056 (106 Shares) through the
distribution reinvestment plan provided under the Company's registration
statement. The offering of the Shares of the Company will terminate no later
than July 9, 1998, unless the Company elects to extend it to a date no later
than July 9, 1999, in states that permit such extension.
The Company was organized to acquire properties (the "Properties")
located across the United States to be leased on a long term, "triple-net" basis
to operators of selected national and regional limited service, extended stay
and full service hotel chains (the "Hotel Chains") and to operators of national
and regional fast-food, family-style and casual dining restaurant chains (the
"Restaurant Chains") . The Company is not obligated to invest in both hotel
Properties and restaurant Properties. Under the Company's triple-net leases, the
lessee will be responsible for property costs associated with ongoing
operations, including repairs, maintenance, property taxes, insurance, and
utilities. The Company may also provide mortgage financing (the "Mortgage
Loans") in the aggregate principal amount of approximately 5% to 10% of the
gross offering proceeds. The Company expects that the general economic effects
of the Mortgage Loans will be similar to those of its leases with full repayment
in 15 to 20 years. The Company also intends to offer furniture, fixtures, and
equipment financing (the "Secured Equipment Leases") to operators of Hotel
Chains and Restaurant Chains. Secured Equipment Leases will be funded from the
proceeds of financing to be obtained by the Company. The aggregate outstanding
principal amount of Secured Equipment Leases will not exceed 10% of gross
proceeds from the offering. The number of Properties to be acquired and Mortgage
Loans to be entered into will depend upon the amount of net offering proceeds
available to the Company. As of December 31, 1997, net proceeds to the Company
from its offering of Shares and capital contributions from CNL Real Estate
Advisors, Inc. (the "Advisor"), after deduction of selling commissions,
marketing support and due diligence expense reimbursement fees and
organizational and offering expenses totalled $9,220,841.
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making distributions commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and distributions)
and providing protection against inflation through automatic increases in base
rent and/or receipt of percentage rent, and obtaining fixed income through the
receipt of payments from Mortgage Loans and Secured Equipment Leases; (iii)
qualifying and remaining qualified as a REIT for federal income tax purposes;
and (iv) providing stockholders of the Company with liquidity of their
investment within five to ten years after commencement of the offering, either
in whole or in part, through (a) listing of the shares on a national securities
exchange or over-the-counter market (the "Listing"), or (b) the commencement of
orderly sales of the Company's assets and distribution of the proceeds thereof
(outside the ordinary course of business and consistent with its objectives of
qualifying as a REIT). There can be no assurance that these investment
objectives will be met. In addition, if the Shares are not listed by December
31, 2007, as to which there can be no assurance, the Company will commence the
orderly sale of its assets and the distribution of the proceeds. Listing does
not assure liquidity.
For the first five to ten years after the commencement of the offering,
the Company intends, to the extent consistent with the Company's objective of
qualifying as a REIT, to reinvest in additional Properties or Mortgage Loans any
proceeds of the sale of a Property or Mortgage Loan that are not required to be
distributed to stockholders in order to preserve the Company's REIT status for
federal income tax purposes. Similarly, and to the extent consistent with REIT
qualification, the Company plans to use the proceeds of the sale of a Secured
Equipment Lease to fund additional Secured Equipment Leases, or to reduce its
outstanding indebtedness on the Loan. At or prior to the end of such ten-year
period, the Company intends to provide stockholders of the Company with
liquidity of
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their investment, either in whole or in part, through Listing of the Shares of
the Company (although liquidity cannot be assured thereby) or by commencing
orderly sales of the Company's assets. If Listing occurs, the Company intends to
reinvest in additional Properties, Mortgage Loans and Secured Equipment Leases
any net sales proceeds not required to be distributed to stockholders in order
to preserve the Company's status as a REIT. The Company's Articles of
Incorporation provide, however, that if Listing does not occur within ten years
after the commencement of the offering, the Company thereafter will undertake
the orderly liquidation of the Company and the sale of the Company's assets and
will distribute any net sales proceeds to stockholders. In addition, the Company
will not sell any assets if such sale would not be consistent with the Company's
objective of qualifying as a REIT.
In deciding the precise timing and terms of Property sales, the Advisor
will consider factors such as national and local market conditions, potential
capital appreciation, cash flows, and federal income tax considerations. The
terms of certain leases, however, may require the Company to sell a Property at
an earlier time if the tenant exercises its option to purchase a Property after
a specified portion of the lease term has elapsed. The Company will have no
obligation to sell all or any portion of a Property at any particular time,
except as may be required under property or joint venture purchase options
granted to certain tenants. In connection with sales of Properties by the
Company, purchase money obligations may be taken by the Company as part payment
of the sales price. The terms of payment will be affected by custom in the area
in which the Property is located and prevailing economic conditions. When a
purchase money obligation is accepted in lieu of cash upon the sale of a
Property, the Company will continue to have a mortgage on the Property and the
proceeds of the sale will be realized over a period of years rather than at
closing of the sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets. In addition, the Company does not
anticipate selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building improvements which secure the Mortgage Loan and the sale of the
Property occurs, or (ii) the Company undertakes an orderly sale of its assets.
Leases
As of December 31, 1997, the Company had not entered into any
commitment for an acquisition of a Property. However, the leases are expected to
be triple-net leases, which means that the tenants generally will be required to
pay all repairs, maintenance, property taxes, utilities, and insurance. The
tenants also will be required to pay for special assessments, sales and use
taxes, and the cost of any renovations permitted under the leases. The Company
will own the Properties either directly or indirectly through a joint venture,
partnership, or a subsidiary. Some hotel Property leases may obligate the tenant
to fund, in addition to its lease payment, a capital expenditures reserve fund
up to a pre-determined amount. Money in that fund may be used by the tenant,
with the approval of the Company, to pay for capital expenditures. The Company
may be responsible for capital expenditures in excess of the amounts in the
reserve fund, and the tenant generally would be responsible for replenishing the
reserve fund and to pay a specified return on the amount of capital expenditures
paid for by the Company in excess of amounts in the reserve fund.
The initial terms of the leases are presently anticipated to be 10 to
20 years with up to four, five-year renewal options. During the initial term of
each lease, the tenant will pay the Company, as lessor, minimum annual rent
equal to a specified percentage of the Company's cost of purchasing the Property
payable in monthly installments. If the Company is acquiring a Property that is
to be constructed or renovated pursuant to the development agreement, the cost
of purchasing the Property will include the purchase price of the land,
including all fees, costs, and expenses paid by the Company in connection with
its purchase of the land, and all fees, costs, and expenses disbursed by the
Company for construction of building improvements. The minimum rental payment
under the renewal option generally will be greater than that due for the final
lease year of the initial term of the lease. In addition to the minimum annual
rent, the lease will generally provide for percentage rent based on a percentage
of the gross sales above a specified amount to be paid by the tenant.
Certain lessees may have the right to purchase the Property seven to
twenty years after commencement of the lease at a purchase price equal to the
greater of (i) the appraised value of the Property, or (ii) a specified amount,
generally equal to the Company's purchase price of the Property, plus a
pre-determined percentage of the Company's purchase price. The leases also
generally provide that, in the event the Company wishes to sell a Property
subject
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to that lease to a third party, it must offer the lessee first refusal to
purchase the Property on the same terms and conditions, and for the same price,
as any offer which the Company has received for the sale of the Property.
Certain Management Services
Pursuant to an advisory agreement (the "Advisory Agreement") with the
Company, the Advisor provides management services relating to the Company, the
Properties, the Mortgage Loans and the Secured Equipment Lease Program. Under
this agreement, the Advisor is responsible for assisting the Company in
negotiating leases, Mortgage Loans, the line of credit (the "Line of Credit")
and Secured Equipment Leases, collecting rental, Mortgage Loan and Secured
Equipment Lease payments, inspecting the Properties and the tenants' books and
records, and responding to tenants inquiries and notices. The Advisor also
provides information to the Company about the status of the leases, the
Properties, the Mortgage Loans, the Line of Credit and the Secured Equipment
Leases. In exchange for these services, the Advisor is entitled to receive
certain fees from the Company. For supervision of the Properties and the
Mortgage Loans, the Advisor receives the asset management fee, which is payable
monthly in an amount equal to one-twelfth of .60% of the total amount invested
in the Properties as of the end of the preceding month, exclusive of acquisition
fees and acquisition expenses (the "Real Estate Asset Value") plus one-twelfth
of .60% of the outstanding principal amount of any Mortgage Loans, as of the end
of the preceding month. For negotiating Secured Equipment Leases and supervising
the Secured Equipment Lease program, the Advisor will receive, upon entering
into each lease, a secured equipment lease servicing fee, payable out of the
proceeds of the Line of Credit, equal to 2% of the purchase price of the
equipment subject to each Secured Equipment Lease (the "Secured Equipment Lease
Servicing Fee"). For identifying the Properties, structuring the terms of the
acquisition and leases of the Properties and structuring the terms of the
Mortgage Loans, the Advisor will receive a fee equal to 4.5% of gross proceeds,
loan proceeds from permanent financing (the "Permanent Financing") and amounts
outstanding on the Line of Credit, if any, at the time of Listing, but excluding
that portion of the Permanent Financing used to finance Secured Equipment
Leases.
The Advisory Agreement continues until July 9, 1998, and thereafter my
be extended annually upon mutual consent of the Advisor and the Board of
Directors of the Company unless terminated at an earlier date upon 60 days prior
written notice by each party.
Borrowing
The Company plans to obtain a revolving Line of Credit in an amount up
to $45,000,000, and may, in addition, also obtain Permanent Financing to acquire
assets and to pay certain fees during the offering period. The Line of Credit
may be repaid with offering proceeds, working capital or Permanent Financing.
