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As filed with the Securities and Exchange Commission on September 27, 1999
Registration No. 333-74329
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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CNL AMERICAN PROPERTIES FUND, INC.
(Exact name of Registrant as specified in its charter)
---------------
Maryland 525930 59-3239115
(State or other (Primary North American (I.R.S. Employer
jurisdiction Industry Identification No.)
of organization) Classification Number)
400 East South Street
Orlando, Florida 32801
407-540-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Curtis B. McWilliams
CNL Center at City Commons
450 South Orange Avenue
Orlando, Florida 32801
407-540-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
Thomas H. McCormick, Esq.
John M. McDonald, Esq.
Shaw Pittman
2300 N Street, N.W.
Washington, D.C. 20037
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Approximate date of commencement of the proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in connec-
tion with the formation of a holding company and there is compliance with Gen-
eral Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering pur-
suant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act regis-
tration statement number of the earlier effective registration statement for
the same offering. [_]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registra-
tion Statement shall thereafter become effective in accordance with Section
8(a) of the Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said sec-
tion 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The Information in this consent solicitation is not complete and may be +
+changed. CNL American Properties Fund, Inc. may not sell these securities +
+until the registration statement filed with the Securities and Exchange +
+Commission is effective. This consent solicitation is not an offer to sell +
+these securities and is not soliciting an offer to buy these securities in +
+any state that prohibits the offer or sale of such securities. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
Dated , 1999
PROSPECTUS/CONSENT SOLICITATION STATEMENT
CNL American Properties Fund, Inc.
27,343,243 shares of common stock and 7.0% callable notes, due , 2005
If you are a limited partner of any of CNL Income Fund, Ltd through CNL
Income Fund XVI, Ltd., your vote is very important:
This document is formally called a prospectus/consent solicitation statement
because the prospectus also acts as a method through which we are asking for
your consent to transactions that are described in detail in the document.
Rather than refer to its formal title repeatedly, we have chosen to refer to
this document as the consent solicitation. Through this consent solicitation
and the accompanying supplement, we, as the general partners of the Income
Funds, are asking you, as the Limited Partners of each of the Income Funds, to
vote on whether to approve the Acquisition of each of the 16 Income Funds by
CNL American Properties Fund, Inc. In the Acquisition, APF will issue shares of
common stock or, in specified situations, 7.0% callable notes in exchange for
your limited partnership units. Limited Partners holding in excess of 50% of
the outstanding units in each Income Fund must vote "For" the Acquisition on
the enclosed consent form in order for the Acquisition to be consummated. We,
as the general partners of the Income Funds, recommend that you vote "For" the
Acquisition.
This solicitation of consents expires at p.m., Eastern time on ,
2000, unless you are notified that it has been extended.
There are material risks and potential disadvantages associated with the
Acquisition as described in "Risk Factors" beginning on page 38. In particular,
you should consider:
. APF's common stock may trade at prices substantially below the $20.00
exchange value.
. The Acquisition is a taxable transaction.
. As Board members of APF, Messrs. James M. Seneff, Jr. and Robert A. Bourne
have a different interest in the completion of the Acquisition which may
conflict with the interests of the Limited Partners of the Income Funds or
with their own positions as the general partners of the Income Funds.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited Partner
of the Income Funds and with their own as general partners of the Income
Funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this consent solicitation. Any representation to the
contrary is a criminal offense.
The date of this consent solicitation is , 1999.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT CNL AMERICAN PROPERTIES FUND, INC.'S
ACQUISITION OF THE CNL INCOME FUNDS...................................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS?....................................... 4
SUMMARY................................................................... 5
Purpose of this Consent Solicitation.................................... 5
Description of APF and the Income Funds................................. 5
APF................................................................... 5
The Income Funds...................................................... 6
Material factors that make the offering speculative or risky.......... 6
Conflicts of and Benefits to General Partners........................... 7
The Acquisition......................................................... 7
Principal Components of the Acquisition............................... 7
Acquisition Expenses.................................................. 10
Conditions to the Acquisition......................................... 11
What you will receive if your Income Fund is acquired in the
Acquisition.......................................................... 11
Consideration Paid to the Income Funds................................ 12
Our Reasons for Supporting the Acquisition.............................. 13
Benefits of the Acquisition........................................... 13
Our Recommendation to You............................................. 14
Why we believe the Acquisition is fair to you......................... 14
Fairness Opinions..................................................... 14
Appraisals............................................................ 15
Alternatives to the Acquisition that we considered.................... 15
Prices for Income Fund Units.......................................... 16
Voting.................................................................. 18
Voting Procedures..................................................... 18
Amendments to Your Income Fund's Partnership Agreement................ 18
No Rights to Independent Appraisal.................................... 18
Comparison of Ownership of APF Shares, Notes and Units.................. 19
Federal Income Tax Considerations....................................... 20
The Acquisition will be a taxable transaction for Limited Partners
subject to federal income taxation................................... 20
Summary Financial Information........................................... 20
Summary Historical Consolidated Financial Data of APF and
Subsidiaries ........................................................ 21
Summary Historical Combined Financial Data of the Income Funds........ 23
Summary Consolidated Historical Financial Data of CNL Fund Advisors,
Inc. and Subsidiary.................................................. 24
Summary Historical Financial Data of CNL Financial Services, Inc. .... 25
Summary Historical Financial Data of CNL Financial Corporation........ 26
Summary Unaudited Pro Forma Combined Financial Data of APF for the Six
Months Ended June 30, 1999........................................... 27
Summary Unaudited Pro Forma Combined Financial Data of APF for the
Year Ended
December 31, 1998................................................... 34
RISK FACTORS.............................................................. 38
You May be Subject to the Following Risks if You Become an APF
Stockholder in the Acquisition......................................... 38
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The exchange value was determined by APF, and the trading price of the
APF Shares may decrease substantially below the exchange value upon
listing.............................................................. 38
The general partners will receive benefits from the Acquisition and
will have conflicts of interest in the Acquisition................... 38
Existing stockholders will be diluted by the public offering.......... 38
A majority vote of the Limited Partners of Income Funds binds all
Limited Partners..................................................... 39
Partners have no cash appraisal rights................................ 39
The size of APF after the Acquisition is uncertain.................... 39
The Acquisition will result in a fundamental change in the nature of
your investment...................................................... 39
The loss of a significant tenant would adversely affect APF's income.. 40
Tenants of two significant restaurant chains have filed for bankruptcy
protection........................................................... 40
APF would be required to pay termination fees in its interest rate
swap contracts if it terminates such contracts early................. 40
APF is subject to several risks associated with its hedging
transactions, including credit risks, legal enforceability risks and
basic risks.......................................................... 40
An increase in interest rates could adversely affect the price of APF
Shares............................................................... 41
APF's officers and directors have more limited liability than we do as
your Income Fund's general partners.................................. 41
As general partners, our fiduciary duties to you as Limited Partners
may be greater than our fiduciary duties as directors of APF to you
once you become APF stockholders..................................... 42
Limited Partners have filed lawsuits against us and APF in connection
with the Acquisition................................................. 42
APF could lose revenues or incur significant costs if its software or
hardware systems fail or if those systems of its clients fail due to
year 2000 problems................................................... 42
If APF's borrowers default on mortgage loans, APF's income could be
adversely affected................................................... 43
APF may not be able to access the securitization markets.............. 43
APF's gains on any completed securitizations may be overstated if
prepayments or defaults are greater than anticipated................. 43
The retained subordinated interests that APF holds in securitizations
may not be recoverable............................................... 43
APF's increased leverage increases APF's risk of default which could,
in turn, adversely affect APF's results of operations and stockholder
distributions........................................................ 44
APF's ability to incur additional secured debt may reduce the value of
the notes held by former Limited Partners of the Income Funds........ 44
APF's plan to grow through the acquisition and development of new
restaurant properties could be adversely affected by trends in the
real estate and financing businesses................................. 44
The inability of a tenant or borrower to make lease and mortgage
payments could have an adverse affect on APF......................... 44
APF's failure to qualify as a REIT for tax purposes would result in
APF's taxation as a corporation and the reduction or elimination of
funds available for stockholder distribution......................... 45
APF's leases of restaurants where APF does not own the underlying land
may not be considered leases by the IRS, which could result in
adverse tax consequences............................................. 45
APF's secured equipment leases are not considered qualified real
estate assets under the REIT rules, and, if APF has secured equipment
leases in excess of certain percentages of its assets, it would
violate the REIT rules............................................... 46
If APF cannot meet its REIT distribution requirements, it may have to
borrow funds or liquidate assets to maintain its REIT status......... 46
Limitations on share ownership required to maintain APF's REIT status
may deter attractive tender offers for APF Shares.................... 46
REIT legislation could have an adverse effect on APF's ability to
enter into securitization transactions involving non-mortgage loans.. 47
Changes in the tax law could adversely affect APF's REIT status....... 47
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There Are Also Risk Factors Related to Restaurant Properties to which
You Will Continue to be Subject as an APF Stockholder.................. 47
APF may not be able to re-lease restaurant properties upon the
expiration of leases................................................. 47
Many tenants have purchase rights and rights of first offer that may
restrict APF's control over sale of the restaurant properties........ 48
The business of owning and developing real estate properties involves
risks................................................................ 48
Compliance with various environmental laws could be costly to APF..... 48
Trends in the restaurant industry could adversely affect the
performance of the restaurant chains that lease from APF............. 48
The failure rate of franchised restaurant chains may adversely affect
APF's business....................................................... 49
APF may not be able to recover potential renovation costs associated
with restaurant failure.............................................. 49
BACKGROUND OF THE ACQUISITION............................................. 50
Background of the Income Funds.......................................... 50
Investment Objectives of the Income Funds............................... 50
Our Efforts to Liquidate the Income Funds............................... 51
Chronology of the Acquisition........................................... 52
Chronology of our recommendation that the Income Funds be acquired by
APF.................................................................... 60
OUR RECOMMENDATION AND FAIRNESS DETERMINATION............................. 63
General................................................................. 63
Our Reasons for Recommending the Acquisition............................ 63
Material Factors Underlying Belief as to Fairness....................... 64
Relative Weight Assigned to Material Factors............................ 67
Fairness to Limited Partners Receiving APF Shares in the Acquisition.... 67
Fairness in View of Conflicts of Interest............................... 67
REPORTS, OPINIONS AND APPRAISALS.......................................... 69
General................................................................. 69
Fairness Opinions to the General Partners............................... 69
Income Fund Appraisals.................................................. 74
Fairness Opinions of Merrill Lynch to APF's Special Committee with
respect to the CNL Restaurant Businesses and the Income Funds.......... 78
THE ACQUISITION........................................................... 88
Conditions to the Acquisition........................................... 88
Merger Agreements....................................................... 88
Approval and Recommendation of the General Partners..................... 89
Vote Required for Approval of the Acquisition........................... 89
Consideration........................................................... 89
Estimated Value of APF Shares Payable to Income Funds................... 90
No Fractional APF Shares................................................ 90
Effect of the Acquisition on Limited Partners Who Vote Against the
Acquisition............................................................ 91
Effect of Acquisition on Income Funds Not Acquired...................... 91
Acquisition Expenses.................................................... 91
Accounting Treatment.................................................... 91
BENEFITS OF THE ACQUISITION............................................... 92
Growth Potential........................................................ 92
Greater Access to Capital............................................... 92
Diversification Benefit................................................. 92
Operational Economies of Scale.......................................... 93
Liquidity............................................................... 93
Future Development and Mortgage Loan Opportunities...................... 93
Public Market Valuation of Assets....................................... 93
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Regular Quarterly Cash Distributions................................... 94
Greater Reduction of Conflicts of Interest............................. 94
CONFLICTS OF INTEREST.................................................... 95
Affiliated General Partners............................................ 95
Substantial Benefits to General Partners............................... 95
COMPARISON OF THE INCOME FUNDS AND APF AND OF THE OWNERSHIP OF UNITS,
NOTES AND APF SHARES.................................................... 96
Form of Organization and Purpose....................................... 96
Length and Type of Investment.......................................... 97
Business and Property Diversification.................................. 97
Borrowing Policies..................................................... 98
Other Investment Restrictions.......................................... 98
Management Control..................................................... 99
Fiduciary Duties....................................................... 99
Management's Liability and Indemnification............................. 100
Antitakeover Provisions................................................ 101
Sale................................................................... 101
Merger................................................................. 102
Dissolution............................................................ 102
Amendments............................................................. 102
Compensation and Fees.................................................. 103
Review of Investor Lists............................................... 104
Nature of Investment................................................... 105
Additional Equity/Potential Dilution................................... 106
Liability of Investors................................................. 106
Voting Rights.......................................................... 107
Liquidity.............................................................. 107
Expected Distributions and Payments.................................... 108
Taxation of Taxable Investors.......................................... 109
Taxation of Tax-Exempt Investors....................................... 110
VOTING PROCEDURES........................................................ 111
Distribution of Solicitation Materials................................. 111
Special Meetings....................................................... 111
Required Vote and Other Conditions..................................... 112
SELECTED HISTORICAL FINANCIAL DATA OF APF AND SUBSIDIARIES............... 114
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF APF AND SUBSIDIARIES................................... 115
Overview............................................................... 115
Liquidity and Capital Resources........................................ 117
Results of Operations.................................................. 119
Year 2000 Readiness Disclosure......................................... 121
Quantitative and Qualitative Disclosures About Market Risk............. 123
Future Business Plans.................................................. 124
APF'S BUSINESS .......................................................... 125
General................................................................ 125
Overview............................................................. 125
Business Objectives and Strategies................................... 126
Competitive Advantages............................................... 128
APF's Recent Expansion of Services................................... 128
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Evaluation of Investment Opportunities................................. 131
Financial Products and Services.......................................... 133
Triple-Net Lease Restaurant Properties................................. 133
Mortgage Financing..................................................... 136
Geographic Diversification of Restaurant Properties.................... 140
APF after the Acquisition................................................ 142
The Restaurant Properties.............................................. 142
Other Business Information............................................... 143
The Food Service Industry.............................................. 143
Environmental Matters.................................................. 144
Insurance.............................................................. 144
Competition............................................................ 145
Regulation of Mortgage Loans and Equipment Leases...................... 145
Franchise Regulation................................................... 146
Employees.............................................................. 146
Legal Proceedings...................................................... 146
BUSINESS OF THE INCOME FUNDS............................................... 147
General.................................................................. 147
Management Services...................................................... 148
Site Selection and Acquisition of Restaurant Properties.................. 148
Standards for Investment................................................. 149
Description of Restaurant Properties..................................... 150
Description of Leases.................................................... 153
Joint Venture/Tenancy in Common Arrangements............................. 155
Financing................................................................ 156
Sale of Restaurant Properties............................................ 156
Competition.............................................................. 157
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 158
APF...................................................................... 158
Investment Policies.................................................... 158
Financing Policies..................................................... 159
Miscellaneous Policies................................................. 159
Working Capital Reserves............................................... 160
The Income Funds......................................................... 160
Investment Policies.................................................... 160
Financing.............................................................. 160
MANAGEMENT................................................................. 161
Directors and Executive Officers......................................... 161
Board of Directors....................................................... 164
Executive Compensation................................................... 165
Employment Agreements.................................................... 165
1999 Performance Incentive Plan.......................................... 165
Other Incentive Compensation............................................. 166
PRINCIPAL STOCKHOLDERS OF APF.............................................. 167
FIDUCIARY RESPONSIBILITY................................................... 168
Directors and Officers of the Company.................................... 168
General Partners of the Income Funds..................................... 168
DESCRIPTION OF CAPITAL STOCK............................................... 170
Preferred Stock.......................................................... 170
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Ownership Limits and Restrictions on Transfer........................... 170
Registrar and Transfer Agent............................................ 172
DESCRIPTION OF THE NOTES.................................................. 173
General Terms of the Notes.............................................. 173
Principal Amount of the Notes and the Repayment thereof................. 174
Interest Rate........................................................... 174
Redemption.............................................................. 174
Proceeds from Sale of Restaurant Properties Formerly Owned by the Income
Funds.................................................................. 175
Proceeds from Refinancings of Restaurant Properties Formerly Owned by
the Income Funds....................................................... 175
Limitation on Incurrence of Indebtedness................................ 175
Merger, Consolidation or Sale........................................... 176
Events of Default, Notice and Waiver.................................... 176
Modification of the Indenture........................................... 177
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS.... 179
FEDERAL INCOME TAX CONSIDERATIONS......................................... 180
Material Tax Differences between the Ownership of Units and APF Shares.. 180
Tax Consequences of the Acquisition..................................... 181
Taxation of APF......................................................... 185
Taxation of Stockholders................................................ 192
EXPERTS................................................................... 196
LEGAL MATTERS............................................................. 196
WHERE YOU CAN FIND MORE INFORMATION....................................... 196
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NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
TO BE HELD , 2000
CNL CENTER AT CITY COMMONS
450 SOUTH ORANGE AVENUE
ORLANDO, FLORIDA 32801
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CNL Income Fund, Ltd. CNL Income Fund IX, Ltd.
CNL Income Fund II, Ltd. CNL Income Fund X, Ltd.
CNL Income Fund III, Ltd. CNL Income Fund XI, Ltd.
CNL Income Fund IV, Ltd. CNL Income Fund XII, Ltd.
CNL Income Fund V, Ltd. CNL Income Fund XIII, Ltd.
CNL Income Fund VI, Ltd. CNL Income Fund XIV, Ltd.
CNL Income Fund VII, Ltd. CNL Income Fund XV, Ltd.
CNL Income Fund VIII, Ltd. CNL Income Fund XVI, Ltd.
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James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, as the
general partners of each of the 16 CNL Income Funds listed above, ask you by
this notice to attend the special meeting of Limited Partners to vote on the
following:
(a) Proposed Acquisition. Your vote on the proposed acquisition of your
Income Fund by CNL American Properties Fund, Inc. is important. In the
proposed Acquisition, APF is offering a specified number of APF Shares,
as we have described in the attached consent solicitation, to the
Limited Partners of each Income Fund. After the Acquisition, APF will
own, through a subsidiary, all of the assets of the Income Funds. The
Agreement and Plan of Merger, as amended, for each of the Income Funds,
which describes the terms of the Acquisition in detail, is attached as
Appendix B to the supplement for each Income Fund, and
(b) Other Business. At the special meeting, you will also consider such
other business as may properly come before the meeting or at any
adjournment of the meeting.
Only Limited Partners of each of the Income Funds who hold their units at
the close of business on , 1999 are entitled to notice of and to vote at
the special meeting or at any adjournment or postponement of the meeting.
By order of the General Partners,
/s/ James M. Seneff, Jr.
_____________________________________
James M. Seneff, Jr.
/s/ Robert A. Bourne
_____________________________________
Robert A. Bourne
CNL Realty Corporation
/s/ James M. Seneff, Jr.
By: _________________________________
Chief Executive Officer
Title:
We invite you to attend the special meeting or to vote using the enclosed
consent form because it is important that your units be represented at the
meeting. Please sign, date and return the enclosed consent card in the
accompanying postage-paid envelope. If you attend the meeting, you may
personally vote, which will revoke your signed proxy. You may also revoke your
proxy at any time before the meeting either in writing or by personal
notification.
This consent solicitation is first being mailed to Limited Partners on or
about , 1999.
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QUESTIONS AND ANSWERS ABOUT
CNL AMERICAN PROPERTIES FUND, INC.'S ACQUISITION OF THE
CNL INCOME FUNDS
Q: What is the proposed Acquisition that I am being asked to vote upon?
A: You are being requested to approve the acquisition of your CNL Income Fund
by CNL American Properties Fund, Inc. Your CNL Income Fund is one of 16
limited partnerships, which we refer to as the Income Funds, that CNL
American Properties Fund, Inc., or APF as we call it, is seeking to
acquire.
Q: Who is soliciting my approval of the proposed Acquisition?
A: We, James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, as
the general partners of the Income Funds, are soliciting your approval for
the Acquisition.
Q: Do you, as the general partners of my Income Fund, recommend that I vote
"For" the proposed Acquisition?
A: Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of
your investment in your Income Fund, as opposed to liquidating your Income
Fund's portfolio or continuing unchanged the investment in your Income
Fund.
Q: What is CNL American Properties Fund, Inc.?
A: APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to
operators of national and regional restaurant chains on a triple-net lease
basis. Unlike your Income Fund, which is restricted, due to capital and
other limitations, to owning and leasing a static number of restaurant
properties on a triple-net basis, APF has the ability to offer a complete
range of restaurant property services to operators of national and regional
restaurant chains from triple-net leasing and mortgage financing to site
selection, construction management and build-to-suit development. If APF
acquires all of the Income Funds in the Acquisition, APF expects to have
total assets of approximately $1.5 billion at the time the Acquisition is
consummated and will be one of the largest triple-net lease REITs in the
United States.
Q: What is a REIT?
A: In general, a REIT is a company that owns or provides financing for real
estate, offers the benefits of a diversified portfolio under professional
management and pays annual distributions to investors of at least 95% of
its taxable income. A REIT typically is not subject to federal income
taxation on its net income, provided that it meets specific income tax
requirements. This treatment substantially eliminates the "double taxation"
imposed at both the corporate and stockholder levels that generally results
from investments in a corporation.
Q: What will I receive if my Income Fund approves the Acquisition?
A: If your Income Fund approves the Acquisition, you will be entitled to
receive shares of APF common stock in exchange for the units of limited
partnership interest that you own in your Income Fund. The APF Shares will
be listed for trading on the New York Stock Exchange, or NYSE, concurrently
with the consummation of the Acquisition.
Q: How many APF Shares will I receive if my Income Fund is acquired by APF?
A: The number of APF Shares that will be paid to each Income Fund in the
Acquisition is set forth in the chart on page 12 under the caption
"Summary--The Acquisition--Consideration Paid to the Income Funds" and in
the supplement accompanying this consent solicitation. You will receive
your proportion of
1
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such shares in accordance with the terms of your Income Fund's limited
partnership agreement.
Q: Did you receive a fairness opinion in connection with APF's acquisition of
my Income Fund?
A: Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an
opinion that the APF Share consideration offered by APF to your Income Fund
is fair to the Income Fund from a financial point of view.
Q: Will I receive future distributions with respect to the APF Shares I
receive in the Acquisition?
A: Yes. Historically, APF has made quarterly distributions, and it expects to
continue to do so in the future. In order to maintain APF's status as a
REIT, APF must distribute at least 95% of its taxable income to its
stockholders on an annual basis.
Q: In the event that my Income Fund is acquired by APF, may I choose to
receive something other than APF Shares?
A: Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share
consideration that would otherwise have been paid to your Income Fund,
based on the exchange value. Please note that you may only receive the
notes if you vote "Against" the Acquisition and you elect to receive the
notes on your consent form. You will receive APF Shares if your Income Fund
elects to be acquired in the Acquisition and you vote "For" the Acquisition
or you vote "Against" the Acquisition and do not affirmatively select the
notes on your consent form. In addition, if Limited Partners in your Income
Fund elect to receive notes in an amount greater than 15% of the estimated
value of APF Shares, based on the exchange value, to be paid to your Income
Fund, then APF has the right to decline to acquire your Income Fund. The
notes will not be listed on any exchange or automated quotation system, and
a market for the notes will not likely develop.
Q: How long has APF been an operating company and how large is it?
A: Since its inception in 1994 through June 1999, APF has raised approximately
$750 million in three public offerings. Assuming APF acquired the CNL
Restaurant Businesses, as described below, as of June 30, 1999, APF would
have owned an interest in 1,193 restaurant properties, including mortgage
loans of over $628 million, and had approximately 32,000 stockholders of
record.
Q: Who manages APF?
A: APF is managed by its Board of Directors, consisting of five members, the
majority of which are independent. Independent directors are neither
employed by APF, nor have a substantial financial interest in APF. James M.
Seneff, Jr. is the Chairman of the Board of APF and Robert A. Bourne is
Vice Chairman of the Board of APF. You should note that Messrs. Seneff and
Bourne are also the individual general partners of your Income Fund.
Q: What are the tax consequences of the Acquisition to me?
A: The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners of the Income Funds are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an
individual subject to income taxation or a tax-paying entity and you
receive APF Shares, your tax obligation will generally be based on the
difference between the value of the APF Shares you receive and the tax
basis of your units. If you elect to receive notes, your tax will be based
upon your allocable share of the gain which will be recognized by your
Income Fund; your Income Fund's gain will generally equal the excess, if
any, of the value of the APF Shares received by your Income Fund over the
tax basis of your Income Fund's net assets.
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Depending on the type of real property gain, some of the gain may be
subject to a 25% rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the
Acquisition.
Q: Who can vote on the Acquisition? What vote is required to approve the
Acquisition?
A: Limited Partners of each Income Fund who are Limited Partners at the close
of business on the record date of , 1999 are entitled to vote at the
special meeting.
For an Income Fund to be acquired by APF, Limited Partners holding units
constituting greater than 50% of the outstanding units of a Income Fund
must approve the Acquisition. Such an approval by your Income Fund's
Limited Partners in favor of the Acquisition will be binding on you even if
you vote against the Acquisition.
Q: Am I entitled to an independent appraisal of my units at my request?
A: No. However, a market valuation and a liquidation valuation of the
restaurant properties owned by your Income Fund have been prepared by
Valuation Associates. You should review the accompanying supplement for
details.
Q: When and where is the special meeting of Limited Partners?
A: The special meeting of the Limited Partners for each Income Fund to vote on
the Acquisition will be held at 10:00 a.m. on , , 2000, at CNL
Center at City Commons, 450 South Orange Avenue, Orlando, Florida 32801.
Q: How do I vote?
A: Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage
paid return envelope as soon as possible, so that at the special meeting of
Limited Partners, your units may be voted "For" or "Against" the
acquisition of your Income Fund. If you sign and send in your consent form
and do not indicate how you want to vote, your consent will be counted as a
vote "For" the Acquisition. If you do not vote or you abstain from voting,
it will count as a vote "Against" the Acquisition.
Q: Can I change my vote after I mail my consent form?
A: Yes, you can change your vote at any time before your consent is voted at
the special meeting. You can do this in three ways: first, you can send us
a written statement that you would like to revoke your consent; second, you
can send us a new consent form; or third, you can attend the special
meeting and vote in person. Any revocation or new consent form should be
sent to Corporate Election Services, P.O. Box 125, Pittsburgh, PA 15230-
0125, our vote tabulator.
Q: I am a Limited Partner of more than one Income Fund. Why did I receive only
one consent solicitation?