Although the Board of Directors anticipates that the Line of Credit will be in
the amount of $45,000,000 and that the aggregate amount of any Permanent
Financing will not exceed 30% of the Company's total assets, the maximum amount
the Company may borrow, absent a satisfactory showing that a higher level of
borrowing is appropriate as approved by the majority of the independent
directors, is 300% of the Company's Net Assets (as defined in the Company's
Prospectus). Any excess in borrowing over such 300% level shall occur only with
approval by a majority of the independent directors and will be disclosed and
explained to stockholders in the first quarterly report of the Company prepared
after such approval occurs. The Company has engaged in preliminary discussions
with a potential lender, but has not yet received a commitment for the Line of
Credit or any Permanent Financing and there is no assurance that the Company
will obtain the Line of Credit or any Permanent Financing on satisfactory terms.
Competition
The hotel and restaurant businesses are characterized by intense
competition. The operators of the hotels and restaurants to be located on the
Company's Properties are expected to compete with independently owned hotels and
restaurants, hotels and restaurants which are part of local or regional chains,
and hotels and restaurants in other well-known national chains, including those
offering different types of food and accommodations.
Many successful fast-food, family-style, and casual dining restaurants
are located in "eating islands", which are areas to which people tend to return
frequently and within which they can diversify their eating habits, because in
many cases local competition may enhance the restaurant's success instead of
detracting from it. Fast-food, family-style, and casual dining restaurants
frequently experience better operating results when there are other
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restaurants in the same area. Similarly, many successful hotel "pockets" have
developed in areas of concentrated lodging demand, such as airports, urban
office parks and resort areas where this gathering promotes credibility to the
market as a lodging destination and accords the individual properties
efficiencies such as area transportation, visibility and the promotion of other
support amenities.
The Company will be in competition with other persons and entities both
to locate suitable Properties to acquire and to locate purchasers for its
Properties. The Company also will compete with other financing sources such as
banks, mortgage lenders, and sale/leaseback companies for suitable Properties,
tenants and equipment tenants.
Employees
Reference is made to Item 10. Directors and Executive Officers of the
Registrant for a listing of the Company's Executive Officers. The Company has no
other employees.
Item 2. Properties
Even though the Company can acquire hotel or restaurant Properties, it
is not obligated to acquire both hotel and restaurant Properties. Generally,
Properties to be acquired by the Company will consist of both land and building,
although in a number of cases the Company may acquire the land underlying the
building with the building owned by the tenant or a third party, and also may
acquire the building only with the land owned by a third party. The Company
expects that any Properties purchased by the Company will conform generally to
the following specifications of size, cost, and type of land and buildings.
Hotel Properties. The lot sizes will generally range up to 10 acres
depending on product, market and design considerations, and are available at a
broad range of pricing. It is anticipated that hotel sites purchased by the
Company will generally be in primary or secondary urban, suburban, airport,
highway or resort markets which have been evaluated for past and future expected
lodging demand trends.
The hotel buildings are predicted to be low to mid rise construction.
The Company may acquire limited service, extended stay or full service hotel
Properties. Limited service hotels generally minimize non-guest room space and
offer limited food service such as complimentary continental breakfasts and do
not have restaurant or lounge facilities on site. Extended stay hotels generally
contain guest suites with a kitchen area and living area separate from the
bedroom. Extended stay hotels vary with respect to providing on-site restaurant
facilities. Full service hotels generally have conference or meeting facilities
and on-site food and beverage facilities.
Restaurant Properties. Lot sizes will range between 25,000 to 60,000
square feet depending upon building size and local demographic factors.
Restaurants located on land within shopping centers will be freestanding and may
be located on smaller parcels if insufficient common parking is available. Sites
purchased by the Company will be in locations zoned for commercial use which
have been reviewed for traffic patterns and volume. The restaurant buildings
generally will be rectangular and constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes generally will range from
2,500 to 6,000 square feet, with the larger restaurants having greater seating
and equipment areas.
Before or after construction or renovation, both hotel and restaurant
Properties to be acquired will be one of a Hotel Chain's or Restaurant Chains's
approved designs. In general, the Properties will be freestanding and surrounded
by paved parking areas. Buildings will be suitable for a variety of uses, and in
the case of hotel Properties, the Properties may include equipment.
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 under the franchise agreement to reflect the current
commercial image of its Hotel Chain or Restaurant Chain. These capital
expenditures generally will be paid by the lessee during the term of the lease.
Some hotel Property leases may, however, obligate the lessee to fund, in
addition to its lease payment, a capital expenditures reserve fund up to a
pre-determined amount. Money in that fund may be used by the lessee, with the
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approval of the Company, to pay for capital expenditures. The Company may be
responsible for capital expenditures in excess of the amounts in the reserve
fund, and the lessee would be generally responsible for replenishing the reserve
fund and to pay a specified return on the amount of capital expenditures paid
for by the Company in excess of amounts in the reserve fund.
The Company presently is negotiating to acquire Properties and as of
January 22, 1998, had not acquired any such Properties.
Item 3. Legal Proceedings
Neither the Company, nor its Advisor or any affiliates of the Advisor,
nor any of their respective properties, is a party to, or subject to, any
material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of January 22, 1998, there were 695 stockholders of record of common
stock. There is no public trading market for the Shares, and even though the
Company intends to list the Shares on a national securities exchange or
over-the-counter market within ten years of commencement of the offering of
Shares, there is no assurance that one will develop and it is not known at this
time if a public market for the Shares will develop. After the termination of
the offering and prior to such time, if any, as Listing occurs, any stockholder
(other than the Advisor) may present all or any portion equal to at least 25% of
such stockholder's Shares to the Company for redemption at any time. At such
time, the Company may, at its option, subject to certain conditions, redeem such
Shares presented for redemption for cash to the extent it has sufficient net
proceeds ("Reinvestment Proceeds") from the sale of Shares under the Company's
distribution reinvestment plan (the "Reinvestment Plan"). Stockholders who wish
to have their distributions used to acquire additional Shares (to the extent
Shares are available for purchase), may do so pursuant to the Company's
Reinvestment Plan. There is no assurance that there will be Reinvestment
Proceeds available for redemption and, accordingly, a stockholder's Shares may
not be redeemed. Any Shares acquired pursuant to a redemption will be retired
and no longer available for issuance by the Company. The Board of Directors of
the Company, in their discretion, may amend or suspend the redemption plan at
any time they determine that such amendment or suspension is in the best
interest of the Company. The price to be paid for any Share transferred other
than pursuant to the redemption plan is subject to negotiation by the purchaser
and the selling stockholder. For the year ended December 31, 1997, no Shares
were transferred, or retired pursuant to the redemption plan.
As of December 31, 1997, the offering price per Share was $10.
The Company expects to distribute at least 95% of its real estate
investment trust taxable income to the stockholders pursuant to the provisions
of the Articles of Incorporation. For the year ended December 31, 1997, the
Company declared cash distributions of $29,776 to stockholders. For federal
income tax purposes, 100 percent of dividends paid in 1997 were considered to be
ordinary income. No amounts distributed to stockholders for the year ended
December 31, 1997, were required to be or have been treated by the Company as a
return of capital for purposes of calculating the stockholders' return on their
invested capital. As indicated in the chart below, these distributions were
declared for each month following the first admission of stockholders to the
Company.
Distributions
Record Date (1) 1997 Distribution per Share
November 1 $10,758 $0.025
December 1 19,018 0.025
Total $29,776 $0.050
(1) For the period June 12, 1996 (date of inception) through October 15,
1997, the Company did not make any cash distributions because
operations had not commenced.
In January 1998, the Company declared distributions to stockholders
totalling $28,814 ($0.025 per Share) payable in March 1998. In addition, in
January 1998, the Company declared distributions of $0.025 per share of common
stock to stockholders of record on February 1, 1998, also payable in March 1998.
The Company intends to continue to declare distributions of cash to
stockholders on a monthly basis during the offering period, and quarterly
thereafter.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1997 (1) 1996 (2)
------------- ---------
<S> <C>
Year Ended December 31:
Revenues $ 46,071 $ -
Net earnings 22,852 -
Cash distributions declared 29,776 -
Funds from operations (3) 22,852 -
Earnings per Share 0.03 -
Cash distributions declared per Share 0.05 -
Weighted average number of Shares outstanding (4) 686,063 -
At December 31:
Total assets $9,443,476 $598,190
Total stockholders' equity 9,233,917 200,000
</TABLE>
(1) No operations commenced until the Company received minimum offering
proceeds and funds were released from escrow on October 15, 1997.
(2) Selected financial data for 1996 represents the period June 12, 1996
(date of inception) through December 31, 1996.
(3) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of NAREIT and as used herein, means net
earnings determined in accordance with generally accepted accounting
principles ("GAAP"), excluding gains or losses from debt restructuring
and sales of property, plus depreciation and amortization of real
estate assets and after adjustments for unconsolidated partnerships and
joint ventures. FFO was developed by NAREIT as a relative measure of
performance and liquidity of an equity REIT in order to recognize that
income-producing real estate historically has not depreciated on the
basis determined under GAAP. However, FFO (i) does not represent cash
generated from operating activities determined in accordance with GAAP
(which, unlike FFO, generally reflects all cash effects of transactions
and other events that enter into the determination of net earnings),
(ii) is not necessarily indicative of cash flow available to fund cash
needs and (iii) should not be considered as an alternative to net
earnings determined in accordance with GAAP as an indication of the
Company's operating performance, or to cash flow from operating
activities determined in accordance with GAAP as a measure of either
liquidity or the Company's ability to make distributions. Accordingly,
the Company believes that in order to facilitate a clear understanding
of the consolidated historical operating results of the Company, FFO
should be considered in conjunction with the Company's net earnings and
cash flows as reported in the accompanying financial statements and
notes thereto.
(4) The weighted average number of Shares outstanding is based upon the
period the Company was operational.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company is a Maryland corporation that was organized on June 12,
1996, to acquire Properties located across the United States to be leased on a
long term, "triple net" basis to operators of selected national and regional
limited service, extended stay and full service Hotel Chains and operators of
national and regional fast-food, family- style and casual dining Restaurant
Chains. The Company is not obligated to invest in both hotel Properties and
restaurant Properties. The Company may also provide Mortgage Loans in the
aggregate principal amount of approximately 5% to 10% of the gross offering
proceeds. The Company also intends to offer Secured Equipment Leases to
operators of Hotel Chains and Restaurant Chains. Secured Equipment Leases will
be funded from the proceeds of financing to be obtained by the Company. The
aggregate outstanding principal amount of Secured Equipment Leases will not
exceed 10% of gross proceeds from the offering.
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Pending investment in suitable Properties and Mortgage Loans, net
offering proceeds are invested in short-term, highly liquid U.S. Government
securities or in other short-term, highly liquid investments with appropriate
safety of principal. Management anticipates that after the Company has invested
in assets, Company revenues sufficient to pay operating expenses, provide cash
distributions to the stockholders and service debt, will be derived from the
lease and mortgage payments paid to the Company by the tenants and borrowers.
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making distributions commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and distributions)
and providing protection against inflation through automatic increases in base
rent and/or receipt of percentage rent, and obtaining fixed income through the
receipt of payments from Mortgage Loans and Secured Equipment Leases; (iii)
qualifying and remaining qualified as a REIT for federal income tax purposes;
and (iv) providing stockholders of the Company with liquidity of their
investment within five to ten years after commencement of the offering, either
in whole or in part, through (a) Listing of the Shares or (b) the commencement
of orderly sales of the Company's assets, and distribution of the proceeds
thereof (outside the ordinary course of business and consistent with its
objective of qualifying as a REIT). There can be no assurance that these
investment objectives will be met. In addition, if the Shares are not listed by
December 31, 2007, as to which there can be no assurance, the Company will
commence the orderly sale of its assets and the distribution of the proceeds.
Listing does not assure liquidity.
Pursuant to the registration statement on Form S-11 under the
Securities Act of 1933, as amended, effective July 9, 1997, the Company
registered for sale an aggregate of $165,000,000 of Shares of common stock
(16,500,000 Shares at $10 per Share), with 1,500,000 of such Shares available
only to stockholders who elect to participate in the Company's Reinvestment
Plan. The offering of Shares of the Company will terminate no later than July 9,
1998, unless the Company elects to extend it to a date no later than July 9,
1999, in states that permit such extension.
Liquidity and Capital Resources
During the period June 12, 1996 (date of inception) through December
31, 1996, the Company received initial capital contributions of $200,000 for
20,000 shares of common stock from CNL Fund Advisors, Inc. In February 1997, CNL
Real Estate Advisors, Inc. purchased the Company's outstanding common stock from
CNL Fund Advisors, Inc. and became the sole stockholder of the Company.
Effective July 1997, the Company commenced an offering of its Shares of
common stock. As of December 31, 1997, the Company had received aggregate
subscription proceeds totalling $11,325,402 (1,132,540 Shares) from the
offering, including $1,056 (106 Shares) through the Company's Reinvestment Plan.
As of December 31, 1997, net proceeds to the Company from its offering
of Shares and capital contributions from the Advisor, after deduction of selling
commissions, marketing support and due diligence expense reimbursement fees and
organizational and offering expenses totalled $9,220,841. The Company used
$535,792 to pay for acquisition fees and acquisition expenses, leaving
$8,658,049 in net offering proceeds available for investment in Properties and
Mortgage Loans. As of January 22, 1998, the Company had received subscription
proceeds (excluding the capital contributions from the Advisor) of $12,628,022
(1,262,802 Shares) from its offering of Shares. As of January 22, 1998, net
proceeds to the Company from its offering of Shares and capital contributions
from the Advisor, after deduction of selling commissions, marketing support and
due diligence expense reimbursement fees and organizational and offering
expenses totalled $10,419,251. The Company used $594,410 to pay for acquisition
fees and acquisition expense, leaving $9,824,841 in net offering proceeds
available for investment in Properties and Mortgage Loans. As of January 22,
1998, the Company had not acquired any Properties or entered into any Mortgage
Loans.
The Company expects to use net offering proceeds from the sale of
Shares to purchase Properties and to invest in Mortgage Loans. In addition, the
Company intends to borrow money to acquire Properties, to invest in Mortgage
Loans and Secured Equipment Leases, and to pay certain related fees. The Company
intends to encumber assets in connection with such borrowing. The Company plans
to obtain a revolving Line of Credit in an amount up to $45,000,000. The Company
also plans to obtain Permanent Financing. Although the Board of Directors
anticipates that the Line of Credit will be in the amount of $45,000,000 and
that the aggregate amount of any Permanent Financing shall not exceed 30% of the
Company's total assets, the maximum amount the Company may borrow, absent a
satisfactory showing that a higher level of borrowing is appropriate as approved
by a majority of the independent directors, is 300% of the Company's net assets,
defined for this purpose as the Company's total assets (other than intangibles),
calculated at cost, less total liabilities. The Line of Credit is expected to be
used to facilitate the acquisition of assets and will be repaid with proceeds of
the offering or from Permanent Financing.
8
<PAGE>
The Company has engaged in discussions with a potential lender, but has not yet
executed a commitment for the Line of Credit or any Permanent Financing and
there is no assurance that the Company will obtain the Line of Credit or any
Permanent Financing on satisfactory terms.
Properties will be leased on a long-term, triple-net basis, meaning
that tenants are generally required to pay all repairs and maintenance, property
taxes, insurance and utilities. Rental payments under the leases are expected to
exceed the Company's operating expenses. For these reasons, no short-term or
long-term liquidity problems associated with operating the Properties are
currently anticipated by management.
Until Properties are acquired, or Mortgage Loans are entered into, net
offering proceeds are held in short-term, highly liquid investments which
management believes to have appropriate safety of principal. This investment
strategy provides high liquidity in order to facilitate the Company's use of
these funds to acquire Properties at such time as Properties suitable for
acquisition are located or to fund Mortgage Loans. At December 31, 1997, the
Company had $8,869,838 invested in such short-term investments as compared to
$2,084 at December 31, 1996. The increase in the amount invested in short-term
investments reflects subscription proceeds derived from the sale of Shares
during the year ended December 31, 1997. These funds will be used primarily to
purchase and develop or renovate Properties, to make Mortgage Loans, to pay
organizational and offering expenses and acquisition expenses, to pay
distributions to stockholders, to meet other Company expenses and, in
management's discretion, to create cash reserves.
During the year ended December 31, 1997 and the period June 12, 1996
(date of inception) through December 31, 1996, affiliates of the Company
incurred on behalf of the Company $638,274 and $555,812, respectively, for
certain organizational and offering expenses. In addition, during the year ended
December 31, 1997, affiliates of the Company incurred on behalf of the Company
$26,149 for certain acquisition expenses and $11,003 for certain operating
expenses. As of December 31, 1997 and 1996, the Company owed the Advisor
$193,254 and $386,561, respectively, for such amounts, unpaid fees and
accounting and administrative expenses. The Advisor has agreed to pay or
reimburse to the Company all organizational and offering expenses in excess of
three percent of gross offering proceeds.
During the year ended December 31, 1997, the Company generated cash
from operations (which includes interest received less cash paid for operating
expenses) of $22,469. Based on current and anticipated future cash from
operations the Company declared distributions to its stockholders of $29,776
during the period October 15, 1997 (the date operations commenced) through
December 31, 1997. No distributions were paid or declared for the period June
12, 1996 (date of inception) through October 14, 1997 because operations had not
commenced. On January 1, 1998, the Company declared distributions to
stockholders of record on January 1, 1998, totalling $28,814 ($0.025 per share),
payable in March 1998. On January 16, 1998, the Company declared distributions
of $0.025 per share of common stock to stockholders of record on February 1,
1998, also payable in March 1998. For the year ended December 31, 1997, 100
percent of the distributions received by stockholders were considered to be
ordinary income for federal income tax purposes. No amounts distributed or to be
distributed to the stockholders as of January 22, 1998, were required to be or
have been treated by the Company as a return of capital for purposes of
calculating the stockholders' return on their invested capital.
Due to anticipated low operating expenses, rental income expected to be
obtained from Properties after they are acquired, the fact that the Line of
Credit and Permanent Financing have not been obtained and that the Company has
not entered into Mortgage Loans or Secured Equipment Leases, management does not
believe that working capital reserves will be necessary at this time. Management
has the right to cause the Company to maintain reserves if, in their discretion,
they determine such reserves are required to meet the Company's working capital
needs.
As of January 22, 1998, the Company had not entered into any
arrangements creating a reasonable probability that a Property would be acquired
by the Company or that a particular Mortgage Loan or Secured Equipment Lease
would be funded. The number of Properties to be acquired and Mortgage Loans to
be invested in will depend upon the amount of net offering proceeds and loan
proceeds available to the Company. The amount invested in Secured Equipment
Leases will not exceed 10% of the gross offering proceeds.
Management expects that the cash to be generated from operations will
be adequate to pay operating expenses and to make distributions to stockholders.
9
<PAGE>
Results of Operations
No operations commenced until the Company received the minimum offering
proceeds of $2,500,000 on October 15, 1997. The Company did not acquire any
Properties or enter into any Mortgage Loans during the year ended December 31,
1997.
During the year ended December 31, 1997, the Company earned $46,071 in
interest income from investments in money market accounts. Interest income is
expected to increase as the Company invests subscription proceeds received in
the future in highly liquid investments pending investment in Properties and
Mortgage Loans. However, as net offering proceeds are invested in Properties and
used to make Mortgage Loans, the percentage of the Company's total revenues from
interest income from investments in money market accounts or other short term,
highly liquid investments is expected to decrease.
Operating expenses, including amortization expense, were $23,219 for
the year ended December 31, 1997. Operating expenses, including amortization
expense, represent only a portion of operating expenses which the Company is
expected to incur during a full year in which the Company owns Properties or in
which the Company is operational. The dollar amount of operating expenses is
expected to increase as the Company acquires Properties and invests in Mortgage
Loans.