A: Many of the Limited Partners in the Income Funds own units in more than one
Income Fund. To reduce expenses and to prevent our Limited Partners from
receiving duplicate mailings, we decided to send only one consent
solicitation to Limited Partners who our records show own units in more
than one Income Fund. If you are one of these Limited Partners, we have
enclosed multiple, detachable consent forms, which are on blue paper, as
well as the different supplements relating to each of the Income Funds in
which you are an investor. Please sign and return all consent forms in the
same envelope.
Q: In addition to the consent solicitation, I received a supplement. What is
the difference between the consent solicitation and the supplement?
A: The purpose of the consent solicitation is to describe the Acquisition
generally and to provide you with a summary of the risks and benefits
generic to all of the Income Funds. The
3
<PAGE>
purpose of the supplement is to describe the risks and benefits particular
to your specific Income Fund.
After you read the consent solicitation, we urge you to read the
supplement. The supplement contains very important information that is
unique to your Income Fund and that will be material in your decision
whether to vote "For" or "Against" the Acquisition.
Q: When do you expect the Acquisition to be completed?
A: APF, in conjunction with our efforts, plans to complete the Acquisition as
soon as possible after the receipt of your approval at the special meetings.
It is expected that the Acquisition will be consummated in the first quarter
of 2000, and we have required that it be completed no later than March 31,
2000.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the Acquisition or would like additional
copies of the consent solicitation or the supplement relating to your Income
Fund(s), you should contact our solicitation firm, which we hired to assist us
in answering your questions:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 290-6428
4
<PAGE>
SUMMARY
This summary highlights selected information from this consent solicitation
and may not contain all of the information regarding the Acquisition that is
important to you. Unless otherwise indicated, the terms "we," "us," "our," and
"ourselves" refer to James M. Seneff, Jr., Robert A. Bourne and CNL Realty
Corporation, the general partners of each of the Income Funds. When we refer to
APF, we are referring to CNL American Properties Fund, Inc. and its
subsidiaries, including CNL APF Partners, L.P., a wholly owned limited
partnership through which APF conducts its business and which we call the
Operating Partnership. To understand the Acquisition fully and for a more
complete description of the terms of and risks related to the Acquisition, you
should read carefully this entire consent solicitation, the supplement(s)
accompanying this consent solicitation and the other documents to which we have
referred you.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
Purpose of This Consent Solicitation
This consent solicitation describes the proposed Acquisition by CNL American
Properties Fund, Inc., a Maryland corporation, of up to 16 Income Funds.
Through this consent solicitation we, as the general partners of the Income
Funds, are asking you to approve APF's acquisition of your Income Fund,
assuming the other conditions to the Acquisition are satisfied. APF will
acquire your Income Fund in the Acquisition if the Limited Partners in your
Income Fund holding greater than 50% of the outstanding units of limited
partnership interest in your Income Fund vote to approve the Acquisition.
Description of APF and the Income Funds
APF
APF is a real estate investment trust, or REIT, that provides a complete
range of financial, development and other real estate services to operators of
national and regional restaurant chains. APF's ability to offer complete "turn-
key," build-to-suit development services, from site selection to construction
management, together with its ability to provide its clients with financing
options, such as triple-net leasing, mortgage loans and secured equipment
financing, makes APF a preferred provider for all the real estate related
business needs of operators of national and regional restaurant chains.
Since APF's inception in 1994 through June 1999, APF raised approximately
$750 million in three public offerings and used all of the net offering
proceeds to acquire restaurant properties and to make mortgage loans. If APF's
acquisition of its external advisor and certain affiliates of the advisor, as
described later in this consent solicitation, had been completed as of June 30,
1999, APF's portfolio would have consisted of investments in 1,193 restaurant
properties. Of these restaurant properties, APF has provided triple-net lease
financing and/or mortgage financing on 905 properties, and holds a securitized
mortgage interest in 288 properties. Generally, the real estate owned by APF
consists of land and buildings. As you know from being Limited Partners,
triple-net leases provide that the tenants bear responsibility for all of the
costs and expenses associated with the ongoing maintenance and operations of
the leased restaurant properties, including utilities, property taxes,
insurance and structural repairs. You may not be as familiar with mortgage
financing and securitizations, since the Income Funds do not engage in those
activities. Mortgage financing involves lending money at a specified interest
rate to owners of restaurant properties and securing that loan with a mortgage
lien on the restaurant property. Securitizing mortgages involves bundling a
group of mortgages into an investment entity, usually a trust, and selling
securities of that entity to the public. APF has purchased some of these
securities and holds them as "securitized mortgage interests," as described
above.
5
<PAGE>
APF's address is CNL Center at City Commons, 450 South Orange Avenue,
Orlando, Florida 32801, (407) 540-2000.
The Income Funds
The Income Funds are finite-life, Florida limited partnerships that we
formed from 1985 to 1993 to invest solely in triple-net leased restaurant
properties. As of June 30, 1999, the Income Funds owned, in the aggregate, 571
restaurant properties located in 39 states which, for the six months ended June
30, 1999, had aggregate gross revenues of approximately $21.6 million. The
Income Funds' restaurant properties are generally leased to restaurant chains
and were also managed by APF's external advisor which, prior to its acquisition
by APF on September 1, 1999, was an affiliate of ours. The Income Funds consist
of the following 16 limited partnerships:
<TABLE>
<S> <C>
. CNL Income Fund, Ltd. . CNL Income Fund IX, Ltd.
. CNL Income Fund II, Ltd. . CNL Income Fund X, Ltd.
. CNL Income Fund III, Ltd. . CNL Income Fund XI, Ltd.
. CNL Income Fund IV, Ltd. . CNL Income Fund XII, Ltd.
. CNL Income Fund V, Ltd. . CNL Income Fund XIII, Ltd.
. CNL Income Fund VI, Ltd. . CNL Income Fund XIV, Ltd.
. CNL Income Fund VII, Ltd. . CNL Income Fund XV, Ltd.
. CNL Income Fund VIII, Ltd. . CNL Income Fund XVI, Ltd.
</TABLE>
Our address is CNL Center at City Commons, 450 South Orange Avenue, Orlando,
Florida 32801, (407) 650-1000. Any questions regarding the Acquisition should
be directed to D.F. King, 77 Water Street, New York, New York 10005, Tel. (800)
290-6428.
Material factors that make the offering speculative or risky
There are risks involved in the Acquisition, which are more fully discussed
beginning at page 38 in "Risk Factors," that you should consider in determining
whether to vote in favor of the Acquisition. The following list summarizes the
risks of the Acquisition that we believe to be most material to you:
. Because there has not been a public market for the APF Shares, the
trading price of the APF Shares may fluctuate significantly, and, once
listed on the NYSE, the APF Shares may trade at prices substantially
below the exchange value.
. If the Acquisition is approved, you will no longer hold an interest in an
Income Fund that has a fixed portfolio of restaurant properties, but will
instead be a stockholder in an operating company that will own, assuming
APF acquired all of the Income Funds on June 30, 1999, interests in 1,764
restaurant properties, will be able to make future acquisitions of
restaurant properties using equity or indebtedness and will make mortgage
loans and securitize those mortgage loans.
. Your ability to utilize passive losses to offset income derived from your
investment in the Income Fund will no longer be available.
. Going forward, APF will likely incur significantly more indebtedness to
acquire restaurant properties and make mortgage loans. This increased use
of debt will subject APF, among other risks, to an increased risk of
default on its obligations, which could in turn adversely affect APF's
results of operations.
. The Acquisition is a taxable transaction. If you are an individual
subject to federal income taxation or a tax-paying entity and you receive
APF Shares, the tax that you must pay will be based on the difference
between the value of the APF Shares you receive and the tax basis of your
units.
6
<PAGE>
Conflicts of and Benefits to General Partners
As a result of the Acquisition and assuming all of the Income Funds are
acquired, we, as the general partners of the Income Funds, will receive
benefits. We may also have certain conflicts of interest as a result of the
Acquisition. These include:
. With respect to our ownership in the Income Funds, we may be issued up to
an estimated 139,519 APF Shares in the aggregate in accordance with the
Income Funds' partnership agreements. The APF Shares issued to us will
have an estimated value, based on the exchange value, of approximately
$2,790,380.
. Following the Acquisition, James M. Seneff, Jr. and Robert A. Bourne, as
the individual general partners of your Income Fund, will continue to
serve as directors of APF, with Mr. Seneff serving as the Chairman and
Mr. Bourne serving as Vice Chairman. As APF directors, they may be
entitled to receive stock options under any incentive compensation
adopted by APF.
. As Board members of APF, Messrs. James M. Seneff, Jr. and Robert A.
Bourne have a different interest in the completion of the Acquisition
which may conflict with the interests of the Limited Partners of the
Income Funds or with their own positions as the general partners of the
Income Funds.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Funds and with their own as general partners of the
Income Funds.
The benefits that may be realized by Messrs. Seneff and Bourne may exceed
the benefits that they would derive from the Income Funds or APF if the
Acquisition does not occur.
The Acquisition
Principal Components of the Acquisition
The Acquisition will consist of the following principal components:
. APF Lists the APF Shares on NYSE. APF will provide liquidity and a
trading market for the APF Shares by listing the APF Shares for trading
on the New York Stock Exchange concurrently with the consummation of the
Acquisition. As a condition to closing the Acquisition, the APF Shares
must be approved for listing on the NYSE.
. APF Acquires the Income Funds. APF will acquire, in exchange for APF
Shares, the Income Funds in which Limited Partners holding greater than
50% of the units approve the Acquisition. Consequently, APF will own the
acquired Income Funds' restaurant properties and other assets after the
completion of the Acquisition. The Acquisition will be accomplished by
merging the acquired Income Funds into CNL APF Partners, L.P., a wholly
owned subsidiary of APF, which we refer to as the Operating Partnership.
We expect that the Acquisition will be consummated in the first quarter of
2000, and we and APF have required that it be completed no later than March 31,
2000.
In an effort to obtain a greater following by the investment banking analyst
community, concurrently with or shortly following the Acquisition and the
listing of APF Shares on the NYSE, and, assuming market conditions permit, APF
intends to offer APF Shares to the public pursuant to an underwritten public
offering. APF has not yet determined how many APF Shares will be offered for
sale in the public offering or when the offering will commence.
The following chart reflects the organizational structure of, and the
relationship among APF, Messrs. Seneff and Bourne, the Income Funds and the CNL
Restaurant Businesses before any acquisitions. The CNL Restaurant Businesses,
which were acquired by APF on September 1, 1999, were CNL Fund Advisors, Inc.,
or the Advisor, which managed APF's business, and the CNL Restaurant Financial
Services Group, which originated and serviced mortgage loans to operators of
national and regional restaurant chains. CNL Financial
7
<PAGE>
Corporation, or CFC, which funded the loans, and CNL Financial Services, Inc.,
or CFS, which originated and serviced the loans, comprise the CNL Restaurant
Financial Services Group.
Organization of CNL Restaurant Business and Income Funds before any acquistions
[CHART APPEARS HERE]
(1) CNL Group, Inc. is 100% owned by James M. Seneff, Jr. and his wife,
Dayle L. Seneff.
(2) The remaining 5% of CNL Fund Advisors, Inc. was owned by members of
management of CNL Fund Advisors, Inc.
(3) The remaining 5% of CNL Financial Corporation was owned by members of
management of CNL Financial Corporation.
(4) The remaining 2% of CNL Financial Services, Inc. was owned by members
of management of CNL Financial Services, Inc.
8
<PAGE>
The following chart shows the structure of APF before any acquisitions. As
shown in the chart, APF had five direct qualified REIT subsidiaries:
. CFA Acquisition Corporation, which was a shell corporation that merged
into the Advisor on September 1, 1999.
. CFS Acquisition Corporation, which was a shell corporation that merged
into CNL Financial Services, Inc. on September 1, 1999.
. CNL Financial Services, LP, which is a limited partnership into which CNL
Financial Services, Inc. merged following the merger with CFS Acquisition
Corp. described in the previous bullet.
. CNL APF GP Corp., which serves as the general partner of APF's Operating
Partnership.
. CNL APF LP Corp., which serves as the limited partner of APF's Operating
Partnership.
. CNL APF Partners, L.P., APF's Operating Partnership, which, as previously
described, is the entity through which APF conducts its business and is
the entity into which any Income Funds approving the Acquisition will
merge.
Organization Chart of APF before
the acquisition of the CNL Restaurant Businesses and the Income Funds
[CHART APPEARS HERE]
9
<PAGE>
The following chart shows the organization of APF following the acquisition
of the CNL Restaurant Businesses and the Acquisition. As you can see, it
reflects the results of the following:
. CFA Acquisition Corporation has merged into the Advisor.
. CFS Acquisition Corporation has merged into CNL Financial Services, Inc.,
and CNL Financial Services, Inc., has merged into CNL Financial Services,
L.P.
. CFC Acquisition Corporation has merged into CNL Financial Corporation,
and, subsequently part of its assets were distributed to APF and the
remaining parts of its assets were distributed to the Operating
Partnership.
. The Income Funds that have approved the Acquisition have merged into CNL
APF Partners, L.P., the Operating Partnership.
Organizational Chart of APF after
the Acquisition and the acquisition of the CNL Restaurant Businesses
[CHART APPEARS HERE]
Acquisition Expenses
APF and each Income Fund will bear their own expenses incurred in connection
with the Acquisition. If your Income Fund approves the Acquisition and your
Income Fund is acquired by APF, the number of APF Shares you receive will
reflect a reduction for your Income Fund's expenses of the Acquisition.
Acquisition expenses are expected to range from 1.1% to 1.3% of the estimated
value of the APF Shares payable to each Income Fund. For a breakdown of the
expenses estimated to be paid in the Acquisition by your Income Fund, please
see the supplement attached to this consent solicitation.
If the Acquisition is rejected by your Income Fund, then your Income Fund
will bear the portion of its Acquisition expenses based upon the percentage of
"For" votes and we, as the general partners of the Income Fund, will bear the
portion of such Acquisition expenses based upon the percentage of "Against"
votes and abstentions.
10
<PAGE>
Conditions to the Acquisition
The following conditions must be satisfied in order for the Acquisition to
be consummated.
. The APF Shares must be listed on the NYSE prior to or concurrently with
the consummation of the Acquisition.
. The stockholders of APF must have approved an increase of the APF Shares
authorized to be issued by APF at a special meeting of APF stockholders
scheduled for , 1999. The increase is necessary in order for APF to
have a sufficient number of shares to acquire the Income Funds.
. If fewer than all of the Income Funds approve the Acquisition, the
Special Committee of APF must receive an additional fairness opinion from
Merrill Lynch & Co. stating that the aggregate consideration payable to
the approving Income Funds is fair to APF from a financial point of view.
As a condition to closing the Acquisition of any Income Fund, the aggregate
amount of notes to be issued to Limited Partners who elect to receive notes may
not exceed 15% of the estimated value of APF Shares otherwise payable to such
Income Fund based on the exchange value. To the extent that the aggregate
amount of notes to be issued to the Limited Partners of any Income Fund exceeds
this 15% limitation, APF has the right, pursuant to the terms of each Income
Fund's merger agreement, to decline to acquire that Income Fund.
What you will receive if your Income Fund is acquired in the Acquisition
You will receive APF Shares as consideration for your units, unless you vote
against the Acquisition of your Income Fund by APF and elect to receive notes,
as described below.
. APF Shares. The consideration paid to your Income Fund upon the
consummation of the Acquisition will consist of APF Shares, reduced by
the expenses of the Acquisition that are incurred by your Income Fund and
assumed or paid by APF. You will receive APF Shares for your units unless
you vote "Against" the Acquisition and specifically elect to receive the
notes. You should note that if you vote against the Acquisition and do
not specifically choose to receive the notes, you will receive APF Shares
in the event that your Income Fund approves the Acquisition.
The number of APF Shares that you will receive for your units will be
determined in accordance with your Income Fund's partnership agreement,
which specifies how consideration is distributed to partners in the event
of a liquidation of your Income Fund. The next section of this Summary
contains a chart that lists the number and estimated value of APF Shares,
based on the exchange value, to be paid to each Income Fund. As we have
previously noted, the exchange value has been assigned by APF to the APF
Shares, and upon listing the APF Shares on the NYSE, the APF Shares may
trade at prices significantly below the exchange value. We have included
in the chart, as a way to demonstrate the relationship of the APF Shares
that will be paid to your Income Fund to your investment in the Income
Funds, the estimated value of APF Shares per average $10,000 original
investment in each Income Fund.
. Notes. If your Income Fund approves the Acquisition and you have voted
"Against" the Acquisition, but you do not wish to own APF Shares, you can
elect to receive your portion of the consideration in 7.0% callable
notes, due , 2005. The payment received by you and other Limited
Partners who elect to receive notes will be equal to 97% of the value of
your portion of the APF Share consideration, based on the exchange value,
that would otherwise have been paid to your Income Fund. The notes will
bear interest at 7.0% and will mature on , 2005. APF may redeem the
notes at any time prior to their maturity at a price equal to the sum of
the outstanding principal balance plus accrued interest.
11
<PAGE>
Consideration Paid to the Income Funds
The following table sets forth the consideration for each Income Fund, based
on the exchange value, to be paid in the Acquisition. The data in these tables
assumes that none of the Limited Partners in any Income Fund have elected to
receive notes. You should note that the APF Shares may trade at prices
substantially below the exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Investments
Original less
Limited Distributions
Partner of Net Sales Estimated Value of
Investments Proceeds per Number of Estimated APF Shares per
less Average APF Shares Value of APF Estimated Value Average $10,000
Distributions $10,000 Offered to Shares Estimated of APF Shares Original Limited
of Net Sales Original Income Payable to Acquisition after Acquisition Partner
Income Fund Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
----------- ------------- ------------- ---------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I.................... $12,001,150 $ 8,001 578,880 $11,577,600 $153,000 $11,424,600 $ 7,616
II................... 23,046,408 9,219 1,196,634 23,932,680 285,000 23,647,680 9,459
III.................. 22,253,502 8,901 1,041,451 20,829,020 258,000 20,571,020 8,228
IV................... 28,226,458 9,409 1,334,008 26,680,160 333,000 26,347,160 8,782
V.................... 22,258,862 8,903 1,024,516 20,490,320 273,000 20,217,320 8,087
VI................... 35,000,000 10,000 1,865,194 37,303,880 409,000 36,894,880 10,431
VII.................. 30,000,000 10,000 1,601,186 32,023,720 378,000 31,645,720 10,441
VIII................. 35,000,000 10,000 2,021,318 40,426,360 446,000 39,980,360 11,263
IX................... 35,000,000 10,000 1,850,049 37,000,980 424,000 36,576,980 10,353
X.................... 40,000,000 10,000 2,121,622 42,432,440 467,000 41,965,440 10,393
XI................... 40,000,000 10,000 2,197,098 43,941,960 464,000 43,477,960 10,763
XII.................. 45,000,000 10,000 2,384,248 47,684,960 504,000 47,180,960 10,405
XIII................. 40,000,000 10,000 1,943,093 38,861,860 430,000 38,431,860 9,608
XIV.................. 45,000,000 10,000 2,156,521 43,130,420 464,000 42,666,420 9,481
XV................... 40,000,000 10,000 1,866,951 37,339,020 412,000 36,927,020 9,232
XVI.................. 45,000,000 10,000 2,160,474 43,209,480 462,000 42,747,480 9,499
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998, an adjustment to the Limited Partners' original
investments for special distributions of net sales proceeds from sales of
restaurant properties and net sales proceeds added to these Income Funds'
working capital and subsequently distributed to Limited Partners of CNL
Income Fund, Ltd. through CNL Income Fund V, Ltd.
Why we are showing a $10,000 original investment. You may have originally
invested more or less than $10,000 in your Income Fund. We used a $10,000
original investment because it is easier to illustrate the purchase prices with
a round number. In order to determine the approximate value, based on the
exchange value, of APF Shares you will receive if your Income Fund is acquired
in the Acquisition, you would multiply the figure in the last column, which is
titled "Estimated Value of APF Shares per Average $10,000 Original Limited
Partner Investment," by the amount of your original investment divided by
$10,000. Thus, for example, if you originally invested $25,000 in CNL Income
Fund XI, Ltd., you would multiply $10,763 by 2.5, which is equal to $25,000
divided by $10,000, and which would result in your receiving an estimated value
of $26,908 in APF Shares in the Acquisition, based on the exchange value.
12
<PAGE>
Why the APF Shares may trade at prices below the exchange value. There has
been no public trading market for the APF Shares, and it is possible that the
APF Shares will trade, when listed on the NYSE, at prices below the exchange
value. The principal reasons for this are as follows:
. Upon the NYSE listing of the APF Shares, current APF stockholders, as
well as Limited Partners who receive APF Shares in the Acquisition, will
for the first time be able to sell these shares in a relatively liquid
market. Consequently, the supply of APF Shares offered for sale may
exceed the demand for APF Shares, thereby depressing the trading price of
an APF Share.
. Depending upon market conditions, APF intends to engage in a public
offering of APF Shares concurrently with, or shortly after, the
consummation of the Acquisition in an effort to obtain the following of
investment banking analysts and institutional investors. APF believes
that analyst and institutional investor support will limit, but will not
eliminate, any depression in the trading price of APF Shares as a result
of excess supply.
. While sales of APF Shares, adjusted for the one-for-two reverse stock
split, have been at prices per share equal to the exchange value in all
three of APF's public offerings, a portion of the proceeds raised in
these offerings was used by APF to pay fees and expenses of the
offerings. As of June 30, 1999, the book value of an APF Share was
$17.54. When the APF Shares begin trading on the NYSE, trading prices may
be below the exchange value to reflect that fact.
. Market prices for APF Shares may fluctuate with market and economic
conditions, the financial condition of APF and other factors that
generally influence the market prices of securities, including the
general market perception of REITs. Such fluctuations may depress the
market price of APF Shares independent of the financial performance of
APF.
We also will receive APF Shares in the Acquisition. With respect to our
ownership interest in the Income Funds, we, as the general partners of your
Income Fund, also will receive APF Shares in exchange for our general partner
interests if Income Funds VI through XII are acquired by APF. If your Income
Fund is acquired, the APF Shares paid to your Income Fund will be allocated
between you and the other investors and us in the same manner as net
liquidation proceeds would be distributed under your Income Fund's partnership
agreement, as if your Income Fund's restaurant properties and other assets were
sold and your Income Fund were distributing net liquidation proceeds.
Our Reasons for Supporting the Acquisition
We are proposing your approval of the Acquisition because we believe that
APF's acquisition of the Income Funds is the best way to maximize the value of
your investment. We believe that the addition of the Income Funds' restaurant
properties to APF's portfolio will likely result in higher values being paid to
the Income Funds than if such restaurant properties were sold individually and
the Income Funds were liquidated.
Benefits of the Acquisition
We believe that the Acquisition will provide you the following benefits:
. Growth Potential. We believe that there is greater potential for
increased distributions to you as an APF stockholder and for appreciation
in the price of your APF Shares than there would be for you as a Limited
Partner of your Income Fund in holding units.
. Risk Diversification. The combination of the restaurant properties owned
by the Income Funds with APF's existing restaurant properties, as well as
future property acquisitions made by APF, will diversify your investment
over a larger number of restaurant properties, a broader group of
restaurant types, tenants, and geographic locations.
13
<PAGE>
. Operational Economies of Scale. The combination of the Income Funds into
the business already owned by APF will result in administrative and
operational economies of scale and cost savings for APF.
. Liquidity. We believe the Acquisition provides you with liquidity of your
investment, which means your APF Shares would be freely tradable.
Our recommendation to you
We believe that the terms of the Acquisition provide substantial benefits
and are fair to you. We recommend that you vote "For" the approval of the
Acquisition.
Why we believe the Acquisition is fair to you
We believe that the terms of the Acquisition are fair and that they will
maximize the return on your investment for the following principal reasons:
. We analyzed the benefits of the Acquisition, and we believe that the
expected benefits of the Acquisition to you outweigh the risks and
potential detriments of the Acquisition to you.
. After careful consideration, we concluded that the likely value of the
APF Shares would be higher than the value of the consideration you would
have received if we had elected an alternative to the Acquisition, such
as liquidation or continuation of the Income Funds.
. We considered that you have the opportunity to vote for or against the
Acquisition, and, if you vote against it, you have the ability to elect
to receive either APF Shares or notes if your Income Fund approves the
Acquisition.
. We considered and agreed with the financial advice and the fairness
opinions rendered by Legg Mason, and the appraisals of Valuation
Associates.
. In each of APF's three offerings, the offering price per APF Share, after
giving effect to the one-for-two reverse stock split, equaled the
exchange value. The offering price was determined by APF based upon the
estimated costs of investing in restaurant properties and making mortgage
loans, fees paid to the Advisor, its affiliates and third parties and the
expenses of the offerings.
. Based on recorded transfers of APF Shares, the average price at which APF
Shares sold during 1998 was $17.30 per share. Additionally, APF bought
back APF Shares pursuant to a redemption plan at a per share value of
$18.40, after giving effect to the one-for-two reverse stock split. We
believe that these discounts to the original offering price are
reasonable in light of the current lack of market for the APF Shares.
Upon listing the APF Shares on the NYSE, we believe that the liquidity
afforded to holders of APF Shares will enhance the value of the APF
Shares.
Fairness Opinions
In deciding to recommend the Acquisition, we considered and agreed with the
fairness opinions of Legg Mason as to the fairness from a financial point of
view of the APF Share consideration to be offered to each Income Fund. Because
the Acquisition of any single Income Fund is not a condition of the Acquisition
of any other Income Fund, we obtained from Legg Mason with respect to each
Income Fund a fairness opinion that did not assume that APF acquired any other
Income Funds. Based on the reasons previously stated and the opinion of Legg
Mason that the APF Share consideration payable to each Income Fund is fair from
a financial point of view, we believe the Acquisition is fair regardless of the
number of Income Funds that are acquired in the Acquisition. The fairness
opinion for your Income Fund is attached as Appendix A to your Income Fund's
supplement that accompanies this consent solicitation. You should read Legg
Mason's opinion in its entirety with respect to the assumptions made, matters
considered and limits of the reviews undertaken by Legg Mason in rendering its
opinions.
14
<PAGE>
Based on the analysis more fully described under "Reports, Opinions, and
Appraisals--Fairness Opinions," and subject to the assumptions, limitations and
qualifications discussed in this consent solicitation and in its fairness
opinions, Legg Mason concluded that the APF Share consideration offered to each
Income Fund in the Acquisition is fair from a financial point of view.