The Company anticipates that its leases will be triple-net leases and
will contain provisions that management believes will mitigate the adverse
effect of inflation. Such provisions will include clauses requiring the payment
of percentage rent based on certain gross 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 gross 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 Company's
Properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the Properties and on potential capital appreciation of
the Properties.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure". The Statement, which is effective for fiscal years
ending after December 15, 1997, provides for disclosure of the Company's capital
structure as it relates to its preferred stock. At this time, the Company's
Board of Directors has not determined the relative rights, preferences, and
privileges of each class or series of preferred stock authorized. Since the
Company has not issued preferred shares, the disclosures to this Statement are
not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
Statement, which is effective for fiscal years beginning after December 15,
1997, requires the reporting of net earnings and all other changes to equity
during the period, except those resulting from investments by owners and
distributions to owners, in a separate statement that begins with net earnings.
Currently, the Company's only component of comprehensive income is its net
earnings. The Company does not believe that adoption of this Statement will have
a material effect on the Company's financial position or results of operations.
The Advisor of the Company is in the process of assessing and
addressing the impact of the year 2000 on its computer package software. The
hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the Company does not expect this matter to materially impact how it
conducts business nor its future results of operations or financial position.
This information contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include the following: changes in general economic conditions,
changes in local and national real estate conditions, continued availability of
proceeds from the Company's offering, the ability of the Company to obtain a
Line of Credit or Permanent Financing, as described above, on satisfactory
terms, the ability of the Company to identify suitable investments, the ability
of the Company to locate suitable tenants for its
10
<PAGE>
Properties and borrowers for its Mortgage Loans and Secured Equipment Leases,
and the ability of such tenants and borrowers to make payments under their
respective leases, Mortgage Loans or Secured Equipment Leases.
Item 8. Financial Statements and Supplementary Data
11
<PAGE>
CNL AMERICAN REALTY FUND, INC.
CONTENTS
Page
Report of Independent Accountants 13
Financial Statements:
Balance Sheets 14
Statements of Earnings 15
Statements of Stockholders' Equity 16
Statements of Cash Flows 17
Notes to Financial Statements 19
12
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL American Realty Fund, Inc.
We have audited the financial statements of CNL American Realty Fund, Inc. (a
Maryland corporation) listed in Item 14(a) of this Form 10-K. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CNL American Realty Fund, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and the period June 12, 1996 (date of
inception) through December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Orlando, Florida
January 22, 1998
13
<PAGE>
CNL AMERICAN REALTY FUND, INC.
BALANCE SHEETS
December 31,
ASSETS 1997 1996
------------ -----------
Cash and cash equivalents $8,869,838 $ 2,084
Due from related party 7,500 -
Prepaid expenses 11,179 -
Organization costs, less accumulated
amortization of $833 in 1997 19,167 -
Deferred offering costs - 596,106
Other assets 535,792 -
---------- ---------
$9,443,476 $ 598,190
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 16,305 $ 11,629
Due to related parties 193,254 386,561
---------- ----------
Total liabilities 209,559 398,190
---------- ----------
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000
shares in 1997 - -
Excess shares, $.01 par value per
share. Authorized and unissued
63,000,000 shares in 1997 - -
Common stock, $.01 par value per
share. Authorized 60,000,000
shares and 100,000 shares,
respectively, issued and
outstanding 1,152,540 and 20,000,
respectively 11,525 200
Capital in excess of par value 9,229,316 199,800
Accumulated distributions in excess
of net earnings (6,924 ) -
---------- ---------
Total stockholders' equity 9,233,917 200,000
---------- ----------
$9,443,476 $ 598,190
========== ==========
See accompanying notes to financial statements.
14
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF EARNINGS
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ------------
Interest income $ 46,071 $ -
---------- ---------
Expenses:
General operating and
administrative 22,386 -
Amortization 833 -
---------- ---------
23,219 -
---------- ---------
Net Earnings $ 22,852 $ -
========== =========
Earnings Per Share of Common
Stock (Basic and Diluted) $ 0.03 $ -
========== =========
Weighted Average Number of
Shares of Common Stock
Outstanding 686,063 -
========== =========
See accompanying notes to financial statements.
15
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 1997 and the
Period June 12, 1996 (Date of Inception) through
December 31, 1996
<TABLE>
<CAPTION>
Accumulated
distributions
Common stock Capital in in excess
Number Par excess of of net
of shares value par value earnings Total
<S> <C>
Balance at
June 12, 1996 - $ - $ - $ - $ -
Sale of common
stock to related
party 20,000 200 199,800 - 200,000
---------- ------- ----------- --------- -----------
Balance at
December 31, 1996 20,000 200 199,800 - 200,000
Subscriptions
received for
common stock
through public
offering and
distribution
reinvestment plan 1,132,540 11,325 11,314,077 - 11,325,402
Stock issuance costs - - (2,284,561) - (2,284,561)
Net earnings - - - 22,852 22,852
Distributions
declared ($0.05
per share) - - - (29,776) (29,776)
---------- ------- ----------- --------- -----------
Balance at
December 31, 1997 1,152,540 $11,525 $ 9,229,316 $ (6,924) $ 9,233,917
========== ======= =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Interest received $ 46,071 $ -
Cash paid for expenses (23,602) -
------------ -----------
Net cash provided by operating
activities 22,469 -
------------ -----------
Cash Flows From Investing Activities:
Increase in other assets (463,470) -
------------ -----------
Net cash used in investing
activities (463,470) -
------------ -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition, organi-
zation and stock issuance costs paid
by related parties on behalf of the
Company (1,003,031) (197,916)
Sale of common stock to related party - 200,000
Subscriptions received from stock-
holders 11,327,900 -
Distributions to stockholders (29,776) -
Payment of stock issuance costs (986,338) -
------------ -----------
Net cash provided by financing
activities 9,308,755 2,084
------------ ------------
Net Increase in Cash and Cash Equivalents 8,867,754 2,084
Cash and Cash Equivalents at Beginning of
Period 2,084 -
------------ -----------
Cash and Cash Equivalents at End of Period $ 8,869,838 $ 2,084
============ ============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
CNL AMERICAN REALTY FUND, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ -------------
<S> <C>
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 22,852 $ -
------------ -----------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Amortization 833 -
Increase in prepaid expenses (11,179) -
Increase in accounts payable and
accrued expenses 6,141 -
Increase in due to related parties,
excluding reimbursement of acqui-
sition, organization and stock
issuance costs paid on behalf
of the Company 3,822 -
------------ -----------
Total adjustments (383) -
------------ -----------
Net Cash Provided by Operating Activities $ 22,469 $ -
============ ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain acquisition,
organization and stock issuance
costs on behalf of the Company as follows:
Acquisition costs $ 26,149 $ -
Organization costs - 20,000
Deferred offering costs - 535,812
Stock issuance costs 638,274 -
------------ -----------
$ 664,423 $ 555,812
============ ============
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies:
Organization and Nature of Business - CNL American Realty Fund, Inc.
(the "Company") was organized in Maryland on June 12, 1996 primarily to
acquire properties ("Properties") located across the United States to
be leased on a long-term triple-net basis. The Company intends to
invest the proceeds from its public offering, after deducting offering
expenses, in hotel Properties to be leased to operators of national and
regional limited service, extended stay and full service hotel chains
(the "Hotel Chains") and in restaurant Properties to be leased to
operators of selected national and regional fast-food, family-style and
casual dining restaurant chains (the "Restaurant Chains"). The Company
may also provide mortgage financing ( the "Mortgage Loans"). The
Company also intends to offer furniture, fixture and equipment
financing (the "Secured Equipment Leases") to operators of Hotel Chains
and Restaurant Chains.
The Company was a development stage enterprise from June 12, 1996
through October 15, 1997. Since operations had not begun, activities
through October 15, 1997 were devoted to organization of the Company.
Cash and Cash Equivalents - The Company 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 Company in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Company has not experienced any losses in such
accounts. The Company limits investment of temporary cash investments
to financial institutions with high credit standing; therefore,
management believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Organization Costs - Organization costs are amortized over five years
using the straight-line method.
19
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
Income Taxes - The Company intends to make an election to be taxed as a
real estate investment trust ("REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, commencing with its
taxable year ended December 31, 1997. If the Company qualifies for
taxation as a REIT, the Company generally will not be subject to
federal corporate income taxes to the extent it distributes its REIT
taxable income to its stockholders, so long as it distributes at least
95 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the financial statements. Even if
the Company qualifies for taxation as a REIT, it may be subject to
certain state and local taxes on its income and property, and federal
income and excise taxes on its undistributed income.
Earnings Per Share - Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during
the reporting period. The Company does not have any dilutive potential
common shares.
Use of Estimates - Management of the Company has 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. Actual results could differ from those
estimates.
New Accounting Standard - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure". The
Statement, which is effective for fiscal years ending after December
15, 1997, provides for disclosure of the Company's capital structure.
At this time, the Company's Board of Directors has not determined the
20
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
1. Significant Accounting Policies - Continued:
relative rights, preferences, and privileges of each class or series of
preferred stock authorized. Since the Company has not issued preferred
shares, the disclosures to this Statement are not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income". The Statement, which is effective for fiscal years beginning
after December 15, 1997, requires the reporting of net earnings and all
other changes to equity during the period, except those resulting from
investments by owners and distributions to owners, in a separate
statement that begins with net earnings or in the statement of
operations below net earnings. Currently, the Company's only component
of comprehensive income is its net earnings. The Company does not
believe that adoption of this Statement will have a material effect on
the Company's financial position or results of operations.
2. Public Offering:
The Company has filed a currently effective registration statement on
Form S-11 with the Securities and Exchange Commission.
A maximum of 16,500,000 shares ($165,000,000) may be sold, including
1,500,000 shares ($15,000,000) which is available only to stockholders
who elect to participate in the Company's reinvestment plan. The
Company has adopted a reinvestment plan pursuant to which stockholders
may elect to have the full amount of their cash distributions from the
Company reinvested in additional shares of common stock of the Company.
As of December 31, 1997, the Company had received subscription proceeds
of $11,325,402 (1,132,540 shares), including $1,056 (106 shares)
through the reinvestment plan.
3. Other Assets:
Other assets at December 31, 1997, consisted of acquisition fees and
miscellaneous acquisition expenses which will be allocated to future
Properties.
21
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
4. Stock Issuance Costs:
The Company has incurred certain expenses of its offering of shares,
including commissions, marketing support and due diligence expense
reimbursement fees, filing fees, legal, accounting, printing and escrow
fees, which have been deducted from the gross proceeds of the offering.
Preliminary costs incurred prior to raising capital were advanced by an
affiliate of the Company, CNL Real Estate Advisors, Inc. (the
"Advisor"). The Advisor has agreed to pay all organizational and
offering expenses (excluding commissions and marketing support and due
diligence expense reimbursement fees) which exceed three percent of the
gross offering proceeds received from the sale of shares of the
Company.
As of December 31, 1997, the Company had incurred $2,304,561 in
organizational and offering costs, including $906,032 in commissions
and marketing support and due diligence expense reimbursement fees (see
Note 6). Of this amount $2,284,561 has been treated as stock issuance
costs and $20,000 has been treated as organization costs. The stock
issuance costs have been charged to stockholders' equity subject to the
three percent cap described above.
5. Distributions:
For the year ended December 31, 1997, 100 percent of the distributions
were considered to be ordinary income for federal income tax purposes.
No amounts distributed to stockholders for the year ended December 31,
1997, are required to be or have been treated by the Company as a
return of capital for purposes of calculating the stockholders' return
on their invested capital.
6. Related Party Transactions:
Certain affiliates of the Company will receive fees and compensation in
connection with the offering, and the acquisition, management, and sale
of the assets of the Company.
On June 12, 1996 (date of inception), CNL Fund Advisors, Inc.
contributed $200,000 in cash to the Company and became its sole
stockholder. In February 1997, the Advisor purchased the Company's
outstanding common stock from CNL Fund Advisors, Inc. and became the
sole stockholder of the Company.
22
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
CNL Securities Corp. is entitled to receive commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the offering of the shares, a substantial portion of
which has been or will be paid as commissions to other broker-dealers.
During the year ended December 31, 1997, the Company incurred $849,405
of such fees of which $792,832 were or will be paid by CNL Securities
Corp. as commissions to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the year ended December
31, 1997, the Company incurred $56,627 of such fee, the majority of
which were reallowed to other broker-dealers and from which all bona
fide due diligence expenses were paid.
CNL Securities Corp. will also receive a soliciting dealer servicing
fee payable annually by the Company beginning on December 31 of the
year following the year in which the offering is completed in the
amount of 0.20% of the stockholders' investment in the Company. As of
December 31, 1997, no such fees had been incurred.
The Advisor is entitled to receive acquisition fees for services in
finding, negotiating the leases of and acquiring properties on behalf
of the Company equal to 4.5% of gross proceeds, loan proceeds from
permanent financing and amounts outstanding on the line of credit, if
any, at the time of Listing, but excluding that portion of the
permanent financing used to finance Secured Equipment Leases. During
the year ended December 31, 1997, the Company incurred $509,643 of such
fees. Such fees are included in other assets at December 31, 1997.
23
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
The due to related parties consisted of the following at December 31:
1997 1996
---------- ----------
Due to CNL Securities Corp.:
Commissions $100,709 $ -
Marketing support and due
diligence expense reim-
bursement fee 7,268 -
-------- -------
107,977 -
-------- -------
Due to CNL Real Estate Advisors,
Inc.:
Expenditures incurred for
organizational and offering
expenses on behalf of the
Company 21,729 357,896
Accounting and administrative
services 17,376 28,665
Acquisition fees 46,172 -
-------- -------
85,277 386,561
-------- --------
$193,254 $386,561
======== ========
24
<PAGE>
CNL AMERICAN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31, 1997 and the Period
June 12, 1996 (Date of Inception) through
December 31, 1996
6. Related Party Transactions - Continued:
The Advisor and its affiliates provide accounting and administrative
services to the Company (including accounting and administrative
services in connection with the offering of shares) on a day-to-day
basis. For the year ended December 31, 1997 and the period June 12,
1996 (date of inception) through December 31, 1996, the expenses
incurred for these services were classified as follows:
June 12, 1996
(Date of
Inception)
Year Ended through
December 31, December 31,
1997 1996
------------ ------------
Deferred offering costs $ - $ 28,665
Stock issuance costs 185,335 -
General operating and
administrative expenses 6,889 -
-------- -------
$192,224 $ 28,665
======== ========
7. Subsequent Events:
During the period January 1, 1998 through January 22, 1998, the Company
received subscription proceeds of 130,262 shares ($1,302,620) of common
stock.
On January 1, 1998, the Company declared distributions of $28,814 or
$0.025 per share of common stock, payable in March 1998, to
stockholders of record on January 1, 1998.
On January 16, 1998, the Company declared distributions of $0.025 per
share of common stock to stockholders of record on February 1, 1998,
also payable in March 1998.
25
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1998.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1998.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to
the Company's Definitive Proxy Statement to be filed with the Commission no
later than April 30, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Accountants
Balance Sheets at December 31, 1997 and 1996
Statements of Earnings for the year ended December 31, 1997,
and the period June 12, 1996 (date of inception) through
December 31, 1996
Statements of Stockholders' Equity for the year ended December
31, 1997, and the period June 12, 1996 (date of inception)
through December 31, 1996
Statements of Cash Flows for the year ended December 31, 1997,
and the period June 12, 1996 (date of inception) through
December 31, 1996
Notes to Financial Statements
26
<PAGE>
3. Exhibits
3.1 CNL American Realty Fund, Inc. Amended and Restated
Articles of Incorporation (Included as Exhibit 3.2 to
Registration Statement No. 333-9943 on Form S-11 and
incorporated herein by reference.)
3.2 CNL American Realty Fund, Inc. Bylaws (Included as
Exhibit 3.3 to Registration Statement No. 333-9943 on
Form S-11 and incorporated herein by reference.)
4.1 Reinvestment Plan (Included as Exhibit 4.4 to
Registration Statement No. 333-9943 on Form S-11 and
incorporated herein by reference.)
10.1 Advisory Agreement, dated as of July 9, 1997, between
CNL American Realty Fund, Inc. and CNL Real Estate
Advisors, Inc. (Included as Exhibit 10.9 to
Registration Statement No. 333-9943 on Form S-11 and
incorporated herein by reference.)
10.2 Form of Indemnification Agreement dated as of July 9,
1997, between CNL American Realty Fund, Inc. and each
of James M. Seneff, Jr., Robert A. Bourne, G. Richard
Hostetter, J. Joseph Kruse, Richard C. Huseman,
Charles A. Muller, John T. Walker, Jeanne A. Wall and
Lynn E. Rose (Filed herewith.)
27 Financial Data Schedule (Filed herewith.)
(b) No reports on Form 8-K were filed during the period October 1,
1997 through December 31, 1997.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26 day of
February, 1998.
CNL AMERICAN REALTY FUND, INC.
By: ROBERT A. BOURNE
President (Principal Financial
and Accounting Officer)
/s/ Robert A. Bourne
--------------------------
ROBERT A. BOURNE
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ James M. Seneff, Jr. Chairman of the Board and Chief February 26, 1998
- ------------------------ Executive Officer (Principal Executive
James M. Seneff, Jr. Officer)
/s/ Robert A. Bourne Director and President (Principal February 26, 1998
- ------------------------ Financial and Accounting Officer)
Robert A. Bourne
/s/ G. Richard Hostetter Independent Director February 26, 1998
- ------------------------
G. Richard Hostetter
/s/ J. Joseph Kruse Independent Director February 26, 1998
- ------------------------
J. Joseph Kruse
/s/ Richard C. Huseman Independent Director February 26, 1998
- ------------------------
Richard C. Huseman
</TABLE>
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit Number
3.1 CNL American Realty Fund, Inc. Amended and Restated Articles
of Incorporation (Included as Exhibit 3.2 to Registration
Statement No. 333-9943 on Form S-11 and incorporated herein by
reference.)
3.2 CNL American Realty Fund, Inc. Bylaws (Included as Exhibit 3.3
to Registration Statement No. 333-9943 on Form S-11 and
incorporated herein by reference.)
4.1 Reinvestment Plan (Included as Exhibit 4.4 to Registration
Statement No. 333- 9943 on Form S-11 and incorporated herein
by reference.)
10.1 Advisory Agreement, dated as of July 9, 1997, between CNL
American Realty Fund, Inc. and CNL Real Estate Advisors, Inc.
(Included as Exhibit 10.9 to Registration Statement No.
333-9943 on Form S-11 and incorporated herein by reference.)
10.2 Form of Indemnification Agreement dated as of July 9, 1997,
between CNL American Realty Fund, Inc. and each of James M.
Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph
Kruse, Richard C. Huseman, Charles A. Muller, John T. Walker,
Jeanne A. Wall and Lynn E. Rose (Filed herewith.)
27 Financial Data Schedule (Filed herewith.)
i
<PAGE>
EXHIBIT 10.2
Form of Indemnification Agreement
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made and entered into
as of the ____ day of ______________, by and among CNL American Realty Fund,
Inc., a Maryland corporation (the "Company") and __________________________, a
director and/or officer of the Company (the "Indemnitee").