Appraisals
In making our recommendation, we also considered the appraisals of each
Income Fund prepared by Valuation Associates, an independent real estate
appraisal firm. We compared the value of the APF Shares payable to each Income
Fund, based on the exchange value, with the appraised value of each Income
Fund's restaurant properties and other net assets. Based on this comparison, we
determined that the number of APF Shares payable to each Income Fund was
reasonable.
Alternatives to the Acquisition that we considered
In determining whether to accept and recommend the Acquisition proposal, we
considered two principal alternatives to the Acquisition that could have been
pursued by each Income Fund: (1) continuation of each Income Fund pursuant to
its existing partnership agreement and (2) liquidation of each Income Fund.
Benefits and Disadvantages of Continuation Alternative. Continuing each
Income Fund without change would have the following effects, some of which you
might perceive as benefits:
. your Income Fund would not be subject to the risks associated with the
ongoing operations of APF and instead would remain a separate entity,
with its own assets and liabilities, and would pursue its original
investment objectives consistent with the guidelines, restrictions and
safeguards contained in its partnership agreement;
. your Income Fund's performance would not be affected by the performance
of APF and the other Income Funds that APF intends to acquire in the
Acquisition;
. eventually, your Income Fund would liquidate its holdings and distribute
the proceeds received in liquidation in accordance with the terms of the
Income Fund's partnership agreement;
. there would be no change in the nature of your voting rights and no
change in your Income Fund's operating policies;
. your Income Fund would not incur Acquisition expenses, ranging from
approximately $153,000 to $504,000, or approximately 1.1% to 1.3% of the
total value of the APF Shares, based on the exchange value, to be issued
to each Income Fund, depending on the size of the Income Fund. For a
breakdown of the expenses with respect to your Income Fund, see the
supplement accompanying this consent solicitation;
. income from your Income Fund may be offset by passive activity losses
generated from your other investments, whereas you will not have the
ability to offset income from your investment in APF with such losses;
and
. assuming you are a tax-paying Limited Partner, you would not be subject
to any immediate federal income taxation that will otherwise be incurred
by you as a consequence of the Acquisition.
However, we believe that maintaining the Income Funds as separate entities
would have the following disadvantages:
. since the Income Funds are not authorized to raise additional funds
either through equity issuances or by incurring indebtedness for
investment, the Income Funds are unable to benefit from investing in
potential growth opportunities;
15
<PAGE>
. your investment would continue to be illiquid because the units are not
freely transferable and there is no established public trading market or
public market valuation for units, unlike the APF Shares which will have
a public trading market that you could access at your discretion;
. your Income Fund's portfolio of restaurant properties would be less
diversified, and therefore the loss of one tenant or an economic downturn
in the region where a restaurant property is located would likely have a
greater impact on your Income Fund's ability to make distributions than
it would on APF's;
. your Income Fund cannot acquire, develop or finance restaurant properties
or take advantage of the other potential benefits of the Acquisition,
which are described above; and
. since the majority of the Income Funds' operating expenses are fixed, as
the restaurant properties are sold and revenues from the portfolio
decrease, it is unlikely that all of the Income Funds will sustain their
current level of distributions.
Benefits and Disadvantages of Liquidation Alternative. As an alternative to
the Acquisition, each Income Fund could dissolve and liquidate by selling its
restaurant properties and other assets, paying off its existing liabilities not
assumed by the buyer and distributing the net sales proceeds to you, to the
other Limited Partners and to us in our capacity as general partners in
accordance with the distribution provisions of its partnership agreement. The
primary advantage of this alternative would be to provide liquidity to you as
restaurant properties are sold based upon the net liquidation proceeds received
from the sale of your Income Fund's assets.
We do not believe that liquidation would be as beneficial to you as the
Acquisition, for the following reasons:
. the public market valuation of an investment in an operating real estate
company like APF may exceed the liquidation value of your Income Fund's
restaurant properties;
. we believe that the liquidation valuation provided by Valuation
Associates shows that the liquidation values of the Income Funds are
lower than the values of the APF Shares, based on the exchange value, to
be paid to the Income Funds in the Acquisition; and
. an aggressive bulk sale of individual restaurant properties could result
in significant discounts from appraised values while a gradual
liquidation likely would involve higher administrative costs and greater
uncertainty, either of which would reduce the portion of net sales
proceeds available for distribution to you.
In order to assist you in evaluating these alternatives, please review your
supplement and the section entitled "Our Recommendation and Fairness
Determination--Material Factors Underlying Belief as to Fairness" in this
consent solicitation. Your supplement and that section contain estimates of the
value of your investment if your Income Fund continues in operation without
change and of the net liquidation proceeds that might be available if your
Income Fund were liquidated. The methodology and assumptions used to derive
these estimated values are explained there.
Prices for Income Fund Units
The units are not listed on any national securities exchange or quoted on an
automated quotation system, and there is no established public market for the
units. The table below provides the material information regarding sale
transactions in the units for the twelve months ended June 30, 1999 that we
obtained from the three material sources from which such information is
available: the distribution reinvestment plans of the Income Funds, sales
between private individuals and transactions facilitated by companies that
specialize in transacting resales, such as American Partnership Board, Frain
Asset Management and DCC Securities Corp. Other than the information from the
Income Funds' distribution reinvestment plans, we have not contacted the buyers
or sellers to independently verify this information. There have likely been
other secondary sale transactions in the units, although information regarding
them is not available to us. Sales of units therefore may have occurred at
prices either above the high price or below the low price set forth below.
16
<PAGE>
We are providing you this information so that it is readily available to
you. However, we do not believe you should rely on the information below in
determining whether or not to approve the Acquisition because the price paid
per unit may not accurately reflect the current value of the restaurant
properties and other assets of the Income Funds as a result of the relative
illiquidity of the units being sold.
All historical price information in the chart below is on a per unit basis
for the twelve months ended June 30, 1999. The estimated value of the APF
Shares is based on the exchange value established by APF. The value of the APF
Shares upon listing on the NYSE may be below the exchange value.
<TABLE>
<CAPTION>
Original
Limited
Partner Weighted
Investments High Low Average Estimated
Original less Trading Trading Trading Price Value of APF
Limited Distributions Price per Price per of Units Shares per
Partner of Net Sales Number Average Average per Average Average
Investments Proceeds per of Units $10,000 $10,000 $10,000 $10,000
less average Traded Original Original Original Original
Original Distributions $10,000 Number as Percent Limited Limited Limited Limited
Income Cost per of Net Sales Original of Units of Total Partner Partner Partner Partner
Fund Unit Proceeds(1) Investment(1) Traded Income Fund Investment Investment Investment Investment
------ -------- ------------- ------------- -------- ----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I............... $500 $12,001,150 $8,001 482 1.61% $8,398 $7,030 $7,504 $7,616
II.............. 500 23,046,408 9,219 329 0.66 9,507 7,100 8,942 9,459
III............. 500 22,253,502 8,901 263 0.53 9,600 6,850 8,445 8,228
IV.............. 500 28,226,458 9,409 499 0.83 10,000 7,360 8,878 8,782
V............... 500 22,258,682 8,903 231 0.46 10,000 6,550 8,135 8,087
VI.............. 500 35,000,000 10,000 1,081 1.54 9,701 6,664 9,274 10,431
VII............. 1 30,000,000 10,000 286,381 0.95 9,500 7,800 9,300 10,441
VIII............ 1 35,000,000 10,000 495,213 1.41 10,000 7,600 9,300 11,263
IX.............. 10 35,000,000 10,000 47,502 1.36 10,000 8,120 9,320 10,353
X............... 10 40,000,000 10,000 33,363 0.83 9,700 7,800 9,340 10,393
XI.............. 10 40,000,000 10,000 43,292 1.08 9,500 7,980 9,110 10,763
XII............. 10 45,000,000 10,000 39,762 0.88 10,000 7,600 9,270 10,405
XIII............ 10 40,000,000 10,000 33,530 0.84 9,500 7,900 8,940 9,608
XIV............. 10 45,000,000 10,000 25,090 0.56 9,500 7,500 8,960 9,481
XV.............. 10 40,000,000 10,000 25,551 0.64 9,500 6,100 8,530 9,232
XVI............. 10 45,000,000 10,000 37,146 0.83 10,000 6,990 8,760 9,499
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998, an adjustment to the Limited Partners' original
investments for special distributions of net sales proceeds from sales of
restaurant properties and net sales proceeds added to these Income Funds'
working capital and subsequently distributed to Limited Partners of CNL
Income Fund, Ltd. through CNL Income Fund V, Ltd.
17
<PAGE>
Voting
Voting Procedures
Please mark the enclosed consent form to vote "For" or "Against" approval of
the Acquisition. If you have invested in more than one Income Fund, you will
receive only one copy of this consent solicitation and you will receive a
supplement and a consent form for each Income Fund in which you hold units.
Because each Income Fund will vote separately on whether or not to approve the
Acquisition, you must complete one consent form for each Income Fund in which
you are an investor.
If you are voting "Against" the Acquisition, you also should elect on your
consent form whether you would like to receive APF Shares or notes if your
Income Fund is acquired by APF. If your Income Fund approves the Acquisition,
you will receive APF Shares if you vote "Against" the Acquisition but do not
elect specifically to receive notes or you do not vote. You must elect to
receive notes on the consent form or you will receive APF Shares.
Your consent form must be received by Corporate Election Services by 5:00
p.m. Eastern time on , 2000 unless we extend the solicitation period. The
only situation that we can foresee in which an extension of the solicitation
period would be sought would be if a quorum of the Limited Partners was not
present, but of the Limited Partners present and voting, a substantial majority
are voting in favor of the Acquisition. If you do not submit a consent form,
you will also be counted as having voted "Against" the Acquisition and will
receive APF Shares if your Income Fund approves the Acquisition. If you submit
a properly signed consent form but do not indicate how you wish to vote, you
will be counted as having voted "For" the Acquisition and will receive APF
Shares if your Income Fund approves the Acquisition. You may withdraw or revoke
your consent form at any time prior to the expiration of the solicitation
period in the manner described later in this consent solicitation. You may also
vote in person at the special meeting of the Limited Partners of your Income
Fund.
Amendments to Your Income Fund's Partnership Agreement
For Income Funds XI through XVI, if you vote "For" the Acquisition, you will
also be required to cast a separate vote in favor of amendments to the
partnership agreement of such Income Funds to permit the Acquisition to
proceed. These amendments are necessary to complete successfully APF's
acquisition of your Income Fund. For a discussion of the amendments, if
applicable to your Income Fund, you should carefully read the supplement
accompanying the consent solicitation.
No Rights to Independent Appraisal
If your Income Fund approves the Acquisition, but you voted "Against" the
Acquisition, you will not have any right to have an independent valuation of
your Income Fund.
18
<PAGE>
Comparison of Ownership of APF Shares, Notes and Units
In order to assist you in deciding whether to approve the Acquisition, we
have summarized below some of the ownership attributes of APF Shares, notes and
Income Fund units. The following descriptions are qualified in their entirety
by reference to APF's Articles of Incorporation and bylaws and to each Income
Fund's partnership agreement. The descriptions are summaries and do not purport
to be a complete discussion of these matters. We encourage you to review
carefully the more detailed comparison regarding the units, the notes and APF
Shares in "Comparison of Income Funds and APF and of the Ownership of Units,
Notes and APF Shares," in this consent solicitation beginning on page 96, for
additional comparisons.
<TABLE>
<CAPTION>
Characteristic Income Fund Units APF Shares Notes
- ------------------------ --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Liquidity and . No established . Traded on NYSE . No established
Transferability market market
. Transfers are . Freely transferable . Freely transferable
subject to subject to
limitations ownership
limitation in APF's
Articles of
Incorporation
State Tax Withholding on . Some states require . No withholding . No withholding
Distributions withholding on
distributions
Tax Characterization of . Generally passive . Generally, . Generally,
Income income; pro rata portfolio income; portfolio income;
share of income and generally, noteholders will be
expense items of distributions from taxed on interest
Income Fund earnings and income
attributed to profits reported as
partners; ordinary income;
distributions in distributions in
excess of taxable excess of earnings
income (generally and profits
as a result of (generally as a
depreciation) are result of
not currently depreciation),
taxable and reduce reported as non-
taxpayer's basis in taxable
the Income Fund distributions and
reduces taxpayer's
basis in REIT
Tax Reporting to . Schedule K-1, . Form 1099-DIV must . IRS Form 1099-INT
Investor generally mailed by be mailed by must be mailed by
February 15 of each January 31 of each January 31 of each
year year year
Liability of Investor . Limited to the . No personal . No personal
amount of your liability for the liability for the
investment in the debts or debts or
Income Fund obligations of APF obligations of APF
Distributions . Quarterly . Quarterly . No distributions
distributions distributions will be paid to
noteholders; semi-
annual interest
payments and
principal payment
upon maturity
Additional . Income Funds cannot . APF may issue . Will be direct,
Equity/Potential issue additional additional equity unsecured and
Dilution/Subordination equity; no risk of which would result unsubordinated
dilution in the dilution of obligations of APF
your ownership and will rank
interest in APF equally with each
other and with all
other unsecured and
unsubordinated
indebtedness of APF
from time to time
outstanding
. Will be
subordinated to
existing and future
mortgages and other
secured
indebtedness of APF
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Characteristic Income Fund Units APF Shares Notes
- -------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Voting Rights . Voting is based . One vote per share; . Voting is permitted
upon the ownership No supermajority only for the merger
interest in the voting requirements of APF or the sale
Income Fund; voting or anti-takeover of all or
is generally provisions except substantially all
permitted only for as necessary to of APF's assets and
significant meet REIT ownership other actions
transactions as requirements and detrimental to
provided in the with respect to noteholders as
Income Fund's business provided in the
partnership combinations indenture for the
agreement and under involving notes
Florida law interested
stockholders
</TABLE>
You should read this consent solicitation carefully and consult with your
own financial advisor prior to making a decision with respect to the
Acquisition.
Federal Income Tax Considerations
The Acquisition will be a taxable transaction for Limited Partners subject to
federal income taxation
If your Income Fund is acquired by APF, you will be required to recognize
taxable gain or loss if you are subject to federal income tax, but you will not
receive any cash in the Acquisition in order to pay taxes on any gain that you
recognize. If you are required to recognize any gain as a result of the
Acquisition, you may be able to offset that gain with unused passive activity
losses from your other investments.
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences to
you of the Acquisition.
Summary Financial Information
The following tables set forth summary financial information for APF, the
Income Funds, the Advisor, CNL Financial Services and CNL Financial Corporation
on a historical basis, as shown on pages 21 through 26 and for APF, the Income
Funds and the CNL Restaurant Businesses on a pro forma basis, as shown on pages
27 through 37 and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements contained elsewhere in this consent solicitation and the
accompanying supplements. The Pro Forma Combined Financial Data combines
information from the historical consolidated statements of earnings of APF, the
Income Funds and the CNL Restaurant Businesses giving effect to the Acquisition
and the acquisition of the CNL Restaurant Businesses as if the respective
transactions occurred on January 1, 1998 and combines information from the
historical consolidated balance sheets as if the respective transactions
occurred on June 30, 1999.
We are providing the pro forma information for illustrative purposes only.
It does not necessarily reflect what the results of operations or financial
position of APF would have been if the acquisitions had actually occurred on
the dates indicated. This information also does not indicate what APF's future
operating results or consolidated financial position will be. This information
does not reflect additional costs associated with the Acquisition which APF
cannot presently estimate.
20
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF APF AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months ended
June 30,
--------------------------
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Operating Data:
Revenues:
Rental and earned income..... $ 27,900,894 $ 13,807,621
Interest and other income.... 4,249,461 3,821,457
------------ ------------
Total revenues............... 32,150,355 17,629,078
------------ ------------
Expenses:
General and administrative... 2,244,408 1,036,835
Management and advisory fees.. 1,681,870 729,860
State and other taxes........ 464,966 182,703
Depreciation and amortization.. 3,711,674 1,648,827
Transaction costs............ 483,005 --
------------ ------------
Total expenses............... 8,585,923 3,598,225
------------ ------------
Net earnings before Equity in
Earnings of Joint
Ventures/Minority Interests,
Loss on Sale of Properties
and Provision for Losses on
Land and Buildings........... 23,564,432 14,030,853
Equity in earnings of Joint
Ventures/Minority Interests.. 31,241 (15,380)
Loss on Sales of Properties... (201,843) --
Provision for Losses on Land
and Buildings................ (540,522) --
------------ ------------
Net earnings.................. $ 22,853,308 $ 14,015,473
============ ============
Other Data:*
Weighted average number of
shares of common stock
outstanding during
period (1)................... 37,347,883 21,583,217
Total properties owned at end
of period.................... 578 310
Earnings per share............ $ 0.61 $ 0.65
Cash distributions declared
per share of common
stock (2).................... $ 0.76 $ 0.76
Ratio of earnings to fixed
charges...................... 18.16x 112.50x
<CAPTION>
May 2, 1994
(Date of
Inception)
Year ended December 31, through
------------------------------------------------------ December 31,
1998 1997 1996 1995 1994(3)
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and earned income..... $ 33,129,661 $ 15,490,615 $ 4,357,298 $ 539,776 $ --
Interest and other income.... 9,057,376 3,967,318 1,849,386 119,355 --
------------- ------------- ------------- ------------ -------------
Total revenues............... 42,187,037 19,457,933 6,206,684 659,131 --
------------- ------------- ------------- ------------ -------------
Expenses:
General and administrative... 2,798,481 1,010,725 601,540 142,878 --
Management and advisory fees.. 1,851,004 804,879 251,200 23,078 --
State and other taxes........ 548,320 251,358 56,184 20,189 --
Depreciation and amortization.. 4,054,098 1,795,062 521,871 104,131 --
Transaction costs............ 157,054 -- -- -- --
------------- ------------- ------------- ------------ -------------
Total expenses............... 9,408,957 3,862,024 1,430,795 290,276 --
------------- ------------- ------------- ------------ -------------
Net earnings before Equity in
Earnings of Joint
Ventures/Minority Interests,
Loss on Sale of Properties
and Provision for Losses on
Land and Buildings........... 32,778,080 15,595,909 4,775,889 368,855 --
Equity in earnings of Joint
Ventures/Minority Interests.. (14,138) (31,453) (29,927) (76) --
Loss on Sales of Properties... -- -- -- -- --
Provision for Losses on Land
and Buildings................ (611,534) -- -- -- --
------------- ------------- ------------- ------------ -------------
Net earnings.................. $ 32,152,408 $ 15,564,456 $ 4,745,962 $ 368,779 $ --
============= ============= ============= ============ =============
Other Data:*
Weighted average number of
shares of common stock
outstanding during
period (1)................... 26,648,219 11,711,934 4,035,835 949,175 --
Total properties owned at end
of period.................... 409 244 94 18 --
Earnings per share............ $ 1.21 $ 1.33 $ 1.18 $ 0.39 $ --
Cash distributions declared
per share of common
stock (2).................... $ 1.52 $ 1.49 $ 1.41 $ 0.62 $ --
Ratio of earnings to fixed
charges...................... 79.97x 28.61x 37.40x -- --
<CAPTION>
June 30,
--------------------------
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Real estate assets, net....... $691,443,127 $342,940,154
Mortgages/notes receivable.... $ 63,351,507 $ 32,315,411
Accounts receivable, net...... $ 649,972 $ 390,005
Investment in joint ventures.. $ 1,081,046 $ 112,847
Total assets.................. $822,225,342 $470,119,410
Total liabilities/minority interest.. $167,023,516 $ 13,601,064
Total stockholders' equity.... $655,201,826 $456,518,346
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets, net....... $475,774,971 $245,403,313 $ 72,440,181 $21,097,608 $ --
Mortgages/notes receivable.... $ 39,009,073 $ 31,170,054 $ 13,389,607 $ -- $ --
Accounts receivable, net...... $ 526,650 $ 635,796 $ 142,389 $ 113,613 $ --
Investment in joint ventures.. $ 988,078 $ -- $ -- $ -- $ --
Total assets.................. $680,352,013 $339,077,762 $134,825,048 $33,603,084 $929,585
Total liabilities/minority interest.. $ 19,541,727 $ 17,439,661 $ 11,957,621 $ 1,622,436 $729,585
Total stockholders' equity.... $660,810,286 $321,638,101 $122,867,427 $31,980,648 $200,000
</TABLE>
21
<PAGE>
- --------
* Share data and per share data reflects a one-for-two reverse stock split
effective as of June 3, 1999.
(1) The weighted average number of APF Shares outstanding is based upon the
period APF was operational.
(2) Approximately 20%, 12%, 18%, 8%, 13% and 42% of cash distributions ($0.15,
$0.09, $0.28, $0.11, $0.18 and $0.26 per APF Share) for the six months
ended June 30, 1999 and 1998, and the years ended December 31, 1998, 1997,
1996 and 1995, respectively, represent a return of capital in accordance
with generally accepted accounting principles, or GAAP. Cash distributions
treated as a return of capital on a GAAP basis represent the amount of cash
distributions in excess of accumulated net earnings (including deductions
for depreciation expense) on a GAAP basis. For the period May 2, 1994 (date
of inception) through December 31, 1994, APF did not make any cash
distributions because operations had not commenced.
22
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL DATA OF THE INCOME FUNDS
<TABLE>
<CAPTION>
Six Months ended
June 30, Year ended December 31,
------------------------ ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income................ $21,613,405 $20,615,143 $43,462,064 $47,406,656 $49,763,331 $48,448,434 $43,036,875
Interest and other
income................ 708,042 993,013 1,767,773 1,582,186 1,323,870 1,195,322 979,569
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues......... $22,321,447 $21,608,156 $45,229,837 $48,988,842 $51,087,201 $49,643,756 $44,016,444
----------- ----------- ----------- ----------- ----------- ----------- -----------
Expenses:
General and
administrative........ 1,593,825 1,598,667 3,261,776 3,397,568 3,090,649 3,052,687 2,184,551
Management and advisory
fees.................. 112,161 114,274 226,177 226,547 226,329 210,908 150,622
State and other taxes.. 292,633 226,053 227,933 227,155 187,257 211,391 136,608
Depreciation and
amortization.......... 2,792,813 2,668,239 5,572,005 5,536,688 5,676,547 5,554,593 5,013,540
Transaction costs...... 1,716,823 -- 315,081 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses......... 6,508,255 4,607,233 9,602,972 9,387,958 9,180,782 9,029,579 7,485,321
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on Sale
of Properties, Other
Revenues (Expenses) and
Provision for Loss on
Land and Buildings..... 15,813,192 17,000,923 35,626,865 39,600,884 41,906,419 40,614,177 36,531,123
Equity in Earnings of
Joint Ventures/Minority
Interest............... 2,589,175 1,556,186 3,569,877 3,619,807 2,964,176 2,566,728 1,898,156
Gain on Sale of
Properties............. 1,731,417 2,024,896 2,519,894 4,224,500 524,722 10,822 761,669
Other Revenues
(Expenses)............. -- (45,150) (45,150) 214,000 -- -- 161,850
Provision for Loss on
Land and Buildings..... (338,131) (217,805) (2,834,338) (665,574) (316,548) (207,844) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings............ $19,795,653 $20,319,050 $38,837,148 $46,993,617 $45,078,769 $42,983,883 $39,352,798
=========== =========== =========== =========== =========== =========== ===========
Other data:
Total properties owned
at end of period....... 571 576 573 588 603 603 588
Total cash distributions
declared (1)........... $23,259,008 $29,676,357 $53,610,357 $48,894,454 $48,535,704 $46,827,898 $42,546,602
Total cash distributions
declared per $10,000... $ 423 $ 540 $ 975 $ 889 $ 882 $ 859 $ 810
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- ----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Real estate assets,
net.................... $356,476,210 $373,625,708 $366,370,743 $387,768,898 $404,109,694 $415,745,756 $402,191,678
Mortgages/notes
receivable............. $ 3,669,623 $ 5,543,072 $ 4,807,714 $ 5,586,571 $ 4,894,615 $ 2,627,418 $ --
Accounts receivable,
net.................... $ 871,401 $ 470,413 $ 1,302,323 $ 1,268,508 $ 1,639,685 $ 1,477,605 $ 1,707,164
Investment in/due from
joint ventures......... $ 51,051,185 $ 46,809,624 $ 49,106,438 $ 41,608,848 $ 32,693,871 $ 29,432,410 $ 27,735,605
Total assets............ $459,918,898 $467,784,819 $462,217,940 $477,792,517 $478,724,970 $481,643,284 $465,754,289
Total
liabilities/minority
interest............... $ 17,114,527 $ 16,101,187 $ 15,950,214 $ 15,921,571 $ 16,183,187 $ 15,826,566 $ 18,298,166
Total equity............ $442,804,371 $451,683,632 $446,267,726 $461,870,946 $462,541,783 $465,816,718 $447,456,123
</TABLE>
- --------
(1) Cash distributions for the year ended December 31, 1997 include additional
amounts earned in 1997, but declared payable in the first quarter of 1998.
Cash distributions for the years ended December 31, 1998 and 1994 include
special distributions of net sales proceeds from the sale of properties.