W I T N E S S E T H:
WHEREAS, the interpretation of ambiguous statutes, regulations,
articles of incorporation and bylaws regarding indemnification of directors and
officers may be too uncertain to provide such directors and officers with
adequate notice of the legal, financial and other risks to which they may be
exposed by virtue of their service as such; and
WHEREAS, damages sought against directors and officers in shareholder
or similar litigation by class action plaintiffs may be substantial, and the
costs of defending such actions and of judgments in favor of plaintiffs or of
settlement therewith may be prohibitive for individual directors and officers,
without regard to the merits of a particular action and without regard to the
culpability of, or the receipt of improper personal benefit by, any named
director or officer to the detriment of the corporation; and
WHEREAS, the issues in controversy in such litigation usually relate to
the knowledge, motives and intent of the director or officer, who may be the
only person with firsthand knowledge of essential facts or exculpating
circumstances who is qualified to testify in his defense regarding matters of
such a subjective nature, and the long period of time which may elapse before
final disposition of such litigation may impose undue hardship and burden on a
director or officer or his estate in launching and maintaining a proper and
adequate defense of himself or his estate against claims for damages; and
WHEREAS, the Company is organized under the Maryland General
Corporation Law (the "MGCL") and Section 2-418 of the MGCL empowers corporations
to indemnify and advance expenses of litigation to a person serving as a
director, officer, employee or agent of a corporation and to persons serving at
the request of the corporation, while a director of a corporation, as a
director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, and further provides that the indemnification and
advancement of expenses set forth in said section, subject to certain
limitations are not "exclusive of any other rights, by indemnification or
otherwise, to which a director may be entitled under the charter, the
1
<PAGE>
bylaws, a resolution of stockholders or directors, an agreement or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office"; and
WHEREAS, the Articles of Incorporation of the Company, as they may be
amended or amended and restated from time to time (the "Articles of
Incorporation"), provide that the Company shall indemnify and hold harmless
directors, advisors, or affiliates, as such terms are defined in the Articles of
Incorporation; and
WHEREAS, the Board of Directors of the Company (the "Board") has
concluded that it is reasonable and prudent for the Company contractually to
obligate itself to indemnify in a reasonable and adequate manner the Indemnitee
and to assume for itself maximum liability for expenses and damages in
connection with claims lodged against him for his decisions and actions as a
director and/or officer of the Company; and
NOW, THEREFORE, in consideration of the foregoing, and of other good
and valuable consideration, the receipt and sufficiency of which is acknowledged
by each of the parties hereto, the parties agree as follows:
I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
A. "Board" shall mean the Board of Directors of the Company.
B. "Change in Control" shall mean a change in the ownership or power to
direct the Voting Securities of the Company or the acquisition by a person not
affiliated with the Company of the ability to direct the management of the
Company.
C. "Corporate Status" shall mean the status of a person who is or was a
director or officer of the Company, or a member of any committee of the Board,
and the status of a person who, while a director or officer of the Company, is
or was serving at the request of the Company as a director, officer, partner
(including service as a general partner of any limited partnership), trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, other incorporated or unincorporated entity or enterprise
or employee benefit plan.
D. "Disinterested Director" shall mean a director of the
Company who neither is nor was a party to the Proceeding in
2
<PAGE>
respect of which indemnification is being sought by the
Indemnitee.
E. "Expenses" shall mean without limitation expenses of Proceedings
including all attorneys' fees, retainers, court costs, transcript costs, fees of
experts, investigation fees and expenses, accounting and witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating or being or preparing to be a witness in a
Proceeding.
F. "Good Faith Act or Omission" shall mean an act or omission of the
Indemnitee reasonably believed by the Indemnitee to be in or not opposed to the
best interests of the Company and other than (i) one involving negligence or
misconduct, or, if the Indemnitee is an independent director, one involving
gross negligence or willful misconduct; (ii) one that was material to the loss
or liability and that was committed in bad faith or that was the result of
active or deliberate dishonesty; (iii) one from which the Indemnitee actually
received an improper personal benefit in money, property or services; or (iv) in
the case of a criminal Proceeding, one as to which the Indemnitee had cause to
believe his conduct was unlawful.
G. "Liabilities" shall mean liabilities of any type whatsoever,
including, without limitation, any judgments, fines, excise taxes and penalties
under the Employee Retirement Income Security Act of 1974, as amended, penalties
and amounts paid in settlement (including all interest, assessments and other
charges paid or payable in connection with or in respect of such judgments,
fines, penalties or amounts paid in settlement) in connection with the
investigation, defense, settlement or appeal of any Proceeding or any claim,
issue or matter therein.
H. "Proceeding" shall mean any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
administrative hearing or any other actual, threatened or completed proceeding
whether civil, criminal, administrative or investigative, or any appeal
therefrom.
I. "Voting Securities" shall mean any securities of the
Company that are entitled to vote generally in the election of
directors.
II
TERMINATION OF AGREEMENT
3
<PAGE>
This Agreement shall continue until, and terminate upon the late to
occur of (i) the death of the Indemnitee; or (ii) the final termination of all
Proceedings (including possible Proceedings) in respect of which the Indemnitee
is granted rights of indemnification or advancement of Expenses hereunder and of
any proceeding commenced by the Indemnitee regarding the interpretation or
enforcement of this Agreement.
III
SERVICE BY INDEMNITEE, NOTICE OF
PROCEEDINGS, DEFENSE OF CLAIMS
A. Notice of Proceedings. The Indemnitee agrees to notify the Company
promptly in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder, but the Indemnitee's omission to so notify the Company shall
not relieve the Company from any liability which it may have to the Indemnitee
under this Agreement.
B. Defense of Claims. The Company will be entitled to participate, at
its own expense, in any Proceeding of which it has notice. The Company jointly
with any other indemnifying party similarly notified of any Proceeding will be
entitled to assume the defense of the Indemnitee therein, with counsel
reasonably satisfactory to the Indemnitee; provided, however, that the Company
shall not be entitled to assume the defense of the Indemnitee in any Proceeding
if there has been a Change in Control or if the Indemnitee has reasonably
concluded that there may be a conflict of interest between the Company and the
Indemnitee with respect to such Proceeding. The Company will not be liable to
the Indemnitee under this Agreement for any Expenses incurred by the Indemnitee
in connection with the defense of any Proceeding, other than reasonable costs of
investigation or as otherwise provided below, after notice from the Company to
the Indemnitee of its election to assume the defense of the Indemnitee therein.
The Indemnitee shall have the right to employ his own counsel in any such
Proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of its assumption of the defense thereof shall be at the expense of
the Indemnitee unless (i) the employment of counsel by the Indemnitee has been
authorized by the Company; (ii) the Indemnitee shall have reasonably concluded
that counsel employed by the Company may not adequately represent the Indemnitee
and shall have so informed the Company; or (iii) the Company shall not in fact
have employed counsel to assume the defense of the Indemnitee in such Proceeding
or such counsel shall not, in fact, have assumed such defense or such counsel
shall not be acting, in connection therewith, with reasonable diligence; and in
each such case the fees and expenses of the Indemnitee's counsel shall be
advanced by the Company in accordance with this Agreement.
4
<PAGE>
C. Settlement of Claims. The Company shall not settle any Proceeding in
any manner which would impose any liability, penalty or limitation on the
Indemnitee without the written consent of the Indemnitee; provided, however,
that the Indemnitee will not unreasonably withhold or delay consent to any
proposed settlement. The Company shall not be liable to indemnify the Indemnitee
under this Agreement or otherwise for any amounts paid in settlement of any
Proceeding effected by the Indemnitee without the Company's written consent,
which consent shall not be unreasonably withheld or delayed.
IV
INDEMNIFICATION
A. In General. Upon the terms and subject to the conditions set forth
in this Agreement, the Company shall hold harmless and indemnify the Indemnitee
against any and all Liabilities actually incurred by or for him in connection
with any Proceeding (whether the Indemnitee is or becomes a party, a witness or
otherwise is a participant in any role) to the fullest extent required or
permitted by the Articles of Incorporation and by applicable law in effect on
the date hereof and to such greater extent as applicable law may hereafter from
time to time permit. For all matters for which the Indemnitee is entitled to
indemnification under this Article IV, the Indemnitee shall be entitled to
advancement of Expenses in accordance with Article V hereof.
B. Proceeding Other Than a Proceeding by or in the Right of the
Company. If the Indemnitee was or is a party or is threatened to be made a party
to any Proceeding (whether the Indemnitee is or becomes a party, a witness or
otherwise is a participant in any role) (other than a Proceeding by or in the
right of the Company) by reason of his Corporate Status, or by reason of alleged
action or inaction by him in any such capacity, the Company shall, subject to
the limitations set forth in Section IV.F. below, hold harmless and indemnify
him against any and all Expenses and Liabilities actually and reasonably
incurred by or for the Indemnitee in connection with the Proceeding if the
act(s) or omission(s) of the Indemnitee giving rise thereto were Good Faith
Act(s) or Omission(s).
C. Proceedings by or in the Right of the Company. If the Indemnitee was
or is a party or is threatened to be made a party to any Proceeding (whether the
Indemnitee is or becomes a party, a witness or otherwise is a participant in any
role) by or in the right of the Company to procure a judgment in its favor by
reason of his Corporate Status, or by reason of any action or inaction by him in
any such capacity, the Company shall, subject to the limitations set forth in
Section IV.F. below, hold harmless and indemnify him against any and all
Expenses actually incurred by or for him in connection with the investigation,
defense,
5
<PAGE>
settlement or appeal of such Proceeding if the act(s) or omission(s) of the
Indemnitee giving rise to the Proceeding were Good Faith Act(s) or Omission(s);
except that no indemnification under this Section IV.C. shall be made in respect
of any claim, issue or matter as to which the Indemnitee shall have been finally
adjudged to be liable to the Company, unless a court of appropriate jurisdiction
(including, but not limited to, the court in which such Proceeding was brought)
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, regardless of whether the
Indemnitee's act(s) or omission(s) were found to be a Good Faith Act(s) or
Omission(s), the Indemnitee is fairly and reasonably entitled to indemnification
for such Expenses which such court shall deem proper.