23
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA OF
CNL FUND ADVISORS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Six months Six months Six months
ended ended ended Year ended Year ended June 30,
June 30, June 30, December 31, June 30, ----------------------------------------
1999(1) 1998 1998 1998 1997 1996 1995 1994
----------- ----------- ------------ ----------- ---------- ---------- --------- -----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Fees................... $ 9,454,036 14,481,574 $14,408,750 $19,954,188 $6,015,055 $3,650,591 $ 549,067 $ --
Interest and other
income................ 87,570 69,339 89,415 227,597 157,872 25,759 -- 81
----------- ----------- ----------- ----------- ---------- ---------- --------- -----
Total revenues......... $ 9,541,606 $14,550,913 $14,498,165 $20,181,785 $6,172,927 $3,676,350 $ 549,067 $ 81
----------- ----------- ----------- ----------- ---------- ---------- --------- -----
Expenses:
General and
administrative........ 5,494,079 4,971,277 6,139,588 7,467,957 3,674,044 1,674,267 709,280 81
Depreciation and
amortization.......... 77,166 47,766 81,028 81,024 58,110 14,780 2,006 --
Interest expense....... 92,707 62,274 86,141 219,022 42,151 7 -- --
----------- ----------- ----------- ----------- ---------- ---------- --------- -----
Total expenses......... 5,663,952 5,081,317 6,306,757 7,768,003 3,774,305 1,689,054 711,286 81
----------- ----------- ----------- ----------- ---------- ---------- --------- -----
Income (Loss) Before
Benefit (Provision) for
Federal Income Taxes .. 3,877,654 9,469,596 8,191,408 12,413,782 2,398,622 1,987,296 (162,219) --
Benefit (Provision) for
federal income taxes... (1,595,036) (3,721,866) (3,235,606) (4,903,444) (947,458) (808,065) 53,486 --
----------- ----------- ----------- ----------- ---------- ---------- --------- -----
Net income (loss) before
cumulative effect of a
change in accounting
for start-up costs..... 2,282,618 5,747,730 4,955,802 7,510,338 1,451,164 1,179,231 (108,733) --
Cumulative effect of a
change in accounting
for start-up costs..... -- (47,151) -- (39,237) -- -- -- --
----------- ----------- ----------- ----------- ---------- ---------- --------- -----
Net income (loss)....... $ 2,282,618 $ 5,700,579 $ 4,955,802 $ 7,471,101 $1,451,164 $1,179,231 $(108,733) $ --
=========== =========== =========== =========== ========== ========== ========= =====
Other data:
Weighted average number
of shares outstanding
stock outstanding
during period--Class
A...................... 6,400 6,400 6,400 6,400 6,400 6,400 6,400 6,400
Weighted average number
of shares outstanding
stock outstanding
during period--Class
B...................... 3,600 19 3,401 9 -- -- -- --
Total properties owned
at end of period....... N/A N/A N/A N/A N/A N/A N/A N/A
Earnings (loss) per
share--Class A Common
Stock.................. $ 321 $ 802 $ 697 $ 1,167 $ 227 $ 184 $ (17) $ --
Earnings (loss) per
share--Class B Common
Stock.................. $ 63 $ -- $ 146 $ -- $ -- $ -- $ -- $ --
Total dividends
declared--Class A
Common Stock........... $ -- $ 8,431,566 $ 2,126,525 $ 8,431,566 $ -- $ -- $ -- $ --
Total dividends
declared--Class B
Common Stock........... $ -- $ -- $ 119,808 $ -- $ -- $ -- $ -- $ --
Dividends declared per
share--Class A Common
Stock.................. $ -- $ 1,317 $ 332 $ 1,317 $ -- $ -- $ -- $ --
Dividends declared per
share--Class B Common
Stock.................. $ -- $ -- $ 35 $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
June 30,
June 30, June 30, December 31, June 30, -----------------------------------------
1999 1998 1998 1998 1997 1996 1995 1994
----------- ---------- ------------ ---------- ---------- ---------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Mortgages/notes
receivable............. $ -- $ 340,000 $ -- $ 340,000 $ -- $ -- $ -- $ --
Accounts receivable,
net.................... $8,668,738 $6,031,010 $6,764,034 $6,031,010 $2,926,461 $ 609,481 $ 375,418 $ --
Total assets............ $9,407,247 $7,026,586 $7,944,933 $7,026,586 $4,430,976 $1,030,637 $ 797,758 $201,267
Total liabilities....... $1,076,772 $3,708,198 $1,897,076 $3,708,198 $1,554,586 $ 893,251 $ 903,491 $200,267
Total equity............ $8,330,475 $3,318,388 $6,047,857 $3,318,388 $2,876,390 $ 137,386 $(105,733) $ 1,000
</TABLE>
- -------
(1) Historically, the Advisor received acquisition fees based on 4.5% of the
proceeds raised by APF in its three public offerings. APF's most recent
offering was completed in December 1998. Following the investment of
offering proceeds, the advisory agreement with the Advisor provided for
acquisition fees to be paid based on 4.5% of the acquisition purchase price
of a restaurant property.
24
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF CNL FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
Inception
(October 9, 1995)
Six Months Six Months Year Ended June 30, through
Ended Ended Six Months Ended ---------------------- June 30,
June 30, 1999 June 30, 1998 December 31, 1998 1998 1997 1996
------------- ------------- ----------------- ---------- ---------- -----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Fees................... $2,963,154 $ 2,161,894 $3,004,975 $5,974,885 $1,804,357 $ --
Interest and other
income................ 249,258 292,451 283,628 608,560 54,641 --
---------- ----------- ---------- ---------- ---------- ---------
Total revenues......... 3,212,412 2,454,345 3,288,603 6,583,445 1,858,998 --
---------- ----------- ---------- ---------- ---------- ---------
Expenses:
General and
administrative........ 3,130,576 3,959,163 4,010,503 6,158,571 1,033,555 188,859
Depreciation and
amortization.......... 39,032 36,693 -- -- -- --
---------- ----------- ---------- ---------- ---------- ---------
Total expenses......... 3,169,608 3,995,856 4,010,503 6,158,571 1,033,555 188,859
---------- ----------- ---------- ---------- ---------- ---------
Income (Loss) Before
Benefit (Provision)
for Income Taxes...... 42,804 (1,541,511) (721,900) 424,874 825,443 (188,859)
Benefit (Provision) for
Federal Income Taxes.. (16,906) 658,914 285,150 (167,826) (326,050) 76,793
---------- ----------- ---------- ---------- ---------- ---------
Net Income (Loss)....... $ 25,898 $ (882,597) $ (436,750) $ 257,048 $ 499,393 $(112,066)
========== =========== ========== ========== ========== =========
Other data:
Weighted average number
of shares outstanding
stock outstanding
during period--Class
A...................... 2,000 2,000 2,000 1,953 1,800 1,343
Weighted average number
of shares outstanding
stock outstanding
during period--Class
B...................... 724 -- 2 -- -- --
Total properties owned
at end of period....... n/a n/a n/a n/a n/a n/a
Earnings (loss) per
share--Class A Common
Stock.................. $ 12 $ (441) $ (196) $ 132 $ 277 $ (83)
Earnings (loss) per
share--Class B Common
Stock.................. $ 4 $ -- $ (21,838) $ -- $ -- $ --
<CAPTION>
Inception
(October 9, 1995)
June 30, through
June 30, June 30, December 31, ---------------------- June 30,
1999 1998 1998 1998 1997 1996
------------- ------------- ----------------- ---------- ---------- -----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Receivables, net........ $5,417,084 $6,836,000 $5,215,244 $6,836,000 $3,990,489 $ 17,405
Total assets............ $6,369,606 $7,144,393 $6,494,271 $7,144,393 $4,533,936 $432,604
Total liabilities....... $ 829,856 $1,266,191 $1,000,989 $1,266,191 $3,603,195 $ 1,256
Total equity............ $5,539,750 $5,878,202 $5,493,282 $5,878,202 $ 930,741 $431,348
</TABLE>
25
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF CNL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Inception
Six Months Six Months Six Months Year Ended June 30, (October 9, 1995)
Ended Ended Ended -------------------------- through
June 30, 1999 June 30, 1998 December 31, 1998 1998 1997 June 30, 1996
------------- ------------- ----------------- ------------ ------------ -----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Fees................... $ 11,511 $ -- $ -- $ -- $ -- $ --
Interest and other
income................ 11,539,080 12,051,754 14,299,814 20,324,223 3,346,226 52,063
------------ ------------ ------------ ------------ ------------ ----------
Total revenues......... 11,550,591 12,051,754 14,299,814 20,324,223 3,346,226 52,063
------------ ------------ ------------ ------------ ------------ ----------
Expenses:
General and
administrative........ 263,524 964,181 1,292,492 997,856 66,112 956
Management and advisory
fees.................. 1,231,905 1,299,999 734,890 2,245,039 205,837 3,543
Depreciation and
amortization.......... -- -- 85,086 17,891 8,641 286
Interest............... 10,294,499 10,489,339 10,879,294 17,452,876 2,875,881 42,965
------------ ------------ ------------ ------------ ------------ ----------
Total expenses......... 11,789,928 12,753,519 12,991,762 20,713,662 3,156,471 47,750
------------ ------------ ------------ ------------ ------------ ----------
Income (Loss) Before
Benefit (Provision)
for Income Taxes...... (239,337) (701,765) 1,308,052 (389,439) 189,755 4,313
Benefit (Provision) for
Federal Income Taxes.. 86,202 205,669 (493,735) 94,504 (61,066) (1,331)
------------ ------------ ------------ ------------ ------------ ----------
Net Income (Loss)....... $ (153,135) $ (496,096) $ 814,317 $ (294,935) $ 128,689 $ 2,982
============ ============ ============ ============ ============ ==========
Other data:
Weighted average number
of shares outstanding
stock outstanding
during period--Class
A...................... 200 200 200 195 180 155
Weighted average number
of shares outstanding
stock outstanding
during period--Class
B...................... 501 -- 1 -- -- --
Total properties owned
at end of period....... n/a n/a n/a n/a n/a n/a
Earnings (loss) per
share--Class A Common
Stock.................. $ (689) $ (2,480) $ 3,664 $ (1,512) $ 715 $ 19
Earnings (loss) per
share--Class B Common
Stock.................. $ (31) n/a $ 81,432 $ -- $ -- $ --
<CAPTION>
Inception
(October 9, 1995)
June 30, through
June 30, June 30, December 31, -------------------------- June 30,
1999 1998 1998 1998 1997 1996
------------- ------------- ----------------- ------------ ------------ -----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Mortgages/notes
receivable............. $290,522,671 $374,482,298 $211,280,226 $374,482,298 $140,781,095 $6,011,478
Receivables, net........ $ 1,125,933 $ -- $ 1,043,527 $ -- $ -- $ 234,125
Total assets............ $304,738,561 $391,783,797 $223,936,076 $391,832,399 $146,311,547 $6,399,857
Total liabilities....... $300,143,224 $388,059,444 $219,991,725 $388,108,046 $146,179,776 $6,396,775
Total equity............ $ 4,595,337 $ 3,724,353 $ 3,944,351 $ 3,724,353 $ 131,771 $ 3,082
</TABLE>
26
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ -- $ -- $ -- $ --
Fees............. -- -- -- 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 -- 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- --------- ---------- -----------
Total Revenue... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 (9,668,502)
----------- ---------- ----------- ---------- --------- ---------- -----------
Expenses:
General and
Administrative... 2,244,408 -- 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 -- 1,681,870 -- -- 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... -- -- -- 88,949 689,425 -- (743,673)(g)
Interest
Expense.......... -- -- -- 92,707 -- 10,294,499 --
State Taxes...... 464,966 -- 464,966 -- -- -- --
Depreciation--
Other............ -- -- -- 77,130 39,032 -- --
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 -- -- -- --
Amortization..... 9,700 -- 9,700 36 -- -- 1,006,877 (h)
Transaction
Costs............ 483,005 -- 483,005 -- -- -- --
----------- ---------- ----------- ---------- --------- ---------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,424,882)
----------- ---------- ----------- ---------- --------- ---------- -----------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... 23,564,432 2,089,441 25,653,873 3,877,654 42,804 (239,337) (6,243,620)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 -- 31,241 -- -- -- --
Gain (Loss) on
Sale of
Properties....... (201,843) -- (201,843) -- -- -- --
Provision For
Losses on
Properties....... (540,522) -- (540,522) -- -- -- --
----------- ---------- ----------- ---------- --------- ---------- -----------
Net Earnings
(Losses) Before
Benefits
(Provision) for
Federal Income
Taxes............ 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,243,620)
Benefit
(Provision) for
Federal Income
Taxes............ -- -- -- (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- --------- ---------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,717,880)
=========== ========== =========== ========== ========= ========== ===========
Other Data:
Earnings Per
Share/Unit....... $ 0.61 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ========== ===========
Book Value Per
Share/Unit....... $ 17.54 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ========== ===========
Dividends Per
Share/Unit....... $ 0.76 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ========== ===========
Cash
distributions
declared......... $28,476,150 $ -- $28,476,150 n/a n/a n/a $ 4,689,252 (s)
=========== ========== =========== ========== ========= ========== ===========
<CAPTION>
Historical
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ ------------------- ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $21,613,405 $ 553,747 (j) $53,124,666
Fees............. 2,616,185 -- (536,852)(k) 2,079,333
Interest and
Other Income..... 16,269,383 708,042 -- 16,977,425
------------ ------------ ------------------- ------------
Total Revenue... 49,843,082 22,321,447 16,895 72,181,424
------------ ------------ ------------------- ------------
Expenses:
General and
Administrative... 9,579,902 1,593,825 (787,964)(l),(m) 10,385,763
Management and
Advisory Fees.... -- 112,161 (112,161)(n) --
Fees to Related
Parties.......... 34,701 -- -- 34,701
Interest
Expense.......... 10,387,206 -- -- 10,387,206
State Taxes...... 464,966 292,633 105,025 (o) 862,624
Depreciation--
Other............ 116,162 -- -- 116,162
Depreciation--
Property......... 4,669,153 2,779,197 1,038,410 (p) 8,486,760
Amortization..... 1,016,613 13,616 -- 1,030,229
Transaction
Costs............ 483,005 1,716,823 -- 2,199,828
------------ ------------ ------------------- ------------
Total Expenses.. 26,751,708 6,508,255 243,310 33,503,273
------------ ------------ ------------------- ------------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... 23,091,374 15,813,192 (226,415) 38,678,151
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 2,589,175 (260,189)(q) 2,360,227
Gain (Loss) on
Sale of
Properties....... (201,843) 1,731,417 -- 1,529,574
Provision For
Losses on
Properties....... (540,522) (338,131) -- (878,653)
------------ ------------ ------------------- ------------
Net Earnings
(Losses) Before
Benefits
(Provision) for
Federal Income
Taxes............ 22,380,250 19,795,653 (486,604) 41,689,299
Benefit
(Provision) for
Federal Income
Taxes............ -- -- -- --
------------ ------------ ------------------- ------------
Net
Earnings(Losses).. $22,380,250 $19,795,653 $ (486,604) $41,689,299
============ ============ =================== ============
Other Data:
Earnings Per
Share/Unit....... n/a n/a n/a $ 0.59
============ ============ =================== ============
Book Value Per
Share/Unit....... n/a n/a n/a $ 17.77
============ ============ =================== ============
Dividends Per
Share/Unit....... n/a n/a n/a $ 0.76
============ ============ =================== ============
Cash
distributions
declared......... $33,165,402 $23,259,008 $(2,645,252)(s) $53,779,158
============ ============ =================== ============
</TABLE>
27
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data
(cont.):
Weighted Average
of Shares
Outstanding
During Period... 37,347,883 -- 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
Outstanding..... 37,348,464 -- 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
earnings to
fixed charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ -- $ -- $ -- $ --
Mortgages/notes
receivable...... $ 63,351,507 $ -- $ 63,351,507 $ -- $ -- $290,522,671 $ --
Receivables/Due
from Related
Parties......... $ 649,972 $ -- $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 (6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ -- $ 1,081,046 $ -- $ -- $ -- $ --
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $28,901,068 (u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ -- $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $35,858,554 (u1),(w)
<CAPTION>
Historical
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
-------------- ------------ --------------------- -----------------
<S> <C> <C> <C> <C>
Other data
(cont.):
Weighted Average
of Shares
Outstanding
During Period... 43,497,883 n/a 27,035,143 70,533,026(r)
============== ============ ===================== =================
Shares
Outstanding..... 43,498,464 n/a 27,035,143 70,533,607
============== ============ ===================== =================
Total properties
owned at end of
period.......... 581 571 n/a 1,152
============== ============ ===================== =================
Ratio of
earnings to
fixed charges... n/a n/a n/a 4.50x
============== ============ ===================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $356,476,210 $100,590,532 (u2) $1,151,879,725
Mortgages/notes
receivable...... $ 353,874,178 $ 3,669,623 $ -- $ 357,543,801
Receivables/Due
from Related
Parties......... $ 9,247,098 $ 871,401 $ (1,323,882)(x) $ 8,794,617
Investment in
joint ventures.. $ 1,081,046 $ 51,051,185 $ 14,171,514 (u2) $ 66,303,745
Total assets.... $1,175,011,680 $459,918,898 $ 78,495,119 (u2),(x) $1,713,425,697
Total
liabilities/minority
interest........ $ 465,485,738 $ 17,114,527 $ (1,323,882)(x) $ 481,276,383
Total equity.... $ 709,525,942 $442,804,371 $ 79,819,001 (u2) $1,232,149,314
</TABLE>
28
<PAGE>
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the Income
Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in Note (c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
29
<PAGE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u).
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,006,877
</TABLE>
(i) Represents the elimination of $1,525,740 in benefits for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
(j) Represents $553,747 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Funds as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Funds:
<TABLE>
<S> <C>
Management fees.............................................. $(112,161)
Reimbursement of administrative costs........................ (424,691)
---------
$(536,852)
=========
</TABLE>
(l) Represents the elimination of $424,691 in administrative costs
reimbursed by the Income Funds to the Advisor.
(m) Represents savings of $363,273 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $112,161 in management fees by the Income
Funds to the Advisor.
(o) Represents additional state income taxes of $105,025 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Funds had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $1,038,410 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Funds to fair value as a result of accounting for
the Acquisition of the Income Funds under the purchase accounting
method. The adjustment to the
30
<PAGE>
basis of the buildings is being depreciated using the straight-line
method over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $260,189
as a result of adjusting the historical basis of the real estate owned
by the Income Funds, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Funds under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Funds is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 which was in effect during the
proforma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from July
1, 1999 through July 31, 1999 as if these restaurant properties had
been acquired on June 30, 1999. Based on historical results through
July 31, 1999, all interest costs related to the borrowings under the
credit facility were eligible for capitalization, resulting in no pro
forma adjustments to interest expense.
31
<PAGE>
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Funds using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Restaurant
Financial
Services
Advisor Group Income Funds Total
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $77,349,216 $47,834,383 $538,493,773 $663,677,372
=========== =========== ============ ============
Share Consideration..... $76,000,000 $47,000,000 $522,623,372 $645,623,372
Cash Consideration...... -- -- 6,162,000 6,162,000
APF Transaction Costs... 1,349,216 834,383 9,708,401 11,892,000
----------- ----------- ------------ ------------
Total Purchase Price.... $77,349,216 $47,834,383 $538,493,773 $663,677,372
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $442,804,371 $461,269,933
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 80,142,382 80,142,382
Net investment in
direct financing
leases............... -- -- 20,448,150 20,448,150
Investment in joint
ventures............. -- -- 14,171,514 14,171,514
Accrued rental
income............... -- -- (18,287,268) (18,287,268)
Intangibles and other
assets............... -- (2,575,792) (785,376) (3,361,168)
Goodwill*............. -- 40,275,088 -- 40,275,088
Excess purchase
price................ 69,018,741 -- -- 69,018,741
----------- ----------- ------------ ------------
Total allocation...... $77,349,216 $47,834,383 $538,493,773 $663,677,372
=========== =========== ============ ============
</TABLE>
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
32
<PAGE>
The APF Transaction costs of $11,892,000 are allocated on a pro rata basis
to each acquisition based on the total purchase price for the acquisitions of
the Advisor, the CNL Financial Services Group and the Income Funds. The excess
purchase price paid for the Advisor to a related party of $69,018,741 was
expensed at June 30, 1999 because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16, "Business
Combinations." Goodwill of $40,275,088 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A................. 8,600
Common Stock (CFA, CFS, CFC)--Class B................. 4,825
Additional Paid-In-Capital (CFA, CFS, CFC)............ 12,568,974
Retained Earnings..................................... 5,883,163
Accumulated distributions in excess of earnings....... 69,018,741
Goodwill for CFC/CFS (Intangible assets).............. 40,275,088
CFC/CFS Organizational Costs/Other Assets........... 2,575,792
Cash to pay APF transaction costs................... 2,183,599
APF Common Stock.................................... 61,500
APF Capital in excess of par value.................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital..................................... 442,804,371
Land and buildings on operating leases................ 80,142,382
Net investment in direct financing leases............. 20,448,150
Investment in joint ventures.......................... 14,171,514
Accrued rental income............................... 18,287,268
Intangibles and other assets........................ 785,376
Cash to pay APF Transaction costs................... 9,708,401
Cash consideration to Income Funds.................. 6,162,000
APF Common Stock.................................... 270,351
APF Capital in excess of par value.................. 522,353,021
(To record acquisition of Income Funds)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the agreement and
plan of merger requires that the Advisor and CNL Restaurant Financial
Services Group have no accumulated or current earnings and profits for
federal income tax purposes at the time of the acquisition.
(x) Represents the elimination by the Income Funds of $1,323,882 in related
party payables recorded as receivables by the Advisor.
33
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income........... $33,129,661 $22,951,799(a) $56,081,460 $ -- $ -- $ -- $ --
Fees............. -- -- -- 28,904,063 6,619,064 418,904 (32,715,768)(b,c)
Interest and
Other Income..... 9,057,376 -- 9,057,376 145,016 574,078 22,238,311 207,144 (d)
----------- ----------- ----------- ----------- ---------- ----------- ------------
Total Revenue... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215 $(32,508,624)
----------- ----------- ----------- ----------- ---------- ----------- ------------
Expenses:
General and
Administrative
Expenses......... 2,798,481 -- 2,798,481 9,843,409 6,114,276 1,425,109 (4,241,719)(e)
Management and
Advisory Fees.... 1,851,004 -- 1,851,004 -- -- 2,807,430 (4,658,434)(f)
Fees to Related
Parties.......... -- -- -- 1,247,278 1,773,406 -- (2,161,897)(g)
Interest
Expense.......... -- -- -- 148,415 -- 21,350,174 --
State Taxes...... 548,320 -- 548,320 19,126 -- -- --
Depreciation--
Other............ -- -- -- 119,923 79,234 -- --
Depreciation--
Property......... 4,042,290 6,246,947(a) 10,289,237 -- -- -- (340,898)(r)
Amortization..... 11,808 -- 11,808 57,077 -- 95,116 2,013,754 (h)
Transaction
Costs............ 157,054 -- 157,054 -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------- ------------
Total Expenses.. 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829 (9,389,194)
----------- ----------- ----------- ----------- ---------- ----------- ------------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, Gain
on
Securitization,
Other Expenses
and Provision for
Losses on
Properties....... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614) $(23,119,430)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... (14,138) -- (14,138) -- -- -- --
Gain on Sale of
Properties....... -- -- -- -- -- -- --
Gain on
Securitization... -- -- -- -- -- 3,694,351 --
Other Expenses... -- -- -- -- -- -- --
Provision For
Loss on
Properties....... (611,534) -- (611,534) -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------- ------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Income Taxes..... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737 (23,119,430)
Benefit/(Provision)
for Federal
Income Taxes..... -- -- -- (6,957,472) 305,641 (246,603) 6,898,434 (i)
----------- ----------- ----------- ----------- ---------- ----------- ------------
Net Earnings
(Losses)........ $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134 $(16,220,996)
=========== =========== =========== =========== ========== =========== ============
Other data:
Earnings Per
Share/Unit....... $ 1.21 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== =========== ============
Book Value Per
Share/Unit....... $ 17.70 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== =========== ============
Dividends Per
Share/Unit....... $ 1.52 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== =========== ============
Cash
distributions
declared ........ $39,449,149 $11,966,904(t) $51,416,053 n/a n/a n/a $9,378,504(t)
=========== =========== =========== =========== ========== =========== ============
Wtd. Avg. Shares
Outstanding...... 26,648,219 7,847,356 34,495,575 n/a n/a n/a 6,150,000
=========== =========== =========== =========== ========== =========== ============
Shares
outstanding...... 37,337,927 -- 37,337,927 n/a n/a n/a 6,150,000
=========== =========== =========== =========== ========== =========== ============
Total properties
owned at end of
period........... 409 100 509 n/a n/a n/a n/a
=========== =========== =========== =========== ========== =========== ============
<CAPTION>
Historical
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income........... $56,081,460 $43,462,064 $ 1,107,494 (j) $100,651,018
Fees............. 3,226,263 -- (737,898)(k) 2,488,365
Interest and
Other Income..... 32,221,925 1,767,773 -- 33,989,698
------------ ------------ ------------------ ---------------
Total Revenue... $91,529,648 $45,229,837 $ 369,596 $137,129,081
------------ ------------ ------------------ ---------------
Expenses:
General and
Administrative
Expenses......... 15,939,556 3,261,776 (1,207,980)(l,m) 17,993,352
Management and
Advisory Fees.... -- 226,177 (226,177)(n) --
Fees to Related
Parties.......... 858,787 -- -- 858,787
Interest
Expense.......... 21,498,589 -- -- 21,498,589
State Taxes...... 567,446 227,933 168,127 (o) 963,506
Depreciation--
Other............ 199,157 -- -- 199,157
Depreciation--
Property......... 9,948,339 5,480,695 2,076,819 (p) 17,505,853
Amortization..... 2,177,755 91,310 -- 2,269,065
Transaction
Costs............ 157,054 315,081 -- 472,135
------------ ------------ ------------------ ---------------
Total Expenses.. 51,346,683 9,602,972 810,789 61,760,444
------------ ------------ ------------------ ---------------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, Gain
on
Securitization,
Other Expenses
and Provision for
Losses on
Properties....... $40,182,965 $35,626,865 $(441,193) $ 75,368,637
Equity in
Earnings of Joint
Ventures/Minority
Interest......... (14,138) 3,569,877 (520,378)(q) 3,035,361
Gain on Sale of
Properties....... -- 2,519,894 -- 2,519,894
Gain on
Securitization... 3,694,351 -- -- 3,694,351
Other Expenses... -- (45,150) -- (45,150)
Provision For
Loss on
Properties....... (611,534) (2,834,338) -- (3,445,872)
------------ ------------ ------------------ ---------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Income Taxes..... 43,251,644 38,837,148 (961,571) 81,127,221
Benefit/(Provision)
for Federal
Income Taxes..... -- -- -- --
------------ ------------ ------------------ ---------------
Net Earnings
(Losses)........ $43,251,644 $38,837,148 $ (961,571) $ 81,127,221
============ ============ ================== ===============
Other data:
Earnings Per
Share/Unit....... n/a n/a n/a $ 1.20
============ ============ ================== ===============
Book Value Per
Share/Unit....... n/a n/a n/a $ 17.77
============ ============ ================== ===============
Dividends Per
Share/Unit....... n/a n/a n/a 1.51
============ ============ ================== ===============
Cash
distributions
declared ........ $60,794,557 $53,610,357 $(12,382,845)(t) $102,022,069
============ ============ ================== ===============
Wtd. Avg. Shares
Outstanding...... 40,645,575 n/a 27,035,143 $ 67,680,718(s)
============ ============ ================== ===============
Shares
outstanding...... 43,487,927 n/a 27,035,143 70,523,070
============ ============ ================== ===============
Total properties
owned at end of
period........... 509 573 n/a 1,082
============ ============ ================== ===============
Ratio of earnings
to fixed
charges.......... 79.97x n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== =========== ============
Ratio of earnings
to fixed
charges.......... n/a n/a n/a 4.76x
============ ============ ================== ===============
</TABLE>
34
<PAGE>
(a) Represents rental and earned income of $22,951,799 and depreciation expense
of $6,246,947 as if restaurant properties that had been operational when
they were acquired by APF from January 1, 1998 through July 31, 1999 had
been acquired and leased on January 1, 1998. No pro forma adjustments were
made for any restaurant properties for the periods prior to their
construction completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Income
Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial
Corporation. On a historical basis, CNL Financial Services, Inc. records
all of the loan origination fees received as revenue. For purposes of
presenting pro forma financial statements of these entities on a combined
basis, these loan origination fees are required to be deferred and
amortized into revenues over the term of the loans originated in accordance
with generally accepted accounting principles. Total loan origination fees
received by CNL Financial Services, Inc. during the year ended December 31,
1998 of $3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services, Inc. from borrowers during the year ended December 31,
1998, which were deferred for pro forma purposes as described in (c). These
deferred loan origination fees are being amortized and recorded as interest
income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
35
<PAGE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in Note (u)
below.
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,013,754
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
(j) Represents $1,107,494 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Funds as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Funds:
<TABLE>
<S> <C>
Management fees.............................................. $(226,177)
Reimbursement of administrative costs........................ (511,721)
---------
$(737,898)
=========
</TABLE>
(l) Represents the elimination of $511,721 in administrative costs reimbursed
by the Income Funds to the Advisor.
(m) Represents savings of $696,259 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $226,177 in management fees by the Income
Funds to the Advisor.
(o) Represents additional state income taxes of $168,127 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1998 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Funds
had been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $2,076,819 as a result of
adjusting the historical basis of the real estate owned indirectly by the
Fund through joint venture or tenancy in common arrangements with
affiliates or unrelated third parties, to fair value as a result by the
Income Funds to fair value as a result of accounting for the Acquisition of
the Income Funds under the purchase accounting method. The adjustment to
the basis of the buildings is being depreciated using the straight-line
method over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $520,378 as
a result of adjusting the historical basis of the real estate owned by the
Income Funds, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Funds under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Funds is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
36
<PAGE>
(r) Represents the decrease in depreciation expense of $340,898 as a result of
eliminating acquisition fees (see Note (b) to the Notes and Management's
Assumptions to Unaudited Pro Forma Financial Statements for the six months
ended June 30, 1999) between APF and the Advisor which on a historical
basis were capitalized as part of the basis of the building.
(s) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a one-
for-two reverse stock split proposal and a proposal to increase the number
of authorized common shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The proforma distributions were based on APF's historical monthly
distribution rate of $.12708 which was in effect during the pro forma
period presented.
37
<PAGE>
RISK FACTORS
Before you decide how to vote on the Acquisition, you should be aware that
there are material risks involved in the Acquisition, including those described
below. In addition to the other information included in this consent
solicitation, you should carefully consider the following material risk factors
in determining whether to vote in favor of the Acquisition.
You may be subject to the following risks if you become an
APF stockholder in the Acquisition.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
There has been no prior market for the APF Shares, and it is possible that
the APF Shares may trade at prices substantially below the exchange value or
the historical per share book value of the assets of APF. The APF Shares have
been approved for listing on the NYSE, subject to official notice of issuance.
Prior to listing, the existing APF stockholders have not had an active trading
market in which they could sell their APF Shares. Additionally, any Limited
Partners of the Income Funds who become APF stockholders as a result of the
Acquisition, will have transformed their investment in non-tradable units into
an investment in freely tradable APF Shares. Consequently, some of these
stockholders may choose to sell their APF Shares upon listing at a time when
demand for APF Shares may be relatively low. The market price of the APF Shares
may be volatile after the Acquisition, and the APF Shares could trade at
amounts substantially less than the exchange value as a result of increased
selling activity following issuance of the APF Shares, the interest level of
investors in purchasing the APF Shares after the Acquisition and the amount of
distributions to be paid by APF.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have four material conflicts of interest in the
Acquisition. First, we, James M. Seneff, Jr. and Robert A. Bourne, who also sit
on the Board of Directors of APF, and CNL Realty Corp., an entity whose sole
stockholders are Messrs. Seneff and Bourne, are the three general partners of
the Income Funds. As Board members of APF, Messrs. Seneff and Bourne have a
different interest in the completion of the Acquisition which may conflict with
the interests of the Limited Partners of the Income Funds or with their own
positions as the general partners of the Income Funds. Second, as stockholders
of APF, Messrs. Seneff's and Bourne's interests in the completion of the
Acquisition may conflict with yours as a Limited Partner of the Income Funds
and with their own as general partners of the Income Funds. Third, assuming all
of the Income Funds are acquired in the Acquisition, we will receive an
aggregate of 139,519 APF Shares. For information on the number of APF Shares to
be paid to us if your Income Fund is acquired, if any, please see the
supplement relating to that Income Fund accompanying this consent solicitation.
Finally, in the event that one or more Income Funds is not acquired, we may be
required to pay all or a substantial portion of the Acquisition costs allocated
to such Income Funds. When you consider the recommendation of Messrs. Seneff
and Bourne, as the individual general partners of your Income Fund, keep in
mind that their interests may differ significantly from your interests with
respect to the Acquisition.
Existing stockholders will be diluted by the public offering.
Concurrently with or shortly after the Acquisition, APF intends to engage in
an underwritten public offering of APF Shares, if market conditions permit.
This future sale of APF Shares could adversely affect the market price of the
APF Shares. Based on the number of APF Shares outstanding at September 15, 1999
and assuming APF had acquired the Income Funds as of that date, APF will have
70,533,607 APF Shares
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outstanding. This amount already accounts for estimated expenses to be paid by
the Income Funds in the Acquisition in the form of a reduction in the number of
APF Shares paid to each Income Fund. Of such outstanding shares, 64,373,607
will be freely tradable in the open market, including any APF Shares you
receive as a Limited Partner.
A majority vote of the Limited Partners of Income Funds binds all Limited
Partners.
Each Income Fund will be acquired by APF if the Limited Partners of that
Income Fund who hold a majority interest in the outstanding units vote in favor
of the Acquisition. Such approval will bind all of the Limited Partners in the
Income Fund, including you or any other Limited Partners who voted against or
abstained from voting with respect to the Acquisition.
Partners have no cash appraisal rights.
If your Income Fund approves the Acquisition and you have voted "Against" it
and you do not wish to receive APF Shares, you will have the option to receive
five year notes with interest at 7% per year instead, as your portion of the
consideration received by your Income Fund. The amount of notes you will
receive will be equal to 97% of your portion of the APF Share consideration
that would have otherwise been paid to your Income Fund, based on the exchange
value. There likely will be no public market for the notes, and, therefore,
they may sell at prices substantially below their issuance price. As a holder
of notes, you are likely to receive the full face amount of the notes only if
you hold the notes to maturity, which is approximately five years after the
Acquisition, unless APF chooses to repay the notes prior to the maturity date
in 2005, or to the extent that APF is required to prepay the notes in
accordance with their terms. Because the notes are unsecured obligations of
APF, they will be subordinated to all secured debt of APF. To illustrate what
this means, if you assume that the Acquisition and the acquisition of the CNL
Restaurant Businesses had been consummated on June 30, 1999 and that all of the
Income Funds were acquired, then as of that date, APF would have had aggregate
consolidated secured liabilities of approximately $268 million which APF would
have to repay before repaying the notes.
The size of APF after the Acquisition is uncertain.
Although APF is currently an operating company that owns an interest in
1,193 restaurant properties, at the time that you and the other Limited
Partners are asked to vote on the Acquisition, there will be several
uncertainties in the transaction that will preclude you from making a complete
evaluation of it, most importantly, which Income Funds will approve the
Acquisition and be acquired by APF, and thus, which restaurant properties will
be acquired by APF. Such uncertainties will affect the post-Acquisition size
and scope of APF.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition involves a fundamental change in the nature of your
investment. Your investment will change from constituting an interest in one or
more Income Funds, each of which has a fixed portfolio of restaurant properties
in which you participate in the profits from the rental of its restaurant
properties, to holding common stock of APF, an operating company, that will own
an interest in 1,764 restaurant properties, assuming all of the Income Funds
and the CNL Restaurant Businesses were acquired as of June 30, 1999. The risks
inherent in investing in an operating company such as APF include that APF may
invest in new restaurant properties that are not as profitable as APF
anticipated, it may incur substantial indebtedness to make future acquisitions
of restaurant properties that it may be unable to repay and it may make
mortgage loans to prospective operators of national and regional restaurant
chains that may not have the ability to repay. These risks are more fully
discussed below under "--Real Estate/Business Risks."
Also, an investment in APF may not outperform your investment in an Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale of the Income Fund's
assets, to an investment in an entity in which you may realize the value of
your
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investment only through the sale of your APF Shares, not from liquidation
proceeds from restaurant properties. Continuation of your Income Fund would, on
the other hand, permit you eventually to receive liquidation proceeds, if any,
from the sale of the Income Fund's restaurant properties, and your share of
these sale proceeds could be higher than the amount realized from the sale of
your APF Shares or from payments on any notes, if you elect to receive notes.
The loss of a significant tenant would adversely affect APF's income.
S&A Properties Corporation accounted for 10% or more of APF's rental,
earned, investment and interest income for the six months ended June 30, 1999.
Assuming APF had acquired all of the Income Funds and the CNL Restaurant
Businesses as of that date, such tenant would have accounted for 5.45% of APF's
combined historical rental, earned, investment and interest income for the six
months ended June 30, 1999. If S&A Properties Corporation were to default on
its lease obligations or declare bankruptcy, APF may have significantly reduced
rental, earned and interest income until it could lease the restaurant property
or properties to a new tenant or tenants.
Tenants of two significant restaurant chains have filed for bankruptcy
protection.
In October and November 1998, tenants of 38 Boston Market restaurant
properties owned by APF and the Income Funds filed voluntary petitions for
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As of August 31, 1999,
10 of these restaurant properties remained closed, two restaurant properties
had been sold, six properties had been re-leased and APF and the relevant
Income Funds continued to receive lease payments on the remaining 20 restaurant
properties. For the quarter ended June 30, 1999 and assuming the acquisition of
the CNL Restaurant Businesses and the Acquisition, Boston Market restaurant
properties represented approximately 2.6% of APF's total rental, earned and
interest income. In June 1998, the tenant of 36 Long John Silver's restaurant
properties of the Income Funds filed a voluntary petition for bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code. As of August 31, 1999, five of these
restaurant properties remained closed, three restaurant properties had been
sold, eight properties had been re-leased and the Income Funds continued to
receive lease payments on the remaining 20 restaurant properties. For the six
months ended June 30, 1999 and assuming the Acquisition of all the Income Funds
and the CNL Restaurant Businesses, Long John Silver's restaurant properties
represented 1.6% of APF's total rental, earned and interest income.
APF would be required to pay termination fees in its interest rate swap
contracts if it terminates such contracts early.
The CNL Restaurant Financial Services Group has invested, and APF will
continue to invest, in derivative financial securities and instruments for the
sole purpose of providing protection against fluctuations in interest rates
related to its borrowings. From the time that APF's fixed rate loans are
originated until the time that they are sold through a securitization
transaction, APF will hedge against fluctuations in interest rates through the
use of derivative financial instruments. At June 30, 1999, the CNL Restaurant
Financial Services Group had outstanding interest rate swap contracts having a
principal amount of $207.8 million. Based on prevailing interest rates, the CNL
Restaurant Financial Services Group would have received approximately $5.9
million if it had terminated the swap contracts at June 30, 1999. APF intends
to terminate these agreements upon securitization of the fixed-rate mortgage
loans, at which time both the gain or loss on the securitization and the gain
or loss on the hedge will be measured and recognized.
APF is subject to several risks associated with its hedging transactions,
including credit, legal enforceability and basis risks.
Hedging poses a credit risk. In the event that APF purchases interest rate
caps, swaps or other interest rate agreements to hedge against periodic rate or
payment caps on its mortgage loans and other income producing assets, and the
provider of interest rate agreements becomes financially unsound or insolvent,
APF may be forced to replace the interest rate agreements with such provider
and may take a loss on such interest rate agreements. Although APF intends to
purchase interest rate agreements only from financially sound institutions and
to monitor the financial strength of such institutions on a periodic basis,
there is no assurance that APF can avoid such third party risks.
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Hedging poses a legal enforceability risk. APF accepts legal enforceability
risk in entering into interest rate swap and cap agreements. No assurance can
be given as to the enforceability of these agreements. An agreement that is not
enforceable may subject APF to unexpected interest rate risk and have a
material adverse affect on results of operations.
Hedging poses a basis risk. To the extent APF utilizes derivatives
transactions to hedge another liability, such transaction will also subject APF
to basis risk. Basis risk refers to the exposure of a transaction or portfolio
to differences in the price performance of the derivatives it contains and
their hedges. If APF enters into a transaction in which an instrument and its
hedges are not perfectly correlated, changes in applicable indices or other
price movements will result in a change (which include a loss) in the market
value of the combined hedge position.
Under current tax law, any payment received from derivatives used to hedge
liabilities that were incurred to acquire real estate properties is treated as
qualifying REIT income under the REIT tax requirements. To the extent a payment
is received under a derivative used to hedge an asset, it will not constitute
qualifying REIT income.
An increase in interest rates could adversely affect the price of APF Shares.
Like the Income Funds, APF owns restaurant properties that are subject to
long-term, triple-net leases. APF also makes mortgage loans on restaurant
properties, typically at fixed rates of interest. Accordingly, the public
valuation of APF Shares will likely be based on the earnings derived by APF
from rental and mortgage income with respect to the restaurant properties and
not from the underlying appraised value of the restaurant properties and
mortgage loans themselves. For instance, if interest rates are greater than the
percentage return you receive on an APF Share, the price of an APF Share will
likely decrease because potential investors may not be willing to invest in APF
Shares that would yield less than the market rates on interest-bearing
securities, such as bonds. As a result, interest rate fluctuations may affect
the value of your APF Shares, assuming there is an active trading market in the
APF Shares.
APF's officers and directors have more limited liability than we do as your
Income Fund's general partners.
As a stockholder of APF, you will have different rights and remedies against
APF, its officers and directors than you have against us, as the general
partners of your Income Fund. The Articles of Incorporation and bylaws of APF
provide that an officer's or director's liability to APF, its stockholders or
third parties for monetary damages may be limited as permitted under Maryland
law. Under Maryland law, the Articles of Incorporation and bylaws, APF
generally is obligated to indemnify its officers and directors for reasonable
expenses that may be incurred in connection with their service to APF.
Specifically, APF will indemnify any director made a party to any legal
proceeding because of his or her conduct in performing his or her duties as a
director. However, APF will not indemnify its director if it has been
determined that 1) the act or omission of the director was material to the
matter giving rise to the proceeding and that the act or omission was committed
in bad faith or was a result of active and deliberate dishonesty, 2) the
director actually received an improper personal benefit in money, property, or
service, or 3) in the case of any criminal proceeding, the director had
reasonable cause to believe that the act or omission was unlawful. For purposes
of determining whether a director is entitled to indemnification, such
determination may be made by the Board of Directors by a majority vote of a
quorum consisting of directors not parties to the proceeding, by special legal
counsel selected by the Board of Directors, or by APF stockholders. In
addition, APF may indemnify its officers to the same extent that it may
indemnify its directors. This indemnification could limit the legal remedies
available to APF, to you and to other stockholders of APF after the Acquisition
against any officers or directors of APF.
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As general partners, our fiduciary duties to you as Limited Partners may be
greater than our fiduciary duties as directors of APF to you once you become
APF stockholders.
As the general partners of the Income Funds, we are accountable as
fiduciaries to the Income Funds, and we owe each Income Fund and its Limited
Partners a duty of loyalty and a duty of care and are required to exercise good
faith and fair dealing in conducting the Income Funds' affairs. James M.
Seneff, Jr. and Robert A. Bourne are members of the Board of Directors of APF.
As directors of APF, their duty is to perform their job in good faith, in a
manner that they reasonably believe to be in the best interests of APF and with
the care of an ordinary prudent person in a like position. Generally, directors
of APF who act in such a manner will not be liable to APF for monetary damages
arising from their activities. Some courts have suggested that the duties of a
general partner to the limited partners in a limited partnership is greater
than the fiduciary duties owed by a director of a corporation to a stockholder.
If this is the case, it is possible that the standard of care to which Messrs.
Seneff and Bourne are held as directors of APF in which you are a stockholder
will be lower than the standard of care to which they have been held as the
general partners of the Income Fund.
Limited Partners have filed two lawsuits against us and APF in connection with
the Acquisition.
Over the last several years, business reorganizations involving the
combination of several partnerships into a single entity occasionally have
given rise to investor lawsuits. These lawsuits have involved claims against
the general partners of the partnerships being acquired, the partnerships
themselves and related persons involved in the structuring of, or benefiting
from, the conversion or reorganization, as well as claims against the surviving
entity and its directors and officers. For example, eight Limited Partners of
several Income Funds have filed two lawsuits against us, APF and certain
entities recently acquired by APF alleging, among other things, breaches of our
fiduciary duties in connection with the Acquisition and that APF aided and
abetted us in breaching our fiduciary duty. In both lawsuits the plaintiffs are
requesting equitable relief that would enjoin the proposed transaction and are
seeking unspecified damages. Such lawsuits could delay the closing of the
Acquisition or result in substantial damage claims against us, APF and the
Operating Partnership. Each Income Fund is obligated to indemnify us for claims
against us arising from our role as general partners unless we are guilty of
negligence, fraud, misconduct or breach of fiduciary duty. Because the
Operating Partnership will be acquiring the Income Funds through the
Acquisition, APF and the Operating Partnership indirectly will be subject to
the indemnification obligations of the Income Funds to us and any obligations
of the Income Funds to pay damages to the extent not covered by any available
insurance.
APF could lose revenues or incur significant costs if its software or hardware
systems fail or if those systems of its clients fail due to year 2000 problems.
Any failure of APF's systems to be Year 2000 compliant could reduce APF's
revenues and the value of the APF Shares. Significant uncertainties exist in
the software industry concerning the potential effects associated with the
failure of computer systems and software to be Year 2000 compliant. APF has
identified needs for and has implemented upgrades for certain hardware
equipment. In addition, APF has identified certain software applications that
will require upgrades to become Year 2000 compliant. APF, however, cannot be
sure that the upgrade solutions provided by the vendors of the software and
hardware have addressed all possible Year 2000 issues or that APF is aware of
all potential Year 2000 problems. For instance, the computer systems of its
clients may also be disrupted by Year 2000 problems that could lead to
disruptions in the clients' ability to make timely rental or mortgage payments
to APF. APF plans to address all significant Year 2000 issues prior to APF
being affected by them; therefore, it has not developed a comprehensive
contingency plan and, unless additional material Year 2000 problems are
identified, does not intend to develop a comprehensive contingency plan.
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Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
In its acquisition of the CNL Restaurant Businesses, APF acquired the CNL
Restaurant Financial Services Group, which consisted of two affiliated
entities, CNL Financial Services, Inc. and CNL Financial Corp. Prior to its
acquisition, this group made mortgage loans to operators of national and
regional restaurant chains comparable to those who are currently tenants of
APF.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions, interest rate fluctuations and adverse performance of its loan
portfolio or servicing responsibilities. If APF is unable to access the
securitization market, it would have to retain as assets those mortgage loans
it would otherwise securitize, thereby remaining exposed to the related credit
and repayment risks on such mortgage loans. Under such circumstances, APF would
also have to seek a different source for funding its operations than
securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized as discussed below.
The retained subordinated interests that APF holds in securitizations may not
be recoverable.
APF also owns fully subordinated interests in the loans it securitizes.
Accordingly, the subordinated interests carry a greater risk than more senior
securities as it relates to the nonpayment of the loans. At June 30, 1999,
assuming the acquisition of the CNL Restaurant Businesses had occurred as of
that date, APF had approximately $22.6 million invested in such subordinated
interests, which represented less than 2% of APF's total assets. A portion of
these subordinated interests is adjusted to market value each calendar quarter
with material changes in value impacting APF's financial statements. Although
no material changes have occurred to
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date, APF may, in the future, recognize material changes that would result in a
reduction in their value on APF's financial statements. Such reductions could
negatively impact APF's net income and total assets in the future.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.78%. If all of the Income Funds were acquired as of that date, APF's debt
service ratio would have been 5.30x and its ratio of debt-to-total assets would
have been 24.54%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may reduce the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of any restaurant chain, may adversely affect
the economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
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. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funds available for stockholder
distribution.
APF's management believes that it operates in a manner that enables APF to
meet the requirements for qualification as a REIT for federal income tax
purposes and will continue to operate in this manner. A REIT generally is not
subject to federal taxes at the corporate level on income it distributes to its
stockholders, as long as it distributes at least 95% of its taxable income to
its stockholders annually. In addition, the REIT must meet certain asset tests
at the end of each calendar quarter. APF has not requested, and does not plan
to request, a ruling from the Internal Revenue Service, or IRS, that it
qualifies as a REIT. It has received an opinion, however, from its tax counsel,
Shaw Pittman, that it has met the requirements for qualification as a REIT for
its taxable years ended through 1998 and that it is in a position to continue
such qualification. Shaw Pittman's opinion is based upon representations made
by APF regarding relevant factual matters, existing provisions of the Internal
Revenue Code of 1986, as amended, applicable regulations issued under the Code,
and reported administrative and judicial interpretations of the Code and
regulations, upon Shaw Pittman's review of relevant documents and upon the
assumption that APF will operate in the manner described in this consent
solicitation.
You should be aware, however, that opinions of counsel are not binding on
the IRS or on any court. Furthermore, the conclusions stated in the opinions
are conditioned on, and APF's continued qualification as a REIT will depend on,
APF's management meeting various requirements that are discussed in more detail
under the heading "Federal Income Tax Considerations--Taxation of APF"
beginning on page 180.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
APF's leases of restaurants where APF does not own the underlying land may not
be considered leases by the IRS, which could result in less favorable tax
consequences.
APF's tax counsel, Shaw Pittman, is of the opinion that the majority of
leases of restaurant properties where APF owns the underlying land constitute
leases for federal income tax purposes. However, with respect
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to the restaurant properties where APF does not own the underlying land, Shaw
Pittman is unable to render such an opinion. If the lease of a restaurant
property does not constitute a lease for federal income tax purposes, it will
be treated as a financing arrangement. In the opinion of Shaw Pittman, the
income derived from such a financing arrangement would satisfy the 75% and the
95% gross income tests for REIT qualification because it would be considered to
be interest on a loan secured by real property. Nevertheless, the
recharacterization of a lease in this fashion may have an adverse effect on
APF's ability to grow from internally generated funds. In this instance, APF
would not be entitled to claim depreciation deductions with respect to such
restaurant property. APF's inability to deduct depreciation expenses would
cause taxable income to increase by an amount equal to the disallowed
depreciation deduction. Because the REIT tax rules require that 95% of all
taxable income be distributed to stockholders, APF would be required to
distribute cash that would otherwise be used to invest in additional restaurant
properties and to make additional mortgage loans. As of June 30, 1999, APF
leased 37 restaurant properties, with an aggregate book value of $27,155,673,
for which it did not own the underlying land.
APF's secured equipment leases are not considered qualified real estate assets
under the REIT rules, and, if APF has secured equipment leases in excess of
certain percentages of its assets, it would violate the REIT rules.
In order to qualify as a REIT, at least 75% of the value of APF's assets
must consist of investments in real estate, investments in other REITs, cash
and cash equivalents and government securities, which we refer to as qualified
real estate assets. APF provides financing for furniture, fixtures and
equipment used at the restaurant through leases or loans. This includes both
kitchen and dining room fixtures and equipment. For federal income tax
purposes, APF's secured equipment leases would not be considered qualified real
estate assets. Therefore, the value of the secured equipment leases, together
with any other property that is not considered a qualified real estate asset,
must represent, in the aggregate, less than 25% of the value of APF's total
assets.
In addition, APF may not own securities in, or make secured equipment loans
to, any one company that is not a REIT, which securities or secured equipment
loans, in the aggregate have a value in excess of 5% of the value of APF's
total assets. For federal income tax purposes, the secured equipment leases
would be considered loans, and the value of the secured equipment leases
entered into with any particular tenant under a lease or borrower under a
mortgage loan must not represent in excess of 5% of the value of APF's total
assets.
The 25% and 5% tests are determined at the end of each calendar quarter. If
at the end of any calendar quarter plus a 30-day cure period APF fails to
satisfy either test, it will cease to qualify as a REIT.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to make sufficient distributions and maintain its
status as a REIT.
Limitations on share ownership required to maintain APF's REIT status may deter
attractive tender offers for APF Shares.
For the purposes of protecting its REIT status, APF's Articles of
Incorporation limit the ownership by any single stockholder of any class of APF
capital stock, including APF Shares, to 9.8% of the issued and outstanding
equity securities. The Articles of Incorporation also prohibit anyone from
buying shares if the
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purchase would result in APF losing its REIT status. For example, APF would
lose its REIT status if it had fewer than 100 different stockholders or if five
or fewer stockholders, applying broad attribution rules of the Code, owned 50%
or more of the APF Shares. These restrictions may discourage a change in
control of APF, deter any attractive tender offers for APF Shares or limit the
opportunity for you or other stockholders to receive a premium for your APF
Shares.
REIT legislation could have an adverse effect on APF's ability to enter into
securitization transactions involving non-mortgage loans.
On August 5, 1999, the Senate and the House of Representatives approved the
Taxpayer Refund and Relief Act of 1999, which was vetoed by President Clinton
on September 23, 1999. If enacted, the proposed legislation would have
implemented a number of changes to the Code's treatment of REITs.
One of the provisions of this legislation would have prohibited APF from
holding securities possessing greater than 10% of the voting power or the value
of any issuer. Because the term "securities" includes loans that are not
secured by real property, under such a regulatory scheme, APF would not be
permitted to make loans with principal amounts exceeding 10% of the value of a
borrower, unless the loans were secured by real property. This restriction
would have impacted APF's ability to enter into securitization transactions
involving non-mortgage loans. It would also have required APF to dispose of any
non-mortgage loans the principal amounts of which exceeded 10% of the value of
their issuers, including, for this purpose, any equipment leases treated as
loans for federal income tax purposes.