D. Indemnification of a Party Who is Wholly or Partly Successful.
Notwithstanding any other provision of this Agreement, to the extent that the
Indemnitee is, by reason of the Indemnitee's Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, the Indemnitee shall
be indemnified by the Company to the maximum extent consistent with applicable
law, against all Expenses and Liabilities actually incurred by or for him in
connection therewith. If the Indemnitee is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall
hold harmless and indemnify the Indemnitee to the maximum extent consistent with
applicable law, against all Expenses and Liabilities actually and reasonably
incurred by or for him in connection with each successfully resolved claim,
issue or matter in such Proceeding. Resolution of a claim, issue or matter by
dismissal, with or without prejudice, except as provided in subsection F hereof,
shall be deemed a successful result as to such claim, issue or matter, so long
as there has been no finding (either adjudicated or pursuant to Article VI
hereof) that the act(s) or omission(s) of the Indemnitee giving rise thereto
were not a Good Faith Act(s) or Omission(s).
E. Indemnification for Expenses of Witness. Notwithstanding any other
provision of this Agreement, to the extent that the Indemnitee, by reason of the
Indemnitee's Corporate Status, has prepared to serve or has served as a witness
in any Proceeding, or has participated in discovery proceedings or other trial
preparation, the Indemnitee shall be held harmless and indemnified against all
Expenses actually and reasonably incurred by or for him in connection therewith.
F. Specific Limitations on Indemnification. In addition to the other
limitations set forth in this Article IV, and notwithstanding anything in this
Agreement to the contrary, the Company shall not be obligated under this
Agreement to make any
6
<PAGE>
payment to the Indemnitee for indemnification with respect to any
Proceeding:
1. To the extent that payment is actually made to the
Indemnitee under any insurance policy or is made on behalf of the
Indemnitee by or on behalf of the Company otherwise than pursuant to
this Agreement.
2. If a court in such Proceeding has entered a judgment or
other adjudication which is final and has become nonappealable and
establishes that a claim of the Indemnitee for such indemnification
arose from: (i) a breach by the Indemnitee of the Indemnitee's duty of
loyalty to the Company or its shareholders; (ii) acts or omissions of
the Indemnitee that are not Good Faith Acts or Omissions or which are
the result of active and deliberate dishonesty; (iii) acts or omissions
of the Indemnitee which the Indemnitee had reasonable cause to believe
were unlawful; or (iv) a transaction in which the Indemnitee actually
received an improper personal benefit in money, property or services.
3. If there has been no Change in Control, for Liabilities in
connection with Proceedings settled without the consent of the Company
which consent, however, shall not be unreasonably withheld.
4. For any loss or liability arising from an alleged violation
of federal or state securities laws unless one or more of the following
conditions are met: (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to
the Indemnitee, (ii) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the Indemnitee;
or (iii) a court of competent jurisdiction approves a settlement of the
claims against the Indemnitee and finds that indemnification of the
settlement and the related costs should be made, and the court
considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published
position of any state securities regulatory authority in which
securities of the Company were offered or sold as to indemnification
for violations of securities laws.
V
ADVANCEMENT OF EXPENSES
Notwithstanding any provision to the contrary in Article VI hereof, the
Company shall advance to the Indemnitee all Expenses which, by reason of the
Indemnitee's Corporate Status, were incurred by or for him in connection with
any Proceeding for which the Indemnitee is entitled to indemnification pursuant
to
7
<PAGE>
Article IV hereof, in advance of the final disposition of such Proceeding,
provided that all of the following are satisfied: (i) the Indemnitee was made a
party to the proceeding by reason of his service as a director or officer of the
Company, (ii) the Indemnitee provides the Company with written affirmation of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the Company pursuant to Article IV hereof, (iii)the
Indemnitee provides the Company with a written agreement (the "Undertaking") to
repay the amount paid or reimbursed by the Company, together with the applicable
legal rate of interest thereon, if it is ultimately determined that the
Indemnitee did not comply with the requisite standard of conduct, and (iv) the
legal proceeding was initiated by a third party who is not a stockholder of the
Company or, if by a stockholder of the Company acting in his or her capacity as
such, a court of competent jurisdiction approves such advancement. The
Indemnitee shall be required to execute and submit the Undertaking to repay
Expenses advanced in the form of Exhibit A attached hereto or in such form as
may be required under applicable law as in effect at the time of execution
thereof. The Undertaking shall reasonably evidence the Expenses incurred by or
for the Indemnitee and shall contain the written affirmation by the Indemnitee,
described above, of his good faith belief that the standard of conduct necessary
for indemnification has been met. The Company shall advance such expenses within
five (5) business days after the receipt by the Company of the Undertaking. The
Indemnitee hereby agrees to repay any Expenses advanced hereunder if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and the undertaking to repay pursuant to
this Article V shall be unsecured.
VI
PROCEDURE FOR PAYMENT OF LIABILITIES;
DETERMINATION OF RIGHT TO INDEMNIFICATION
A. Procedure for Payment. To obtain indemnification for Liabilities
under this Agreement, the Indemnitee shall submit to the Company a written
request for payment, including with such request such documentation as is
reasonably available to the Indemnitee and reasonably necessary to determine
whether, and to what extent, the Indemnitee is entitled to indemnification and
payment hereunder. The Secretary of the Company, or such other person as shall
be designated by the Board of Directors, promptly upon receipt of a request for
indemnification shall advise the Board of Directors, in writing, of such
request. Any indemnification payment due hereunder shall be paid by the Company
no later than five (5) business days following the determination, pursuant to
this Article VI, that such indemnification payment is proper hereunder.
8
<PAGE>
B. No Determination Necessary when the Indemnitee was Successful. To
the extent the Indemnitee has been successful, on the merits or otherwise, in
defense of any Proceeding referred to in Sections IV.B. or IV.C. above or in the
defense of any claim, issue or matter described therein, the Company shall
indemnify the Indemnitee against Expenses actually and reasonably incurred by or
for him in connection with the investigation, defense or appeal of such
Proceeding.
C. Determination of Good Faith Act or Omission. In the event that
Section VI.B. is inapplicable, the Company also shall hold harmless and
indemnify the Indemnitee unless the Company shall prove by clear and convincing
evidence to a forum listed in Section VI.D. below that the act(s) or omission(s)
of the Indemnitee giving rise to the Proceeding were not Good Faith Act(s) or
Omission(s).
D. Forum for Determination. The Indemnitee shall be entitled to select
from among the following the forums, in which the validity of the Company's
claim under Section VI.C., above, that the Indemnitee is not entitled to
indemnification will be heard:
1. A quorum of the Board consisting of Disinterested
Directors;
2. The shareholders of the Company;
3. Legal counsel selected by the Indemnitee, subject to the
approval of the Board, which approval shall not be unreasonably delayed
or denied, which counsel shall make such determination in a written
opinion; or
4. A panel of three arbitrators, one of whom is selected by
the Company, another of whom is selected by the Indemnitee and the last
of whom is selected jointly by the first two arbitrators so selected.
As soon as practicable, and in no event later than thirty (30) days after
written notice of the Indemnitee's choice of forum pursuant to this Section
VI.D., the Company shall, at its own expense, submit to the selected forum in
such manner as the Indemnitee or the Indemnitee's counsel may reasonably
request, its claim that the Indemnitee is not entitled to indemnification, and
the Company shall act in the utmost good faith to assure the Indemnitee a
complete opportunity to defend against such claim. The fees and expenses of the
selected forum in connection with making the determination contemplated
hereunder shall be paid by the Company. If the Company shall fail to submit the
matter to the selected forum within thirty (30) days after the Indemnitee's
written notice or if the forum so empowered to make the determination shall have
failed to make the requested
9
<PAGE>
determination within thirty (30) days after the matter has been submitted to it
by the Company, the requisite determination that the Indemnitee has the right to
indemnification shall be deemed to have been made.
E. Right to Appeal. Notwithstanding a determination by any forum listed
in Section VI.D. above that the Indemnitee is not entitled to indemnification
with respect to a specific Proceeding, the Indemnitee shall have the right to
apply to the court in which that Proceeding is or was pending, or to any other
court of competent jurisdiction, for the purpose of enforcing the Indemnitee's
right to indemnification pursuant to this Agreement. Such enforcement action
shall consider the Indemnitee's entitlement to indemnification de novo, and the
Indemnitee shall not be prejudiced by reason of a prior determination that the
Indemnitee is not entitled to indemnification. The Company shall be precluded
from asserting that the procedures and presumptions of this Agreement are not
valid, binding and enforceable. The Company further agrees to stipulate in any
such judicial proceeding that the Company is bound by all the provisions of this
Agreement and is precluded from making any assertion to the contrary.
F. Right to Seek Judicial Determination. Notwithstanding any other
provision of this Agreement to the contrary, at any time after sixty (60) days
after a request for indemnification has been made to the Company (or upon
earlier receipt of written notice that a request for indemnification has been
rejected) and before the third (3rd) anniversary of the making of such
indemnification request, the Indemnitee may petition a court of competent
jurisdiction, whether or not the court has jurisdiction over, or is the forum in
which is pending, the Proceeding, to determine whether the Indemnitee is
entitled to indemnification hereunder, and such court thereupon shall have the
exclusive authority to make such determination, unless and until such court
dismisses or otherwise terminates the Indemnitee's action without having made
such determination. The court, as petitioned, shall make an independent
determination of whether the Indemnitee is entitled to indemnification
hereunder, without regard to any prior determination in any other forum as
provided hereby.
G. Expenses under this Agreement. Notwithstanding any other provision
in this Agreement to the contrary, the Company shall indemnify the Indemnitee
against all Expenses incurred by the Indemnitee in connection with any hearing
or proceeding under this Section VI involving the Indemnitee and against all
Expenses incurred by the Indemnitee in connection with any other action between
the Company and the Indemnitee involving the interpretation or enforcement of
the rights of the Indemnitee under this Agreement, even if it is finally
determined that the Indemnitee is not entitled to indemnification in whole or in
part hereunder.