It is not clear whether legislation similar to this legislation will be
enacted and, if it is, which provisions will be included and what their
effective dates will be. Additional proposals may be made by the Clinton
Administration or by members of Congress. It is impossible to predict the
nature of those proposals, whether they would be enacted, and their effect on
APF. Furthermore, we cannot predict with certainty that the changes in
legislation will not have a material adverse effect on APF.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
There are also risk factors related to restaurant properties to which you will
continue to be subject as an APF stockholder.
If your Income Fund approves the Acquisition, you and the other Limited
Partners will be subject to the risks described above, to which you are not
currently exposed as a Limited Partner of your Income Fund. The following risk
factors describe the risks to which you, as a Limited Partner in an Income
Fund, are already exposed, and to which you will continue to be exposed if your
Income Fund approves the Acquisition.
APF may not be able to re-lease restaurant properties upon the expiration of
leases.
The leases of APF's existing restaurant properties expire on dates ranging
from 2002 to 2024. Assuming the Acquisition of all of the Income Funds, the
leases of APF's restaurant properties will expire on dates ranging from 1999 to
2024. Upon the expiration of a lease, APF may not be able to re-lease the
related restaurant property at a comparable lease rate or without incurring
additional expenses.
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Many tenants have purchase rights and rights of first offer that may restrict
APF's control over the sale of the restaurant properties.
A number of the leases of the restaurant properties give the tenant the
right to purchase the restaurant property from APF under conditions specified
in the lease that are negotiated on a tenant-by-tenant basis. The price at
which the tenant could make the purchase is generally the greater of APF's
original cost plus a designated amount, or fair market value of the restaurant
property based on an appraisal. Although APF would generally receive a price
equal to fair market value of the restaurant property, this right to purchase
may prevent APF from completely controlling the sale of those restaurant
properties. Additionally, a number of the leases give the tenants of the
restaurant properties the right to purchase the related restaurant property
from APF on the same terms as an offer from a third party. Thus, in these
instances, even if APF receives an offer to purchase a restaurant property from
an independent third party, it may not be able to sell the restaurant property
freely without first offering the property to the tenant. This "right of first
offer" presents another restriction on APF's control over the disposition of
the restaurant properties.
The business of owning and developing real estate properties involves risks.
Like your investment in the Income Funds, if you become a stockholder in
APF, your investment will be subject to the risks of investing in real
property. In general, a downturn in the national or local economy, changes in
the zoning or tax laws or the availability of financing could affect the
performance and value of the restaurant properties. In particular, since APF
leases properties on which restaurant chains operate, you should be aware that
several factors relating to the restaurant business could affect the value of
such properties and the ability of the tenants to pay their rent. For instance,
the increased costs of food products, increased costs of labor or a labor
shortage, fuel shortages, quality of restaurant management, limited alternative
uses for the buildings on the restaurant properties and changing consumer
habits could all adversely affect the restaurant properties. Also, because real
estate is relatively illiquid, APF may not be able to respond promptly to
adverse economic or other conditions by varying its real estate holdings.
Compliance with various environmental laws could be costly to APF.
Various federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of hazardous substances on
a property. Such laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the release of hazardous
substances. The presence of, or the failure to properly remediate hazardous
substances may adversely affect the ability of tenants to operate restaurant
chains and may hinder APF's ability to borrow against contaminated restaurant
properties. Also, the presence of hazardous wastes on a property could result
in personal injury or similar claims by private plaintiffs. We cannot be sure
that future laws or regulations will not impose an unanticipated material
environmental liability on any of the restaurant properties or that the tenants
of the restaurant properties will not affect the environmental condition of the
restaurant properties.
The costs of complying with these environmental laws for APF's restaurant
properties may adversely affect APF's operating costs and the value of the
restaurant properties. In order to comply with the various environmental laws,
APF has obtained satisfactory Phase I environmental site assessments or has
environmental insurance in place for all of the restaurant properties owned by
APF, and APF intends to do the same for all restaurant properties that it
purchases in and following the Acquisition.
Trends in the restaurant industry could adversely affect the performance of the
restaurant chains that lease from APF.
The restaurant chains operated on the restaurant properties are generally
within the fast-food, family-style or casual dining segments of the restaurant
industry. Whether or not fast-food, family-style or casual dining restaurants
are successful will depend largely on the restaurant operators' ability to
adapt to trends in the restaurant industry, including greater competition among
restaurants, the consolidation of fast-food chains,
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industry overbuilding, dining patterns, the introduction of new concepts and
menu items, the availability of labor and general economic conditions. The
success of a particular restaurant chain may affect the income that APF derives
from its restaurant properties.
The failure rate of franchised restaurant chains may adversely affect APF's
business.
The chain restaurant business is highly competitive. The principal areas of
competition for restaurant chains are segment, concept, product, price, value,
quality, service and convenience. Increased competition among operators of
national and regional restaurant chains could adversely affect income from a
given restaurant chain, and such a decline in income could have an adverse
affect on tenant's or borrower's ability to make payments to APF under a lease
or loan. Over the last five years, and assuming the completion of the
Acquisition immediately prior to such period, less than 2.1% of an average
restaurant property portfolio of 746 properties had "failed," meaning that such
properties became vacant and ceased rent payments to APF.
APF may not be able to recover potential renovation costs associated with
restaurant failure.
When a restaurant property is vacated, APF attempts to lease the property to
other franchisees of that restaurant chain to minimize renovation costs. APF
does, however, lease vacant properties to operators of other restaurant chains
when necessary. Renovation costs vary widely by restaurant chain and restaurant
property. Whether APF or the new tenant pays for the renovations is a matter of
negotiations for that lease. If APF pays for renovations up front, it factors
that cost into the rents offered to the new tenant. If the new tenant is not
able to make payments under the negotiated lease, APF may not recover the cost
of renovations made to that property, which may have an adverse affect on APF's
business.
As described above, tenants of Boston Market restaurant properties filed
voluntary petitions for bankruptcy in October and November 1998. As of August
31, 1999, seven of these restaurant properties remain closed. APF pays and will
continue to pay for property taxes and insurance on these closed restaurant
properties until they are sold or re-leased. APF is not aware of any expanding
franchisees in the Boston Market system. Thus, these restaurant properties may
require renovation before they are sold or re-leased.
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BACKGROUND OF THE ACQUISITION
Background of the Income Funds
Formation of the Income Funds. During the latter half of the 1980s and
through the first half of the 1990s, we sponsored public offerings of 18
Florida limited partnerships, including the Income Funds, all of which were
formed to acquire restaurant properties triple-net leased to restaurant chains.
The Income Funds raised capital of $550 million in 16 registered public
offerings and as of June 30, 1999, had more than 40,000 limited partners.
The table below sets forth the number of restaurant properties owned,
capital raised and distributions made by each of the Income Funds since such
Income Fund's inception through June 30, 1999:
<TABLE>
<CAPTION>
Total of
Total Distributions
Distributions Estimated and Estimated
to Value of Value
Total Limited Partners APF Shares per of APF Shares Date of Last
Number of Aggregate Per Average Average $10,000 Combined per Admission
Restaurant Distributions $10,000 Limited Original Limited Average $10,000 of Original
Properties Total Capital to Limited Partner Original Partner Limited Partner Partners
Income Fund Owned(1) Raised Partners Investment Investment(2) Investment (Mo./Yr.)
- ----------- ---------- ------------- ------------- ---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CNL Income Fund,
Ltd................ 17 $15,000,000 $19,881,753 $13,225 $ 7,616 $20,841 Dec. 1986
CNL Income Fund II,
Ltd................ 37 25,000,000 29,395,142 11,758 9,459 21,217 Aug. 1987
CNL Income Fund III,
Ltd................ 26 25,000,000 27,627,387 11,051 8,228 19,279 Apr. 1988
CNL Income Fund IV,
Ltd................ 38 30,000,000 30,041,711 10,014 8,782 18,796 Dec. 1988
CNL Income Fund V,
Ltd................ 23 25,000,000 24,606,567 9,843 8,087 17,930 Jun. 1989
CNL Income Fund VI,
Ltd. .............. 42 35,000,000 30,379,226 8,690 10,431 19,121 Jan. 1990
CNL Income Fund VII,
Ltd. .............. 38 30,000,000 24,227,623 8,076 10,441 18,517 Aug. 1990
CNL Income Fund
VIII, Ltd. ........ 36 35,000,000 27,759,646 7,931 11,263 19,167 Mar. 1991
CNL Income Fund IX,
Ltd. .............. 40 35,000,000 24,635,593 7,039 10,353 17,392 Sept. 1991
CNL Income Fund X,
Ltd. .............. 49 40,000,000 26,443,145 6,611 10,393 17,004 Apr. 1992
CNL Income Fund XI,
Ltd. .............. 40 40,000,000 23,965,146 5,991 10,763 16,754 Oct. 1992
CNL Income Fund XII,
Ltd. .............. 47 45,000,000 24,212,547 5,381 10,405 15,786 Apr. 1993
CNL Income Fund
XIII, Ltd. ........ 47 40,000,000 19,428,412 4,857 9,608 14,465 Sept. 1993
CNL Income Fund XIV,
Ltd. .............. 56 45,000,000 19,704,705 4,379 9,481 13,860 Mar. 1994
CNL Income Fund XV,
Ltd. .............. 50 40,000,000 15,565,947 3,891 9,232 13,123 Sept. 1994
CNL Income Fund XVI,
Ltd. .............. 44 45,000,000 15,223,017 3,383 9,499 12,882 Jul. 1995
</TABLE>
- --------
(1) Includes restaurant properties owned through joint ventures or as tenants
in common with affiliates of the Income Funds. Of the 571 total restaurant
properties owned by the Income Funds as of June 30, 1999, 66 restaurant
properties were owned through joint ventures or as tenants in common with
affiliates of the Income Funds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be at prices significantly below the exchange value.
Investment Objectives of the Income Funds
For CNL Income Fund, Ltd. through CNL Income Fund VI, Ltd., the primary
investment objectives were to preserve, protect and enhance capital, while
providing:
. the potential for increased income and protection against inflation
through participation in the growth and sales of fast-food restaurant
properties;
. the potential for capital appreciation through real estate ownership; and
. partially tax-sheltered cash distributions commencing in the initial year
of operation.
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For CNL Income Fund VII, Ltd. through CNL Income Fund XVI, Ltd., the primary
investment objectives were to preserve, protect and enhance capital, while
providing:
. cash distributions in the initial year of each Income Fund's operations
in amounts that exceed current taxable income because depreciation
deductions attributable to the restaurant properties reduce taxable
income even though depreciation is not a cash expenditure;
. an anticipated minimum level of income through the long-term rental of
restaurant properties to operators of national and regional restaurant
chains;
. percentage rent payments and, typically, automatic increases in the
minimum annual rent; and
. capital appreciation through the potential increase in the value of the
restaurant properties.
Substantially all of the net proceeds from the offerings of the units have
been invested in real estate, except for amounts used as working capital. We
believe that each Income Fund, including yours, has met its objectives of
providing you and the other Limited Partners with increasing cash distributions
from operations and preserving capital. We have not, however, taken formal
steps to meet the Income Funds' investment objective of liquidating.
With respect to each Income Fund, we have set forth in the following table
the date of formation of the Income Fund, the original term of the Income Fund
as set forth in the applicable partnership agreement and, the original
anticipated holding period and the years remaining in such period as set forth
in the original offering materials.
<TABLE>
<CAPTION>
Years
Original Remaining in
Anticipated Original
Legal Life of Partnership Holding Anticipated
Income Fund Formed Period Holding
Income Fund (Years) (Mo./Yr.) (Years) Period
- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
CNL Income Fund, Ltd. ..... 40 Nov. 1985 7 to 15 0-1
CNL Income Fund II, Ltd. .. 40 Nov. 1986 7 to 15 0-2
CNL Income Fund III,
Ltd. ..................... 30 Jun. 1987 7 to 15 0-3
CNL Income Fund IV, Ltd. .. 30 Nov. 1987 7 to 15 0-3
CNL Income Fund V, Ltd. ... 30 Aug. 1988 7 to 12 0-1
CNL Income Fund VI, Ltd. .. 30 Aug. 1988 7 to 12 0-1
CNL Income Fund VII,
Ltd. ..................... 30 Aug. 1989 7 to 12 0-2
CNL Income Fund VIII,
Ltd. ..................... 30 Aug. 1989 7 to 12 0-2
CNL Income Fund IX, Ltd. .. 30 Apr. 1990 7 to 12 0-3
CNL Income Fund X, Ltd. ... 30 Apr. 1990 7 to 12 0-3
CNL Income Fund XI, Ltd. .. 40 Aug. 1991 7 to 12 0-4
CNL Income Fund XII,
Ltd. ..................... 40 Aug. 1991 7 to 12 0-4
CNL Income Fund XIII,
Ltd. ..................... 39 Sept. 1992 7 to 12 0-5
CNL Income Fund XIV,
Ltd. ..................... 39 Sept. 1992 7 to 12 0-5
CNL Income Fund XV, Ltd. .. 38 Sept. 1993 7 to 12 1-6
CNL Income Fund XVI,
Ltd. ..................... 38 Sept. 1993 7 to 12 1-6
</TABLE>
Our Efforts to Liquidate the Income Funds
Because, at their inception, we expected your Income Fund and the other
Income Funds to hold their investments for a number of years after their
formation, we, as the general partners of the Income Funds, did not make any
efforts to sell the restaurant properties in the early years of the Income
Funds' existence. Instead, we concentrated our initial efforts on making
suitable investments for the Income Funds, consistent with the Income Funds'
investment policies and restrictions, and managing the restaurant properties
efficiently in order to maximize the cash flow from the restaurant properties.
As the contemplated period for liquidation of the restaurant properties
approached, we began to explore the feasibility of selling the restaurant
properties. We focused on those Income Funds that had less than three years
remaining in their respective original anticipated holding period.
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Since 1995, we have considered a variety of alternative approaches to
liquidating the Income Funds that have entered into their anticipated time
frame for liquidation. Throughout this period, we considered the possibility of
selling individual restaurant properties to third parties. While some Income
Funds have sold restaurant properties, we concluded that the process of selling
the restaurant properties individually would take an extended period of time
and that some of the restaurant properties might be difficult to sell at fair
prices. If we chose to sell the restaurant properties individually, the Income
Funds would continue to be responsible for all the costs of maintaining the
Income Funds as public companies during that process, including accounting and
SEC reporting requirements and other administrative costs. We believe that the
cost of operating the Income Funds over the time period necessary to sell the
restaurant properties individually would ultimately reduce the net proceeds to
you and the other Limited Partners.
From May 1992 through June 30, 1999, the Income Funds have sold 114
restaurant properties for total consideration of approximately $93.4 million.
These sales were made in connection with the exercise of tenant purchase
options and other opportunities deemed by us to be advantageous for a
particular Income Fund.
We also considered the alternative of selling the entire portfolio of
restaurant properties for a given Income Fund in either a bulk sale to an
unaffiliated third party or in an orderly liquidation. This alternative was not
pursued because we concluded that APF's offer would maximize the returns on
your investment for the following reasons:
. APF is a REIT that provides a complete range of financial, development
and other real estate services to operators of national and regional
restaurant chains. APF's ability to offer complete "turn-key," build-to-
suit development services, from site selection to construction
management, together with its ability to provide its clients with
financing options, such as triple-net leasing, mortgage loans and secured
equipment financing, makes APF a preferred provider for all the real
estate related business needs of operators of national and regional
restaurant chains;
. APF, through its acquisition of the Advisor, is most familiar with the
characteristics of the Income Funds and their operations and is in the
best position to value accurately each Income Fund's restaurant property
portfolio;
. prior to listing on the NYSE, APF has aimed to increase substantially the
size of its portfolio of restaurant properties through acquiring
portfolios of restaurant properties similar to those owned by the Income
Funds; and
. we believe that the liquidation values provided by Valuation Associates
are lower than the value of the APF Shares, based on the exchange value,
to be paid to the Income Funds in the Acquisition,
. an aggressive bulk sale of individual restaurant properties could result
in significant discounts from appraised values while a gradual
liquidation likely would involve higher administrative costs and greater
uncertainty, either of which would reduce the portion of net sales
proceeds available for distribution to you.
Chronology of the Acquisition
In December 1997, APF's management, which, at the time, included Messrs.
Seneff and Bourne, each of whom is a general partner of the Income Funds and
CNL Income Fund XVII, Ltd. and CNL Income Fund XVIII, Ltd., a stockholder of
APF and an officer of the general partner of each of the CNL Income and Growth
Funds, began exploring the following strategic alternatives designed to
increase APF's stockholder value:
. continuing to operate APF in its ordinary course of business and
consistent with past practice;
. considering whether APF should be acquired by a publicly-traded or
private company;
. selling APF's entire real estate portfolio and subsequently liquidating;
. acquiring large real estate portfolios that have comparable properties
leased on a triple-net basis;
. listing APF's stock on a national stock exchange or on an automated
quotation system, and if so, when such listing should take place;
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. becoming internally advised (1) by acquiring the Advisor, (2) by
acquiring an unaffiliated third-party advisor, (3) by hiring the
management of the Advisor or (4) by hiring new management;
. acquiring the CNL Restaurant Financial Services Group;
. acquiring CNL Advisory Services, Inc., an affiliate of the Advisor that
performs investment advisory services;
. acquiring CNL Restaurant Development, Inc., an affiliate of the Advisor
that provides real estate development services on behalf of the Advisor;
and
. engaging in an underwritten public offering of its common stock subject
to favorable market conditions concurrently with or shortly after APF
lists its stocks on an exchange or on an automated quotation system.
During the week of February 9, 1998, APF interviewed four prominent New York
investment banking firms to advise APF regarding the possible implementation of
one or more of the strategic alternatives.
During the week of February 16, 1998, APF interviewed four law firms,
including Shaw Pittman, to advise APF regarding the legal consequences of
implementing one or more of the strategic alternatives.
In early April 1998, APF's Board of Directors selected Shaw Pittman to
represent APF in the implementation of one or more of the strategic
alternatives, and APF's management narrowed the list of investment banking
firms that would potentially represent APF in the implementation of any
strategic alternative to two, Merrill Lynch and Salomon Smith Barney Inc.
On April 15, 1998, members of APF's management and representatives of Shaw
Pittman met to discuss the structuring of particular strategic alternatives and
the time tables necessary to implement such strategic alternatives.
On May 4, 1998, APF's Board of Directors decided to evaluate the
implementation of one or more of the strategic alternatives. In addition to the
members of the Board, representatives of Shaw Pittman were present at the
meeting. Upon completion of the Board's discussion regarding the expansion of
APF's business operations, the Board established a Special Committee of the
Board of Directors to consider the implementation of any strategic alternative.
The Special Committee consisted of Mr. G. Richard Hostetter, Dr. Richard C.
Huseman and Mr. J. Joseph Kruse, each an independent member of APF's Board of
Directors who has no financial interest in the implementation of any strategic
alternative.
On May 4, 1998, the Special Committee met for the first time. In addition to
the members of the Special Committee, representatives of Shaw Pittman, Merrill
Lynch and Salomon Smith Barney were present at the meeting. The Special
Committee heard presentations from representatives of Merrill Lynch and Salomon
Smith Barney regarding their qualifications to advise the Special Committee on
the merits of implementing one or more of the strategic alternatives. In
addition to the oral presentations made by Merrill Lynch and Salomon Smith
Barney, the Special Committee reviewed the written presentations prepared by
the two other investment banking firms that APF's management had interviewed
during the week of February 9.
Upon hearing the oral presentations of Merrill Lynch and Salomon Smith
Barney and reviewing the written presentations of two other investment banking
firms, the Special Committee determined that it was in the best interests of
APF to select Merrill Lynch and Salomon Smith Barney as their financial
advisors for the purposes of determining whether to implement one or more of
the strategic alternatives. APF retained two investment banking firms for two
reasons. First, APF believed, and still believes, that having two premier
investment banking firms advise it in connection with the Acquisition provided
APF with the greatest means of enhancing stockholder value. The representatives
of each investment bank are highly regarded in the REIT industry. Because of
their expertise, APF believed that they would receive the most creative advice
by having each firm analyze issues and provide resolutions to difficult issues.
Second, because of the size of the
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<PAGE>
Acquisition, APF believed that dividing the project between the two investment
banks would assist it in completing the Acquisition more efficiently.
On May 20, 1998, representatives of APF's management, including Mr. Bourne,
Shaw Pittman, Merrill Lynch, Salomon Smith Barney and Rogers & Wells, counsel
to Merrill Lynch and Salomon Smith Barney, met to discuss the various strategic
alternatives and the time frames for implementation of any of the strategic
alternatives. Representatives at the meeting discussed extensively the
structure of APF's potential acquisition of the Income Funds, CNL Income Funds
XVII and XVIII and the Growth Funds, with particular emphasis on the tax
considerations to the limited partners of those funds. The three structures
that were discussed at length are summarized as follows:
. Tax-Free OP Unit Structure. This structure would involve acquiring the
Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds by
exchanging units of limited partnership interest in the Operating
Partnership for units of limited partnership interest in the Income
Funds, CNL Income Funds XVII and XVIII and the Growth Funds. A
transaction structured in this manner would be tax free to the limited
partners of the Income Funds, CNL Income Funds XVII and XVIII and the
Growth Funds and the former limited partners would become limited
partners of the Operating Partnership. The units of limited partnership
of the Operating Partnership would be convertible on a one-for-one basis
into APF Shares.
. Taxable Stock Structure. This structure would involve acquiring the
Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds
through the issuance of APF Shares. A transaction structured in this
manner would be taxable to the limited partners of the Income Funds, CNL
Income Funds XVII and XVIII and the Growth Funds.
. Tax-Free NewCo Structure. This structure would involve forming a new
company and combining APF, the Income Funds, CNL Income Funds XVII and
XVIII and the Growth Funds into the new company in exchange for shares of
common stock of the new company. A transaction structured in this manner
could be tax free to the limited partners of the Income Funds, CNL Income
Funds XVII and XVIII and the Growth Funds but would require that,
immediately following the Acquisition, the limited partners own at least
80% of the total combined voting power of all classes of APF voting stock
and at least 80% of the total number of APF Shares and that APF obtain a
private letter ruling from the IRS regarding the tax-free nature of the
transaction.
On June 10, 1998, the Special Committee met for the second time. In addition
to the members of the Special Committee, representatives of APF management,
Shaw Pittman, Merrill Lynch, Salomon Smith Barney and Rogers & Wells were
present at the meeting. The primary purpose of the meeting was to obtain an
update from Merrill Lynch and Salomon Smith Barney regarding their evaluation
of and recommendation to implement the strategic alternatives. Representatives
of Merrill Lynch and Salomon Smith Barney stated that they had completed their
due diligence of APF, the Income Funds, CNL Income Funds XVII and XVIII and
Growth Funds, but that they were not in the position to provide a
recommendation as to the implementation of any strategic alternative for APF.
On July 8, 1998, the Special Committee met for the third time by telephone.
In addition to the members of the Special Committee, present by telephone at
the meeting were representatives of APF's management, Shaw Pittman, Merrill
Lynch, Salomon Smith Barney and Rogers & Wells. The primary purpose of the
meeting was to obtain an update from Merrill Lynch and Salomon Smith Barney
regarding their evaluation of and recommendation to implement one or more of
the strategic alternatives. Merrill Lynch and Salomon Smith Barney stated that
they would be in a position by July 17th to present their analysis and
conclusions of the strategic alternatives to the Special Committee.
On July 17, 1998, the Special Committee met for the fourth time. In addition
to the members of the Special Committee, representatives of APF's management,
including Messrs. Seneff and Bourne, Shaw Pittman, Merrill Lynch and Salomon
Smith Barney were present at the meeting. Merrill Lynch and Salomon
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Smith Barney presented their analysis of the strategic alternatives, which
included the advantages and disadvantages of each strategic alternative and the
methodologies employed to evaluate the strategic alternatives. After a lengthy
discussion among the members of the Special Committee and representatives of
Merrill Lynch and Salomon Smith Barney, Merrill Lynch and Salomon Smith Barney
concluded that acquiring the Income Funds, CNL Income Funds XVII and XVIII and
Growth Funds, acquiring the CNL Restaurant Businesses and listing the APF
Shares were the strategic alternatives most likely to maximize APF stockholder
value. Mr. Hostetter, the Chairman of the Special Committee, suggested that the
members of the Special Committee further consider Merrill Lynch's and Salomon
Smith Barney's evaluation of the strategic alternatives and that the Special
Committee reconvene on July 20.
On July 20, 1998, the Special Committee met for the fifth time by telephone.
Representatives of Shaw Pittman participated by telephone. After discussing the
Merrill Lynch and Salomon Smith Barney recommendation, the Special Committee
unanimously concluded that the best means to maximize stockholder value would
be for APF to:
. significantly increase its size by acquiring from affiliates of the
Advisor, including the Income Funds, CNL Income Funds XVII and XVIII and
the Growth Funds, portfolios of properties similar to those currently
held by APF;
. become internally advised and acquire internal real estate development
capability by acquiring the Advisor;
. expand its mortgage lending capabilities and develop securitization
capabilities by acquiring the CNL Restaurant Financial Services Group;
and
. list APF's common stock on a national stock exchange, if market
conditions are favorable.
On July 24, 1998, the Special Committee presented its findings to APF's full
Board of Directors and recommended that APF implement the selected strategic
alternatives approved by the Special Committee at the July 20th meeting.
Further, the Special Committee recommended that the Board evaluate the
feasibility of engaging in an underwritten public offering of APF Shares
concurrently with listing. After substantial discussion among the members of
the Board, the Board of Directors unanimously recommended that APF implement
the strategic alternatives. In addition, the Board unanimously recommended that
Merrill Lynch be retained by the Special Committee APF to provide a fairness
opinion to the Special Committee of APF that the consideration to be paid by
APF in connection with the implementation of any applicable strategic
alternative would be fair to APF from a financial point of view.
During the week of September 7, 1998, representatives of APF management,
Merrill Lynch, Salomon Smith Barney, Shaw Pittman, Rogers & Wells and
PricewaterhouseCoopers LLP, APF's independent accountants, gathered for a two-
day meeting to discuss the implementation of the selected strategic
alternatives. During the first day of meetings, the primary focus emphasized
the manner in which the Income Funds, CNL Income Funds XVII and XVIII and the
Growth Funds could be acquired. The principal structures discussed were the
Tax-Free OP Unit Structure, the Taxable Stock Structure and the Tax-Free NewCo
Structure each of which are described above in the description of the May 20th
meeting.
With respect to the Tax-Free OP Unit Structure, the representatives at the
meeting discussed at length the benefits of providing the limited partners of
the Income Funds, CNL Income Funds XVII and XVIII and Growth Funds with a tax
efficient transaction. However, because the number of limited partners of the
Operating Partnership would likely exceed 100, and their partnership interests
would be convertible into stock traded on an established securities market, the
Operating Partnership would be deemed a "publicly-traded partnership," which
would result in the imposition of additional restrictions on the manner in
which APF could operate its business. Representatives of Shaw Pittman were
particularly concerned that APF may lose its ability to qualify as a REIT in
the event that one or more of the restrictions imposed was violated. In
addition, the fact that the Operating Partnership would have greater than 500
limited partners would impose additional reporting requirements under the SEC
rules and would result in a loss of the operating efficiencies that APF was
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attempting to achieve as a result of the proposed Acquisition. While APF and
its counsel could meet the SEC's reporting requirements, the representatives of
APF viewed the administrative burdens of compliance negatively, because in
addition to complying with the SEC rules, APF would have the additional expense
of providing IRS Forms K-1 to the limited partners of the Operating
Partnership. The representatives of Shaw Pittman also noted that, based on
information from APF's management, the taxes that would likely be incurred by
the Limited Partners of the Income Funds and CNL Income Funds XVII and XVIII if
the Taxable Stock Structure were used would not be substantial, particularly
since a number of the limited partners were tax-exempt entities. Finally,
representatives of Merrill Lynch and Salomon Smith Barney expressed concerns
that having a large number of Operating Partnership unit holders may have an
adverse impact on the APF Shares as a result of APF Shares flooding the market
once the Acquisition closes, if the holders of Operating Partnership units
convert their units into APF Shares. The underwriters noted that, in order to
protect against this "overhang" concern, companies generally prevent holders of
units of operating partnerships from converting for a period of time, typically
one year, for the purpose of allowing the market to stabilize. Members of APF's
management expressed concern that a lock-up period would not be viewed
favorably by the limited partners of the Income Funds, CNL Income Funds XVII
and XVIII and the Growth Funds.
With respect to the Tax-Free NewCo Structure, representatives at the meeting
discussed at length the ability to obtain a favorable private letter ruling
from the IRS regarding the tax-free treatment of Tax-Free NewCo Structure and
the delay that would be caused in the event that the IRS ruled against tax-free
treatment or failed to provide a ruling in a timely manner. Representatives of
Shaw Pittman believed that the acquisition of the Advisor, the CNL Restaurant
Financial Services Group and the Growth Funds for various technical reasons
reduced, but did not eliminate, the likelihood of receiving a favorable ruling.
Additionally, the representatives of Shaw Pittman noted, based on information
from APF's management, that the taxes to be imposed if the Taxable Stock
Structure were used would not be substantial for the Limited Partners of the
Income Funds and CNL Income Funds XVII and XVIII, particularly since a
substantial number of the Limited Partners were tax-exempt entities. Overall,
while Shaw Pittman viewed favorably the ability of APF to accomplish the Tax-
Free NewCo Structure in a tax efficient manner for the limited partners of the
Income Funds and the Growth Funds, the potential delay that might be incurred
as a result of seeking a favorable ruling from the IRS and the complexity of
describing the Tax-Free NewCo Structure was viewed negatively by Shaw Pittman
and the other representatives at the meeting.
With respect to the Taxable Stock Structure, the representatives at the
meeting weighed the disadvantages of structuring the transaction as a taxable
transaction for the limited partners. In evaluating the tax consequences to the
limited partners, members of APF's management remarked that the taxable gain
that would be recognized by the limited partners would not be significant for
limited partners in most of the Income Funds and CNL Income Funds XVII and
XVIII and that a substantial number of limited partners in the Income Funds and
CNL Income Funds XVII and XVIII would incur no taxable gain because of their
status as a tax-exempt entity. In addition, members of APF's management
discussed the fact that a former limited partner would have the immediate
opportunity to sell the APF Shares that he, she or it received on the open
market in order to pay his, her or its tax liability, if the tax circumstances
necessitated such a sale. The primary benefit discussed by the group was that
the transaction was straightforward and immediately created a larger
stockholder base in the APF Shares. In addition, members of APF's management
noted that if the tax consequences were too severe for a particular Income
Fund, including CNL Income Funds XVII and XVIII, or Growth Fund, the limited
partners had the option of rejecting the proposed Acquisition. Finally, members
of APF's management noted that the acquisition costs and the future reporting
costs of APF in structuring the transaction as a Taxable Stock Structure would
be less and therefore in the best interests of APF's existing stockholders.
After the discussions of the advantages and disadvantages of each possible
structure for the Acquisition, the representatives of APF selected the Taxable
Stock Structure, which is the structure of the Acquisition.
The remaining portions of the meetings during the week of September 7, 1998
dealt primarily with valuation techniques and methodologies of the Income Funds
and the CNL Restaurant Businesses and the timelines and responsibilities of
each of the representatives.
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On November 6, 1998, the members of the Special Committee met telephonically
to discuss with members of APF's management and their legal counsel the status
of determining the prices to be paid to the CNL Restaurant Businesses, the
Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds in
connection with the Acquisition. In addition, Shaw Pittman provided to the
members of the Special Committee an oral summary of all significant matters
regarding the progress of the transactions, including the SEC review process,
the documentation necessary to get the transactions approved and completed, and
a range of timelines regarding when the Acquisition and the acquisition of the
CNL Restaurant Businesses would be concluded.
On November 16, 1998, the members of the Special Committee, members of APF's
management, Merrill Lynch and Salomon Smith Barney met, some in Orlando and
some telephonically, to discuss the status of determining the prices to be paid
to the Income Funds, CNL Income Funds XVII and XVIII and the Growth Funds in
connection with the Acquisition and the methodologies utilized in determining
the prices to be paid.
During the week of November 23, 1998, representatives of APF management,
Merrill Lynch, Salomon Smith Barney, Shaw Pittman and PricewaterhouseCoopers
gathered for a two-day meeting. The primary purpose of the meeting was to
provide APF's legal, accounting and financial advisors with an overview,
operational as well as financial, of the Advisor, the CNL Restaurant Financial
Services Group, the Income Funds, CNL Income Funds XVII and XVIII and the
Growth Funds.
On December 1, 1998, representatives of APF, Shaw Pittman, Merrill Lynch and
Salomon Smith Barney discussed the viability of acquiring the Growth Funds.
Because the Growth Funds produce income that would not be considered qualified
REIT income and therefore could restrict APF's ability to qualify as a REIT,
the inclusion of the Growth Funds in the Acquisition created additional
complexities for APF. These complexities affected APF's ability to value the
Growth Funds because, for federal tax purposes, the Growth Funds owned assets
that would have to be held in entities that APF did not control and that were
subject to federal corporate income tax. The inability imposed on APF to
control these entities had a negative impact on APF's valuation of the Growth
Funds. In addition, the costs of acquiring the Growth Funds were significantly
greater than those of the Income Funds and CNL Income Funds XVII and XVIII
because APF would have to remove the assets that did not generate qualified
REIT income out of the Growth Funds for inclusion in the entities not
controlled by APF.
After considering the negative tax consequences to the limited partners of
the Growth Funds as a result of utilizing the Taxable Stock Structure, the
reduced valuation of the Growth Funds as a result of the necessity of placing
assets that would not generate good REIT income in entities not controlled by
APF and the additional costs to APF of removing the assets out of the Growth
Funds for inclusion in the entities not controlled by APF, the representatives
of APF concluded that it would be in the best interests of APF's stockholders
not to pursue the acquisition of the Growth Funds at this time.
Following the decision to exclude the Growth Funds from the Acquisition,
representatives of Merrill Lynch and Salomon Smith Barney presented their
valuations of the Advisor, the CNL Restaurant Financial Services Group, the
Income Funds and CNL Income Funds XVII and XVIII to the members of the Special
Committee and the full Board. At such time, the members of the Special
Committee unanimously recommended to the full Board that the Board approve the
Acquisition and that the consideration payable to the Income Funds and CNL
Income Funds XVII and XVIII be $600,000,000 or 30,000,000 APF Shares, based on
the exchange value. The members of the full Board unanimously approved the
Special Committee's recommendation.
On December 1, 1998, APF presented us with its offer to acquire the Income
Funds and CNL Income Funds XVII and XVIII for an aggregate of 30,000,000 APF
Shares, which APF valued at $600,000,000, based on the exchange value.
On January 27, 1999, the Special Committee of the Board of Directors
received a counter-offer from us proposing an increase in the consideration
payable to the Income Funds and CNL Income Funds XVII and XVIII from
$600,000,000 to $610,000,000, or from 30,000,000 APF Shares to 30,500,000 APF
Shares based on the exchange value. After discussing the proposed counter-
offer, the Special Committee unanimously agreed
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to accept our counter-proposal, provided that the fairness opinion from Merrill
Lynch to be presented at the February 10, 1999 meeting of the Special Committee
of the Board of Directors supported the Special Committee's acceptance of the
counter-offer of the consideration to be paid to the Income Funds and CNL
Income Funds XVII and XVIII and the Advisor based on the exchange value.
On February 10, 1999, Merrill Lynch provided an oral and written fairness
opinion to the Special Committee stating that the aggregate consideration to be
paid by APF for the Acquisition of the Income Funds and CNL Income Funds XVII
and XVIII was fair to APF from a financial point of view.
On March 11, 1999, APF entered into a definitive acquisition agreement with
each Income Fund, each of CNL Income Funds XVII and XVIII, the Advisor and the
CNL Restaurant Financial Services Group.
On March 12, 1999, APF filed a Registration Statement on Form S-4 with the
SEC registering the APF Shares to be offered to the Limited Partners of the
Income Funds and CNL Income Funds XVII and XVIII.
On April 22, 1999, APF and Shaw Pittman received comments on the
Registration Statement on Form S-4 from the SEC.
On May 11, 1999, four limited partners in several Income Funds served a
lawsuit, Jon Hale, Mary J. Hewitt, Charles A. Hewitt, and Gretchen M. Hewitt v.
James M. Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, and CNL
American Properties Fund, Inc., Case No. CIO-99-0003561, in the Circuit Court
of the Ninth Judicial Circuit of Orange County, Florida. The lawsuit alleges
that we, as general partners of the Income Funds and CNL Income Funds XVII and
XVIII, breached our fiduciary duties and violated provisions of the partnership
agreements of the Income Funds in which the plaintiffs owned units and CNL
Income Funds XVII and XVIII in connection with the proposed Acquisition. The
plaintiffs are seeking unspecified damages. In addition, the plaintiffs are
seeking equitable relief that would enjoin the proposed Acquisition. APF
retained Shaw Pittman to represent its interests in the lawsuit served on May
11th and in any related or similar litigation that would arise.
On May 19, 1999, representatives of APF's management, Shaw Pittman and we,
as general partners of the Income Funds, met to discuss concerns regarding the
proposed Acquisition. We had received a number of comments from brokers who
sold CNL Income Funds XVII and XVIII. The primary comments concerned the loss
of passive income treatment in the event that CNL Income Funds XVII and XVIII
were acquired in the Acquisition. While it was acknowledged that limited
partners in the Income Funds and CNL Income Funds XVII and XVIII would lose
passive income treatment, the limited partners in CNL Income Funds XVII and
XVIII who purchased their interests in these Income Funds had the option of
acquiring APF Shares at the time of their investment but instead elected to
invest in CNL Income Funds XVII and XVIII. Because of these comments, we
discussed the possibility of potentially restructuring the Acquisition in a
manner to permit the limited partners in CNL Income Funds XVII and XVIII to
retain passive income treatment. In light of our observations, representatives
of APF expressed two primary concerns. First, they were concerned about the
impact of alienating the limited partners in these two CNL Income Funds.
Specifically, they discussed the impact on their ability to acquire the other
16 Income Funds, since some limited partners in CNL Income Funds XVII and XVIII
were also limited partners in other Income Funds. Second, they were concerned
that treating CNL Income Funds XVII and XVIII differently may also have a
negative impact on acquiring the other 16 Income Funds, including significantly
delaying the SEC's review process.
Representatives of APF asked representatives of Shaw Pittman to outline the
different alternatives. Representatives of Shaw Pittman noted three
alternatives:
. Alternative One: Leave the structure of the Acquisition unchanged.
Representatives of Shaw Pittman stated that in order for any Income Fund
to be acquired, holders of greater than 50% of the outstanding
partnership units had to approve the transaction. Therefore, there was no
assurance that either CNL Income Fund XVII or XVIII would be acquired.
Messrs. Seneff and Bourne acknowledged that a majority vote was required.
However, they also noted that because a large number of limited partners
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are tax exempt entities, their vote for or against the Acquisition would
not be affected by the availability of passive treatment.
. Alternative Two: Leave CNL Income Funds XVII and XVIII out of the
Acquisition. Representatives of Shaw Pittman stated that leaving CNL
Income Funds XVII and XVIII out of the Acquisition would potentially
satisfy the concerns of both the general partners and APF.
. Alternative Three: Do an exchange offer for CNL Income Funds XVII and
XVIII instead of the Acquisition. Representatives of Shaw Pittman noted
that an exchange offer would permit limited partners who desire to remain
limited partners of CNL Income Funds XVII and XVIII to retain their
interests in CNL Income Funds XVII and XVIII while permitting other
limited partners to elect to receive APF Shares. The Operating
Partnership would become a limited partner of CNL Income Funds XVII and
XVIII and the remaining limited partners would receive distributions
based solely on the operations of the restaurant properties remaining in
CNL Income Funds XVII and XVIII. In effect, CNL Income Funds XVII and
XVIII would continue to exist. Representatives of Shaw Pittman noted,
however, that APF would not achieve the operating efficiencies it desired
from acquiring all of the CNL Income Funds, including CNL Income Funds
XVII and XVIII, that it would not be able to leverage the portfolios in
these CNL Income Funds XVII and XVIII and that the change in structure
may result in a delay in the SEC review process.
APF deferred to a later date a decision to implement one of the
alternatives discussed above or any other alternative.
We then proceeded to discuss the consideration that would go to dissenting
Limited Partners. At the time of this meeting, APF had offered dissenting
Limited Partners the right to elect a form of cash/notes option. This option
permitted a dissenting Limited Partner the right to receive their proportion
of the consideration based on the liquidation value determined by Valuation
Associates in the form of 10% cash and 90% notes. The notes were to pay
interest at a rate equal to 120% of the applicable federal rate. We had also
received comments that the notes were not as favorable as Limited Partners
would like and asked if APF could improve the terms. While we acknowledged
that the notes were intended for dissenting limited partners, they reiterated
that the broker/dealer community and the Limited Partners had expressed
concerns regarding the terms. Representatives of APF noted that to the extent
that Limited Partners elect to receive notes, APF's results of operations were
positively affected. After discussions among the members of APF's management,
APF proposed to eliminate the 10% cash component, raise the interest rate to
seven percent, decrease the maturation period to five years and base the
amount of notes that a dissenting Limited Partner would receive on 97% of the
APF Shares the investor would have received had such investor not voted
against the Acquisition, based on the exchange value. The representatives of
APF noted that the three percent discount was fair because most Limited
Partners who elected to receive APF Shares would have to pay commissions in
connection with their subsequent sale of APF Shares after the consummation of
the Acquisition.
We accepted APF's offer to change the terms of the notes.
On June 1, 1999, we, on behalf of CNL Income Funds XVII and XVIII,
representatives of APF and representatives of Shaw Pittman met telephonically
to discuss the alternatives discussed at the May 19th meeting regarding CNL
Income Funds XVII and XVIII. Each alternative was discussed extensively in
light of our concerns regarding protection of passive income treatment and
APF's concerns regarding delaying the Acquisition or negatively impacting the
vote of the other Income Funds as a result of CNL Income Funds XVII and XVIII.
On June 3, 1999, APF's Board of Directors agreed that it would be in the
best interests of APF that APF not attempt to acquire CNL Income Funds XVII
and XVIII in the Acquisition. The Board accordingly reduced its offer to
acquire the Income Funds to an aggregate of 27,343,243 APF Shares, for a value
of $546,864,860, before expenses, based on the exchange value. Notwithstanding
this decision, representatives of APF stated that they would, depending on
market conditions, seek to acquire CNL Income Funds XVII and XVIII after APF
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was listed in the NYSE. The representatives further noted that they would be
willing to structure any future acquisition in a manner so that the limited
partners could retain passive income treatment most likely by offering the
limited partners an exchange offer whereby limited partners would exchange
their units of limited partnership interest for APF Shares.
On June 4, 1999, APF entered into a termination agreement with us for CNL
Income Funds XVII and XVIII.
On June 23, 1999, a Limited Partner of several Income Funds served a lawsuit
against us and APF, Ira Gaines, individually and on behalf of a class of
persons similarly situated, v. CNL American Properties Fund, Inc., James M.
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, CNL Fund Advisors, Inc.,
CNL Financial Corporation a/k/a CNL Financial Corp., CNL Financial Services,
Inc. and CNL Group, Inc., Case No. CIO 99-3796, in the Circuit Court of the
Ninth Judicial Circuit of Orange County, Florida, alleging that we breached our
fiduciary duties and that APF aided and abetted our breach of fiduciary duties
in connection with the Acquisition. The plaintiff is seeking unspecified
damages. In addition, the plaintiff is seeking equitable relief that would
enjoin the proposed Acquisition. Pursuant to the terms of the previous
engagement, APF retained Shaw Pittman to represent its interests in the lawsuit
served on June 23rd.
On July 8, 1999, the plaintiffs in the Hale lawsuit served an amended
complaint that, in addition to naming three additional plaintiffs, includes
allegations of aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the defendants
and seeks additional equitable relief. As amended, the case is captioned John
Hale, Mary J. Hewitt, Charles A. Hewitt, Gretchen M. Hewitt, Bernard J.
Schulte, Edward M. and Margaret Berol Trust, and Vicky Berol v. James M.
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, and CNL American
Properties Fund, Inc., Case No. CIO-99-0003561.
On September 1, 1999, APF acquired the CNL Restaurant Businesses.
Chronology of our recommendation that the Income Funds be acquired by APF
After APF's public announcement on July 27, 1998 that it intended to
increase its portfolio of assets by acquiring affiliates of the Advisor,
including the Income Funds and CNL Income Funds XVII and XVIII, we anticipated
that we might receive an offer from APF to purchase the Income Funds and CNL
Income Funds XVII and XVIII in the near future. As a result of this
expectation, we began a search for outside legal counsel and investment
bankers. Messrs. Seneff and Bourne, in their capacities as officers and
directors of APF, were aware that APF was evaluating the possibility of
acquiring the Income Funds. Because the decision to acquire the Income Funds
was solely within the discretion of APF's Special Committee, however, it was
unclear whether the Special Committee would approve the Acquisition until July
24, 1998. Because of this uncertainty and because cash generated by the Income
Funds is limited, we believed that it was in the best interests of the Income
Funds (and the Limited Partners) to wait for the approval by the Special
Committee before incurring the expenses of engaging legal counsel and
investment bankers.
During August 1998, we interviewed two investment banking firms, including
Legg Mason, to provide financial advice and to render fairness opinions to us
in connection with the Acquisition.
In September 1998, we engaged Baker & Hostetler LLP as legal counsel to the
Income Funds and CNL Income Funds XVII and XVIII in the event APF offered to
acquire one or more of the Income Funds and CNL Income Funds XVII and XVIII.
Baker & Hostetler had previously served as securities counsel for CNL Income
Funds XVII and XVIII.
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In September 1998, we engaged Valuation Associates to (1) complete a
restaurant property-by-restaurant property appraisal for each Income Fund and
CNL Income Funds XVII and XVIII, (2) assist an investment banker retained by
us, as the financial advisor to you and the provider of the fairness opinions,
in reviewing the appraisals as they relate to the value of the number of APF
Shares paid to each of the Income Funds and CNL Income Funds XVII and XVIII and
(3) work with all parties involved in the Acquisition to fully explain its
valuation methodologies and conclusions. In accordance with the engagement
letter with Valuation Associates, each Income Fund and CNL Income Funds XVII
and XVIII agreed to pay Valuation Associates between approximately $2,600 and
$9,600, depending on the number of restaurant properties in the Income Fund and
CNL Income Funds XVII and XVIII.
In September 1998, we selected Legg Mason to provide us with financial
advice and to render fairness opinions with respect to the acquisition of each
Income Fund and CNL Income Funds XVII and XVIII. Legg Mason has received $5,000
from each Income Fund and CNL Income Funds XVII and XVIII and will receive up
to $25,000 from each Income Fund upon rendering its fairness opinion to each
Income Fund and CNL Income Funds XVII and XVIII and reimbursement of out-of-
pocket expenses not to exceed $4,000 per Income Fund or $50,000 in the
aggregate.
On November 21, 1998, Valuation Associates presented its appraisal reports
to us with respect to each of the Income Funds and CNL Income Funds XVII and
XVIII.
On December 1, 1998, we received from APF's management a proposal to acquire
for an aggregate of 30,000,000 APF Shares all of the Income Funds and CNL
Income Funds XVII and XVIII.
On January 27, 1999, we compiled and submitted a counter-offer to the
management of APF proposing an increase in the consideration payable to the
Income Funds and CNL Income Funds XVII and XVIII from an aggregate of
30,000,000 to 30,500,000 APF Shares, which APF valued as aggregate
consideration of $610,000,000, based on the exchange value. We based our
$610,000,000 counter-offer on our belief that the quality of the Income Funds'
restaurant properties and the restaurant properties of CNL Income Funds XVII
and XVIII plus cash flow generated from such restaurant properties warranted a
higher price. Additionally, the $610,000,000 counter-offer represented the
amount of consideration necessary to allow us to return to the Limited Partners
of the Income Funds and CNL Income Funds XVII and XVIII an amount approximating
their aggregate original invested capital contributions, after previously
distributed sales proceeds. In submitting the counter-offer, we considered no
factors other than the factors discussed above.
On January 27, 1999, we received from representatives of APF an acceptance
of our counter-offer proposing an increase in the consideration payable to the
Income Funds and CNL Income Funds XVII and XVIII from $600,000,000 to
$610,000,000, or from 30,000,000 APF Shares to 30,500,000 APF Shares based on
the exchange value, subject to Merrill Lynch's ability to render a fairness
opinion at the February 10, 1999 meeting of the Board of Directors that
supported the Special Committee's determination.
On March 10, 1999, Legg Mason rendered its opinions with respect to the
fairness from a financial point of view of (a) the APF Shares offered with
respect to the individual Income Funds and CNL Income Funds XVII and XVIII, (b)
the aggregate APF Shares offered with respect to the Income Funds and CNL
Income Funds XVII and XVIII and (c) the method of allocating the APF Shares
among the Income Funds and CNL Income Funds XVII and XVIII.
On March 11, 1999, we, subject to your approval, entered into definitive
acquisition agreements for each Income Fund and CNL Income Funds XVII and
XVIII.
On May 13, 1999, we retained Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
as legal counsel to represent our interests in the lawsuit served on May 11th.
On June 3, 1999, we received notice from APF's management that APF intended
to withdraw its offer to acquire CNL Income Funds XVII and XVIII. We received
an offer to acquire the Income Funds for an aggregate of 27,343,243 APF Shares.
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On June 4, 1999, we accepted APF's offer and entered into termination
agreements for CNL Income Funds XVII and XVIII.
On June 23, 1999, we retained Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
as legal counsel to represent our interests in the lawsuit served on June 23rd.
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OUR RECOMMENDATION AND FAIRNESS DETERMINATION
General
We believe the Acquisition to be fair to, and in the best interests of, each
of the Income Funds and the Limited Partners. After careful evaluation, we have
concluded that the Acquisition is the best way to maximize the value of your
investment. We recommend that you and the other Limited Partners approve the
Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and the Income Funds and the terms of critical agreements, such as the Income
Funds' partnership agreements.
We also believe that the Acquisition is procedurally fair for several
reasons. First, with respect to each participating Income Fund, the Acquisition
is required to be approved by Limited Partners holding greater than 50% of the
outstanding units of such Income Fund and is subject to the closing conditions.
Those closing conditions are that the APF Shares are listed on the NYSE, that
the APF stockholders have approved the increase in the number of APF Shares
authorized to be issued and that Merrill Lynch has issued a new fairness
opinion if fewer than all of the Income Funds are acquired. Second, all Limited
Partners of Income Funds that approve the Acquisition and who vote against the
Acquisition will be given the option of receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive additional APF Shares, assuming APF acquires all
of the Income Funds, upon completion of the Acquisition,
. that Messrs. Seneff & Bourne are stockholders of APF and, as such,
their interest in the completion of the Acquisition may conflict with
yours as a Limited Partner and with their own as general partners of
the Income Funds, and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Funds that are acquired by APF.
Our Reasons for Recommending the Acquisition
We are recommending that the Income Funds vote in favor of the Acquisition
at this time for the following reasons:
. Because the APF Shares will be listed on the NYSE and will be freely
tradeable, we believe that you and the other Limited Partners will
receive the benefit of a public market valuation of real estate assets,
which is greater than the value you and the other Limited Partners would
receive in any privately negotiated market valuation;
. we believe that APF's acquisition of the CNL Restaurant Businesses,
including the Advisor, will be viewed positively and may result in a
greater valuation of APF because investment analysts specializing in real
estate securities in recent years have emphasized their strong preference
for internally-advised REITs;
. the APF Share consideration offered by APF to acquire the Income Funds is
a firm offer which we believe is reasonable. If we auctioned the Income
Funds in an effort to receive a higher purchase price, there may
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<PAGE>
be no interest in acquiring the Income Funds or there may be an interest
in only acquiring a portion of the Income Funds. There is no guarantee
that APF will subsequently attempt to acquire the Income Funds or if it
does, that the offer price for the Income Funds will be as great;
. we believe the APF Shares paid in the Acquisition may appreciate in value
over time. As such, we believe that the Acquisition represents the best
way to maximize your original investment in the Income Funds.