10
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VII
PRESUMPTIONS AND EFFECT
OF CERTAIN PROCEEDINGS
A. Burden of Proof. In making a determination with respect to
entitlement to indemnification hereunder, the person, persons, entity or
entities making such determination shall presume that the Indemnitee is entitled
to indemnification under this Agreement and the Company shall have the burden of
proof to overcome that presumption.
B. Effect of Other Proceedings. The termination of any Proceeding or of
any claim, issue or matter therein, by judgment, order or settlement shall not
create a presumption that the act(s) or omission(s) giving rise to the
Proceeding were not Good Faith Act(s) or Omission(s). The termination of any
Proceeding by conviction, or upon a plea of nolo contendere, or its equivalent,
or an entry of an order of probation prior to judgment, shall create a
rebuttable presumption that the act(s) or omission(s) of the Indemnitee giving
rise to the Proceeding were not Good Faith Act(s) or Omission(s).
C. Reliance as Safe Harbor. For purposes of any determination of
whether any act or omission of the Indemnitee was a Good Faith Act or Omission,
each act of the Indemnitee shall be deemed to be a Good Faith Act or Omission if
the Indemnitee's action is based on the records or books of accounts of the
Company, including financial statements, or on information supplied to the
Indemnitee by the officers of the Company in the course of their duties, or on
the advice of legal counsel for the Company or on information or records given
or reports made to the Company by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Company.
The provisions of this Section VII.C. shall not be deemed to be exclusive or to
limit in any way the other circumstances in which the Indemnitee may be deemed
to have met the applicable standard of conduct set forth in this Agreement or
under applicable law.
D. Actions of Others. The knowledge and/or actions, or failure to act,
of any director, officer, agent or employee of the Company shall not be imputed
to the Indemnitee for purposes of determining the right to indemnification under
this Agreement.
VIII
INSURANCE
In the event that the Company maintains officers' and directors' or
similar liability insurance to protect itself and any director or officer of the
Company against any expense, liability or loss, such insurance shall cover the
Indemnitee to
11
<PAGE>
at least the same degree as each other director and/or officer of
the Company.
IX
OBLIGATIONS OF THE COMPANY
UPON A CHANGE IN CONTROL
In the event of a Change in Control, upon written request of the
Indemnitee the Company shall establish a trust for the benefit of the Indemnitee
hereunder (a "Trust") and from time to time, upon written request from the
Indemnitee, shall fund the Trust in an amount sufficient to satisfy all amounts
actually paid hereunder as indemnification for Liabilities or Expenses
(including those paid in advance) or which the Indemnitee reasonably determines
and demonstrates, from time to time, may be payable by the Company hereunder.
The amount or amounts to be deposited in the Trust shall be determined by legal
counsel selected by the Indemnitee and approved by the Company, which approval
shall not be unreasonably withheld. The terms of the Trust shall provide that
(i) the Trust shall not be dissolved or the principal thereof invaded without
the written consent of the Indemnitee; (ii) the trustee of the Trust (the
"Trustee") shall be selected by the Indemnitee; (iii) the Trustee shall make
advances to the Indemnitee for Expenses within ten (10) business days following
receipt of a written request therefor (and the Indemnitee hereby agrees to
reimburse the Trust under the circumstances under which the Indemnitee would be
required to reimburse the Company under Article V hereof; (iv) the Company shall
continue to fund the Trust from time to time in accordance with its funding
obligations hereunder; (v) the Trustee promptly shall pay to the Indemnitee all
amounts as to which indemnification is due under this Agreement; (vi) unless the
Indemnitee agrees otherwise in writing, the Trust for the Indemnitee shall be
kept separate from any other trust established for any other person to whom
indemnification might be due by the Company; and (vii) all unexpended funds in
the Trust shall revert to the Company upon final, nonappealable determination by
a court of competent jurisdiction that the Indemnitee has been indemnified to
the full extent required under this Agreement.
X
NON-EXCLUSIVITY,
SUBROGATION AND MISCELLANEOUS
A. Non-Exclusivity. The rights of the Indemnitee hereunder shall not be
deemed exclusive of any other rights to which the Indemnitee may at any time be
entitled under any provision of law, the Articles of Incorporation, the Bylaws
of the Company, as the same may be in effect from time to time, any agreement, a
vote of shareholders of the Company or a resolution of directors of the Company
or otherwise, and to the extent that
12
<PAGE>
during the term of this Agreement the rights of the then-existing directors and
officers of the Company are more favorable to such directors or officers than
the rights currently provided to the Indemnitee under this Agreement, the
Indemnitee shall be entitled to the full benefits of such more favorable rights.
No amendment, alteration, rescission or replacement of this Agreement or any
provision hereof which would in any way limit the benefits and protections
afforded to an Indemnitee hereby shall be effective as to such Indemnitee with
respect to any action or inaction by such Indemnitee in the Indemnitee's
Corporate Status prior to such amendment, alteration, rescission or replacement.
B. Subrogation. In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all documents required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
C. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i) if
delivered by hand, by courier or by telegram and receipted for by the party to
whom said notice or other communication shall have been directed at the time
indicated on such receipt; (ii) if by facsimile at the time shown on the
confirmation of such facsimile transmission; or (iii) if by U.S. certified or
registered mail, with postage prepaid, on the third business day after the date
on which it is so mailed:
If to the Indemnitee, as shown with the Indemnitee's signature below.
If to the Company to:
CNL American Realty Fund, Inc.
400 East South Street, Suite 500
Orlando, FL 32801
Attention: President
Facsimile No. (___) ___-____
or to such other address as may have been furnished to the Indemnitee by the
Company or to the Company by the Indemnitee, as the case may be.
D. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the substantive laws
of the State of Maryland, without application of the conflict of laws principles
thereof.
13
<PAGE>
E. Binding Effect. Except as otherwise provided in this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their heirs, executors, administrators, successors, legal representatives
and permitted assigns. The Company shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of its respective assets or business, by written
agreement in form and substance reasonably satisfactory to the Indemnitee,
expressly to assume and agree to be bound by and to perform this Agreement in
the same manner and to the same extent as the Company would be required to
perform absent such succession or assignment.
F. Waiver. No termination, cancellation, modification, amendment,
deletion, addition or other change in this Agreement, or any provision hereof,
or waiver of any right or remedy herein, shall be effective for any purpose
unless specifically set forth in a writing signed by the party or parties to be
bound thereby. The waiver of any right or remedy with respect to any occurrence
on one occasion shall not be deemed a waiver of such right or remedy with
respect to such occurrence on any other occasion.
G. Entire Agreement. This Agreement, constitutes the entire agreement
and understanding among the parties hereto in reference to the subject matter
hereof; provided, however, that the parties acknowledge and agree that the
Amended and Restated Articles of Incorporation of the Company contain provisions
on the subject matter hereof and that this Agreement is not intended to, and
does not, limit the rights or obligations of the parties hereto pursuant to such
instruments.
H. Titles. The titles to the articles and sections of
this Agreement are inserted for convenience of reference only and
should not be deemed a part hereof or affect the construction or
interpretation of any provisions hereof.
I. Invalidity of Provisions. Every provision of this
Agreement is severable, and the invalidity or unenforceability of
any term or provision shall not effect the validity or
enforceability of the remainder of this Agreement.
J. Pronouns and Plurals. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
K. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but
all of which together constitute one agreement binding on all the
parties hereto.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CNL AMERICAN REALTY FUND, INC.
By: ___________________________
Name: ________________________
Title: _______________________
__________________, as INDEMNITEE
Name: _________________________
Title: ________________________
Address: ______________________
----------------------
Facsimile No.: _________________
<PAGE>
EXHIBIT A
FORM OF UNDERTAKING TO REPAY EXPENSES ADVANCED
The Board of Directors of CNL American
Realty Fund, Inc.
Re: Undertaking to Repay Expenses Advanced
Ladies and Gentlemen:
This undertaking is being provided pursuant to that certain
Indemnification Agreement dated the ____ day of ______________, by and among CNL
American Realty Fund, Inc. and the undersigned Indemnitee (the "Indemnification
Agreement"), pursuant to which I am entitled to advancement of expenses in
connection with [Description of Proceeding] (the "Proceeding"). Terms used
herein and not otherwise defined shall have the meanings specified in the
Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by
reason of alleged actions or omissions by me in such capacity. During the period
of time to which the Proceeding relates I was _____________________ [name of
office(s) held] of CNL American Realty Fund, Inc. Pursuant to Section IV of the
Indemnification Agreement, the Company is obligated to reimburse me for Expenses
that are actually and reasonably incurred by or for me in connection with the
Proceeding, provided that I execute and submit to the Company an Undertaking in
which I (i) undertake to repay any Expenses paid by the Company on my behalf,
together with the applicable legal rate of interest thereon, if it shall be
ultimately determined that I am not entitled to be indemnified thereby against
such Expenses; (ii) affirm my good faith belief that I have met the standard of
conduct necessary for indemnification; and (iii) reasonably evidence the
Expenses incurred by or for me.
[Description of expenses incurred by or for Indemnitee]
This letter shall constitute my undertaking to repay to the Company any
Expenses paid by it on my behalf, together with the applicable legal rate of
interest thereon, in connection with the Proceeding if it is ultimately
determined that I am not entitled to be indemnified with respect to such
Expenses as set forth above. I hereby affirm my good faith belief that I have
met the standard of conduct necessary for indemnification and that I am entitled
to such indemnification.
<PAGE>
----------------------------
Signature
----------------------------
Print Name
----------------------------
Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL American Realty Fund, Inc. at December 31, 1997, and its statement
of earnings for the year then ended and is qualified in its entirety by
reference to the Form 10-K of CNL American Realty Fund, Inc. for the year ended
December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,869,838
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,443,476
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 11,525
<OTHER-SE> 9,222,392
<TOTAL-LIABILITY-AND-EQUITY> 9,443,476
<SALES> 0
<TOTAL-REVENUES> 46,071
<CGS> 0
<TOTAL-COSTS> 23,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,852
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,852
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<FN>
<F1>Due to the nature of its industry, CNL American Realty Fund, Inc. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