. your investment will change from being an interest in a static, finite-
life entity to an investment in a growing operating company. We believe
that as an APF stockholder, you could participate in increased
distributions and appreciation in the price of your APF Shares primarily
because of the substantial opportunities that currently exist for APF to
acquire additional restaurant properties and to make mortgage loans on
favorable terms. As a static, finite-life entity, your Income Fund's
partnership agreement generally restricts it from taking advantage of
such opportunities;
. the Acquisition will diversify your investment. As an APF stockholder,
your portfolio will have a larger number of restaurant properties, a
broader group of restaurant types, tenants and geographic locations and
will also have assets represented by the mortgage loan and other
financing and development activities in which APF is engaged. This
diversification will reduce the dependence of your investment upon the
performance of, and the risks involved with, the particular group of
restaurant properties currently owned by your Income Fund; and
. the combination of the Income Funds into an operating company will result
in administrative and operational economies of scale and cost savings for
APF.
Therefore, we believe that the Acquisition by APF of all the Income Funds,
rather than a liquidation, will result in the greatest possible value of the
investment for you and the other Limited Partners.
Material Factors Underlying Belief as to Fairness
The following is a discussion of all material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital
interest in the Income Funds. We believe that the form and amount of
consideration offered to us and the Limited Partners, including dissenting
Limited Partners who select the notes, constitute fair value. In addition, we
compared the estimated values of the consideration that would have been
received by you and the other Limited Partners in alternative transactions and
concluded that the Acquisition is fair based on such comparison. We believe
the Acquisition is the best way to maximize the return on your investment
because of your ability to participate in the potential appreciation of APF
Shares. Since the investment in your Income Fund is restricted to owning and
leasing a static number of restaurant properties due to the limitations
contained in your Income Fund's partnership agreement and limited capital
resources, your investments have less of an opportunity to appreciate. Because
APF is a growth-oriented operating company, you will have the opportunity, as
an APF stockholder, to participate in APF's future growth.
2. Similarity of Income Funds. We do not believe that there are any
material differences among the Income Funds that would affect the fairness of
the Acquisition to you or the other Limited Partners in any particular Income
Fund. Substantially all of the assets of the Income Funds are restaurant
properties leased on a triple-net basis that are similar in most respects, and
the Income Funds have substantially the same capital structures. In addition,
the investment objectives of each of the Income Funds are substantially the
same.
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<PAGE>
The primary differences among the Income Funds are:
. Date of Formation. The Income Funds were formed at different times and,
therefore, would have begun liquidation at different times. As a result,
the Income Funds formed earlier have already sold some restaurant
properties.
. Income Fund Structure. Although the Funds' partnership agreements have
slightly different provisions with respect to allocations, distributions
and fees, we believe the differences in such provisions are not
substantial.
. Size and Diversity. Some of the Income Funds have purchased fewer
restaurant properties and are less diverse with respect to the number of
tenants and the geographic location and types of restaurant properties.
3. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners and our
statements above regarding the material terms underlying our belief as to
fairness are partially based upon the appraisals of each Income Fund's
restaurant properties prepared by Valuation Associates and upon the fairness
opinions provided by Legg Mason. We attributed significant weight to the
appraisals of Valuation Associates and the fairness opinions of Legg Mason,
which we believe support our conclusion that the Acquisition is fair to the
Limited Partners. We do not know of any factors that would materially alter the
conclusions made in the appraisals of Valuation Associates or the fairness
opinions of Legg Mason, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. We
believe that the engagement of Valuation Associates to provide the appraisals
of each Income Fund's restaurant properties and of Legg Mason to provide the
fairness opinions assisted us in the fulfillment of our fiduciary duties to the
Income Funds and the Limited Partners, notwithstanding that: (1) each of
Valuation Associates and Legg Mason received fees for its services, (2) Legg
Mason has previously provided investment banking services to the Income Funds
and to Commercial Net Lease Realty, Inc., which at the time was an affiliate of
CNL Group, Inc., and (3) Valuation Associates has previously performed
valuation appraisals for APF. See "Reports, Opinions and Appraisals--Fairness
Opinions." We note that because the Acquisition of any one Income Fund is not a
condition of the Acquisition of any other Income Fund, the fairness opinions
analyze each Income Fund separately, not in combination with other Income
Funds. However, based on the reasons stated in this section of the consent
solicitation and the opinion of Legg Mason that the APF Share consideration
payable to each Income Fund is fair from a financial point of view, we believe
the Acquisition is fair regardless of the number of Income Funds that are
acquired in the Acquisition.
In rendering its opinions with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to the
individual Income Funds, (b) the aggregate APF Shares offered with respect to
the Income Funds and (c) the method of allocating the APF Shares among the
Income Funds, Legg Mason did not address or render any opinion with respect to
other aspects of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinions do not compare the relative merits of the
Acquisition with those of any other transaction or business strategy that was
or might have been considered by us as alternatives to the Acquisition.
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Legg Mason's fairness opinions do not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
4. Valuation of Alternatives. Based on the appraisals of each Income Fund's
restaurant properties prepared by Valuation Associates, we estimated the value
of the Income Funds if liquidated and as going concerns. On the basis of these
calculations, we believe that the ultimate value of the APF Shares, based on
the exchange value, will exceed the going concern value and liquidation value
of each Income Fund.
5. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners whose Income Funds are acquired will be able to benefit from the
potential growth of APF as an operating company and will also receive
investment liquidity through the public market in APF Shares.
6. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales Average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Income Fund Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
- ----------- ------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
I....................... $12,001,150 $ 8,001 $ 7,616 $ 7,589 $ 7,033 $7,504
II...................... 23,046,408 9,219 9,459 9,419 8,727 8,942
III..................... 22,253,502 8,901 8,228 8,214 7,652 8,445
IV...................... 28,226,458 9,409 8,782 8,753 8,105 9,878
V....................... 22,258,682 8,903 8,087 8,085 7,523 8,135
VI...................... 35,000,000 10,000 10,431 10,385 9,730 9,274
VII..................... 30,000,000 10,000 10,441 10,410 9,758 9,300
VIII.................... 35,000,000 10,000 11,263 11,227 10,473 9,300
IX...................... 35,000,000 10,000 10,353 10,310 9,654 9,320
X....................... 40,000,000 10,000 10,393 10,349 9,649 9,340
XI...................... 40,000,000 10,000 10,763 10,729 10,000 9,110
XII..................... 45,000,000 10,000 10,405 10,356 9,504 9,270
XIII.................... 40,000,000 10,000 9,608 9,571 8,676 8,940
XIV..................... 45,000,000 10,000 9,481 9,430 8,518 8,960
XV...................... 40,000,000 10,000 9,232 9,182 8,295 8,530
XVI..................... 45,000,000 10,000 9,499 9,449 8,621 8,760
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998, an adjustment to the Limited Partners' original
investments for special distributions of net proceeds from sales of
restaurant properties and net sales proceeds added to these Income Funds'
working capital and subsequently distributed to Limited Partners of CNL
Income Fund, Ltd. through CNL Income Fund V, Ltd.
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<PAGE>
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in the
Income Fund, if the Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisals.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if the
Income Funds had sold their assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisals.
(5) Based on the weighted average trading prices of each Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by the Income Funds as part of their distribution
reinvestment programs and do not necessarily reflect the prices for in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
We do not know of any factors that may materially affect (1) the value of
the consideration to be received by the Income Funds that are acquired in the
Acquisition, (2) the value of the units for purposes of comparing the expected
benefits of the Acquisition to the potential alternatives considered by us or
(3) the analysis of the fairness of the Acquisition.
Relative Weight Assigned to Material Factors
We gave greatest weight to the factors set forth in paragraphs numbered one
through five above in reaching our conclusions as to the fairness of the
Acquisition. Of paragraphs one through five, we considered paragraphs one,
three and four to be the most significant.
Fairness to Limited Partners Receiving APF Shares in the Acquisition
The APF Shares represent equity securities in APF permitting the holders of
the APF Shares to participate in APF's potential growth. Thus, you, as a holder
of APF Shares, will share in both the benefits and risks of an investment in
APF. In addition, the APF Shares will be listed on the NYSE, which will make an
investment in the APF Shares a more liquid investment than an investment in the
units. On balance, we have concluded that the Acquisition is fair to the
Limited Partners of each Income Fund that receives APF Shares because such
investment has substantially more growth potential than an investment in the
units, and the APF Shares will be a more liquid investment than an investment
in the units.
Fairness in View of Conflicts of Interest
We have fiduciary duties to you and the other Limited Partners. We are
expected, in handling the affairs of the Income Funds, to exercise good faith,
to use care and prudence and to act with a duty of loyalty to the Limited
Partners. Under these fiduciary duties, we are obligated to ensure that the
Income Funds are treated fairly and equitably in transactions with third
parties, especially where consummation of such transactions may result in our
interests being opposed to, or not totally aligned with, the interests of you
and the other Limited Partners. To assist us in fulfilling our fiduciary
obligations, we obtained fairness opinions from Legg Mason and the independent
appraisals of Valuation Associates.
In addition, as members of APF's Board of Directors, Messrs. Seneff and
Bourne, the individual general partners of your Income Fund, have fiduciary
duties to APF's stockholders. These duties consist of the duty of care to act
in the best interests of APF and the duty of loyalty to keep APF's Board of
Directors fully-informed of all material facts regarding a transaction with APF
in which they have a personal interest. To assist Messrs.
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<PAGE>
Seneff and Bourne in fulfilling their duty of care, APF retained Merrill Lynch
and Salomon Smith Barney to advise it in the Acquisition and obtained fairness
opinions from Merrill Lynch. To assist Messrs. Seneff and Bourne in fulfilling
their duty of loyalty, APF formed a Special Committee of its independent
directors who have no financial interest in the Acquisition to evaluate the
terms of the Acquisition.
In considering the Acquisition, we gave full consideration to these
fiduciary duties. However, we may be viewed as having a potential conflict of
interest with you and the other Limited Partners with respect to Messrs.
Seneff's and Bourne's current ownership of APF Shares, and we will not have any
personal liability for APF obligations and liabilities which occur after the
Acquisition.
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<PAGE>
REPORTS, OPINIONS AND APPRAISALS
All APF Share information set forth in this section is presented assuming
the one-for-two reverse stock split approved by APF stockholders on May 27,
1999 had not been effected. Accordingly, the analysis performed assumed that an
aggregate of 54,686,486 APF Shares would be issued in the Acquisition and
12,300,000 APF Shares would be issued in the acquisition of the CNL Restaurant
Businesses. Therefore, because the one-for-two reverse stock split reduced the
aggregate number of APF Shares by one-half without affecting the aggregate
value of the APF Share consideration, you should multiply the APF Share
consideration set forth in this section by two in order to obtain a meaningful
comparison with your APF Share consideration.
General
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund. The
fairness opinions rendered to each Income Fund by Legg Mason are attached as
Appendix A to each Income Fund's supplement. We did not impose any limitations,
other than as described in this consent solicitation, in the scope of the
investigations conducted by Legg Mason or Valuation Associates to enable each
of them to render their respective appraisals, reports and opinions. We will
provide, free of charge, a copy of the appraisals and valuation report
completed by Valuation Associates with respect to your Income Fund, upon your
written request or that of your representative, who has been designated in
writing, that is submitted to your Income Fund, Attention: Investor Services.
We did not make any contacts, other than as described in this consent
solicitation, with any outside party regarding the preparation by the outside
party of an opinion as to the fairness of the Acquisition, an appraisal of the
Income Funds or their assets, a valuation of APF or any other report with
respect to the Acquisition.
Fairness Opinions to the General Partners
On March 10, 1999, Legg Mason rendered written opinions to us to the effect
that, as of such date and based upon the qualifications and assumptions made
and matters considered by Legg Mason:
. the APF Share consideration offered by APF with respect to each of the
individual Income Funds, CNL Income Funds XVII and XVIII and their
Limited Partners is fair from a financial point of view;
. the aggregate APF Share consideration offered with respect to all of the
Income Funds and CNL Income Funds XVII and XVIII is fair from a financial
point of view; and
. the method of allocating the APF Share consideration among the Income
Funds and CNL Income Funds XVII and XVIII in the Acquisition pursuant to
the merger agreements is fair from a financial point of view.
The full text of the Legg Mason opinion to your Income Fund, which sets
forth the assumptions made, procedures followed, and matters considered in and
the limitations on the review undertaken in connection with the Legg Mason
opinion, is attached as Appendix A to your Income Fund's supplement that
accompanies this consent solicitation and is incorporated in this document by
reference. The summary of the opinion set forth below is qualified in its
entirety by reference to the full text of the opinion. Legg Mason's opinions
were provided for our information and assistance in connection with our
consideration of the transactions contemplated by the merger agreements and the
opinions do not constitute a recommendation as to how Limited Partners should
vote with respect to the transaction.
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In connection with its opinions, Legg Mason reviewed, among other things:
. the merger agreements with respect to the transactions;
. the financial statements and the related filings of the Income Funds and
CNL Income Funds XVII and XVIII on Form 10-K for the year ended
December 31, 1997, and Form 10-Q for the nine months ended September 30,
1998;
. the financial statements and the related filings of APF on Form 10-K for
the year ended December 31, 1997 and Form 10-Q for the nine months ended
September 30, 1998;
. internal information concerning the business and operations of the Income
Funds and CNL Income Funds XVII and XVIII furnished by the general
partners, including a draft of the Income Funds' Form 10-K and that of
CNL Income Funds XVII and XVIII for the year ended December 31, 1998,
cash flow projections and operating budgets;
. internal information concerning the business and operations of APF
furnished by management of APF, including a draft of APF's Form 10-K for
the year ended December 31, 1998, cash flow projections and operating
budgets;
. financial data and operating statistics provided by us and the management
of APF and similar information for selected public companies; and
. the appraisals of the properties of the Income Funds and CNL Income Funds
XVII and XVIII prepared by Valuation Associates, dated January 6, 1999.
Legg Mason also held meetings and discussions with us and APF's directors,
officers and employees concerning the operations, financial condition and
future prospects of the Income Funds and CNL Income Funds XVII and XVIII and
APF, respectively. In addition, Legg Mason conducted other financial studies,
analyses and investigations and considered other information as it deemed
appropriate.
Legg Mason relied upon the accuracy and completeness of all information that
was publicly available, supplied or otherwise communicated to Legg Mason by or
on behalf of the Income Funds, CNL Income Funds XVII and XVIII or APF. Legg
Mason further relied upon our assurances that we are unaware of any factors
that would materially alter the conclusion made in Legg Mason's fairness
opinions, including developments or trends that have materially affected or are
reasonably likely to materially affect such conclusions. Legg Mason assumed
that the financial forecasts, assumptions and bases thereof examined by it were
reasonably prepared and reflected our best currently available estimates and
good faith judgments as to the future performance of the Income Funds, CNL
Income Funds XVII and XVIII and APF. Legg Mason has relied on these forecasts
and does not in any respect assume any responsibility for the accuracy of
completeness of these forecasts. Legg Mason also assumed, with consent, that
any material liabilities, contingent or otherwise, known or unknown of the
Income Funds, CNL Income Funds XVII and XVIII or APF are as set forth in the
respective financial statements of the Income Funds, CNL Income Funds XVII and
XVIII and APF. Legg Mason also assumed, with our consent, that the table
prepared by or for us of the allocation of the APF Share consideration among us
and the Limited Partners of each of the Income Funds has been prepared in
accordance with, and complies with the terms and conditions of the partnership
agreements of the Income Funds. Legg Mason also assumed that the appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates, and Legg Mason does not in any respect assume any responsibility
for its accuracy or completeness. In addition, Legg Mason did not make an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of the Income Funds or APF. Legg Mason's opinions necessarily were
based upon financial, economic, market and other conditions and circumstances
existing and disclosed to Legg Mason as of the date of its opinion. Legg Mason
has not been requested to update its fairness opinion prior to the closing of
the Acquisition. Legg Mason's opinion does not imply any conclusion as to the
fairness of the Acquisition on any date subsequent to the date of its opinion.
To date there has not been, and we do not anticipate that there will be, any
significant event that would or could affect the fairness determination if it
were redetermined based upon information as of a more recent date.
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Legg Mason has acted as our financial advisor and will receive a fee for
their services. It is understood that Legg Mason's fairness opinions are for
our information in our evaluation of the Acquisition and Legg Mason's opinions
do not constitute a recommendation to us or to you as to how to vote on the
Acquisition or as to whether you should elect to receive the APF Share
consideration or the notes of APF. Legg Mason was not requested to, and did
not, solicit the interest of any other party in acquiring interests in the
Income Funds or their assets. Additionally, Legg Mason's opinions do not
compare the relative merits of the Acquisition with those of any other
transaction or business strategy which were or might have been considered by us
as alternatives to the Acquisition.
In rendering its opinions with respect to the fairness, from a financial
point of view, of (1) the APF Shares offered to the individual Income Funds,
(2) the aggregate APF Shares offered with respect to the Income Funds and (3)
the method of allocating the APF Shares among the Income Funds, Legg Mason did
not address or render any opinion with respect to other aspects of the
Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or other assets
if liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs allocated
to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
The following summarizes the material financial analyses set forth in the
report provided to us on March 10, 1999 in connection with Legg Mason rendering
its opinions.
In valuing APF and the Income Funds, Legg Mason performed the following
financial analysis:
. an analysis of comparable publicly traded real estate investments trusts;
. a dividend discount analysis; and
. a discounted cash flow analysis.
Valuation of APF
Comparable Trading Multiples Analysis
Legg Mason compared financial and operating information and ratios for APF
with the corresponding financial and operating information for a group of
publicly traded real estate investment trusts engaged primarily in the
ownership, operation and financing of restaurant properties. Legg Mason deemed
the following companies as reasonably comparable to APF:
. Franchise Finance Corporation of America; and,
. U.S. Restaurants Properties, Inc.
Legg Mason compared the stock price for each of these comparable companies
with their 1999 and 2000 projected funds from operations. This analysis
indicated the following multiples for these compared companies:
<TABLE>
<CAPTION>
Selected Valuation Multiples
-----------------------------
Public Comparables
-----------------------------
High Mean Low
--------- --------- ---------
<S> <C> <C> <C>
Price to 1999 Projected Funds from Operations.... 9.0 x 8.5 x 8.0 x
Price to 2000 Projected Funds from Operations.... 8.0 x 7.5 x 7.0 x
</TABLE>
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<PAGE>
Legg Mason applied these multiples to the projected funds from operations of
APF for the years 1999 and 2000 to establish a valuation range based on trading
multiples. This analysis resulted in a per share valuation range between $7.04
and $8.24.
Dividend Discount Analysis
Legg Mason estimated a valuation range for APF Shares using a discounted
dividend analysis. The discounted dividend analysis assumes, as a basic
premise, that the value of an equity security reflects the present value of the
future dividends. To establish a current implied value under this approach,
future dividends must be estimated and an appropriate discount rate and
terminal multiple must be determined. The management of APF provided Legg Mason
with projections of its dividends for the six months ending December 31, 1999
and the years 2000 through 2003. The variables applied to the dividend discount
analysis, using discount rates reflecting the 30-year Treasury rate plus a risk
premium, are summarized as follows:
Dividend Discount Analysis
---------------------------------
Discount Rate Terminal Multiple
13.6% 11.6x
14.6% 10.4x
15.6% 9.4x
Based upon APF's projection of dividends per APF Share for the six months
ending December 31, 1999 and the years 2000 through 2003, inclusive, and the
foregoing terminal value multiples, the range of implied values per APF Share
was $8.80 to $10.79.
Discounted Cash Flow Analysis
Legg Mason also estimated a valuation range for APF Shares using a
discounted cash flow analysis. The discounted cash flow analysis assumes, as a
basic premise, that the intrinsic value of any business or property is the
current value of the future cash flow that the business or property will
generate for its owners. To establish a current implied value under this
approach, future cash flow must be estimated and an appropriate discount rate
and terminal multiple must be determined. The management of APF provided Legg
Mason with projections of cash flow to equity stockholders for the six months
ending December 31, 1999 and the years 2000 through 2003. The variables applied
to the discounted cash flow analysis, using discount rates reflecting the
estimated equity cost of capital are summarized as follows:
Discounted Cash Flow Analysis
---------------------------------
Discount Rate Terminal Multiple
12.0% 10.0x
14.0% 9.0x
16.0% 8.0x
Based upon APF's projection of available cash flow to equity stockholders
for the six months ending December 31, 1999 and the years 2000 through 2003,
inclusive, and the foregoing terminal value multiples and discount rates, the
range of implied values per APF Share was $9.00 to $11.94.
Valuation of the Income Funds
Comparable Trading Multiples Analysis
Legg Mason compared financial and operating information and ratios for the
Income Funds with the corresponding information for a group of publicly traded
real estate investment trusts engaged primarily in the
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ownership, operation, management and financing of commercial properties. Legg
Mason deemed the following companies as reasonably comparable to the Income
Funds:
. Commercial Net Lease Realty, Inc.;
. Franchise Finance Corporation of America;
. Realty Income Corporation; and,
. U.S. Restaurant Properties, Inc.
Among other analyses, Legg Mason compared the stock price for each of these
comparable companies with their 1999 and 2000 projected funds from operations.
This analysis indicated the following multiples for these comparable companies:
<TABLE>
<CAPTION>
Selected Trading
Valuation Multiples
-------------------
Public Comparables
-------------------
High Mean Low
------ ------ -----
<S> <C> <C> <C>
Price to 1999 Projected Funds from Operations.............. 8.0 x 7.5 x 7.0 x
Price to 2000 Projected Funds from Operations.............. 7.5 x 7.0 x 6.5 x
Trailing Twelve Months Earnings Before
Interests, Taxes, Depreciation and Amortization (EBITDA).. 10.5 x 10.0 x 9.5 x
</TABLE>
Legg Mason applied these multiples to the projected funds from operations
and EBITDA for the Income Funds for the years 1999 and 2000 and to the trailing
twelve months EBITDA to establish a valuation range based on trading multiples.
This analysis resulted in an implied per share valuation range between $6.44
and $9.73.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses
and the application of those methods to the particular circumstances and,
therefore, these opinions are not readily susceptible to partial analysis or
amenable to summary description. Accordingly, Legg Mason believes that its
analysis must be considered as a whole and that considering any portion of the
analysis and of the factors considered, without considering all analyses and
factors, could create a misleading or incomplete picture of the process
underlying the Legg Mason opinions. No entity used in the above analyses as a
comparison is identical to APF, the Income Funds or the combined company. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses
relating to the values of businesses are not appraisals and may not reflect the
prices at which businesses may actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty and Legg Mason does
not assume responsibility for any future variations from such analyses or
estimates. The above paragraphs summarize the significant quantitative and
qualitative analyses performed by Legg Mason in arriving at its opinions. As
described above, Legg Mason's opinions to us were one of many factors we took
into consideration in making our determination to approve the merger
agreements.
We selected Legg Mason as our financial advisor on the basis of Legg Mason's
experience in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations for corporate
purposes, especially with respect to real estate investment trusts, franchised
real estate and transactions similar to the Acquisition. Prior to its current
engagement by us, Legg Mason has provided investment banking services to the
Income Funds from time to time, including having participated in the offering
of units by some of the Income Funds for which Legg Mason received customary
commissions. Legg Mason has not participated in the offering of any Income
Fund's units during the past two years. In addition, Legg Mason has provided
investment banking services to Commercial Net Lease Realty, Inc., which at the
time was an affiliate of CNL Group, Inc., including having participated in a
number of public offerings of its securities for which it received commissions
of approximately $675,000. Legg Mason also received $175,000 for providing a
fairness opinion
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to the special committee of the board of directors of Commercial Net Lease
Realty, Inc. in connection with its acquisition of its external advisor, also a
former affiliate of ours. Legg Mason may provide investment banking services to
APF in the future and trade APF Shares for its own account and for the accounts
of its customers, and accordingly, may at any time hold a long or short
position in APF Shares.
Pursuant to an engagement letter dated as of November 16, 1998, Legg Mason
will receive a fee, regardless of whether any Income Fund is acquired, of
$30,000 from each Income Fund for its services in rendering its fairness
opinions or $540,000 in the aggregate, including CNL Income Funds XVII and
XVIII. Legg Mason will also be reimbursed for its expenses, including the
reasonable fees and expenses of its attorneys, provided that all expenses may
not exceed $4,000 for each Income Fund and $50,000 in the aggregate. We have
agreed to indemnify Legg Mason, its affiliates and each of its directors,
officers, employees, agents, consultants, and attorneys, and each person or
firm, if any, controlling Legg Mason or any of the foregoing, against
liabilities, including liabilities under federal securities law, related to
Legg Mason's work as our financial advisor.
Income Fund Appraisals
General. Valuation Associates has prepared and delivered to each Income Fund
an appraisal report dated January 6, 1999, based upon and subject to the
matters referenced in the appraisal, containing its opinion regarding the value
of each Income Fund as of December 31, 1998. Valuation Associates is a
nationally recognized independent and fully diversified real estate appraisal
firm with extensive valuation experience. We decided to retain Valuation
Associates to render the appraisal in connection with the Acquisition because
of its valuation experience with respect to franchised restaurant real estate
and transactions similar to the Acquisition. Valuation Associates' restricted
appraisal report was intended to comply with the reporting requirements set
forth under Standard Rule 2-2 of the Uniform Standards of Professional
Appraisal practice for a Restricted Appraisal Report.
The purpose of the appraisals is to establish the relative values of the
restaurant properties in each Income Fund's portfolio. We used the appraisals
to assist us in determining the reasonableness of the proposed consideration
payable by APF to each Income Fund in the Acquisition. Valuation Associates'
appraisals of the Income Funds' restaurant property portfolios address the
market value of each Income Fund's leased and ownership interest in each
restaurant property and the liquidation value of each Income Fund's restaurant
properties, based on the assumptions and methodology discussed below.
Market Value/Going Concern--Valuation Methodology. Valuation Associates'
appraisals of the market value of the Income Funds' restaurant properties
primarily involved the income approach and the cost approach to estimating
market value. A third approach, the sales comparison approach is usually used
only in instances where the valuation of the underlying restaurant property was
required or for select closed restaurants with no contractual rent. On a
portfolio by portfolio basis, this approach was not useful, since Valuation
Associates did not find any comparable sales of large portfolios during their
research. The use of the two primary approaches in the appraisals are
summarized below.
. The income approach to value was relied upon as the primary appraisal
technique based upon the restaurant properties' capability to generate
net income and to be bought and sold in the marketplace.
. The cost approach was applied in Valuation Associates' analysis and was
considered to be relevant only where a value for a reversionary interest
in the property was required and the use of direct capitalization would
not have been the method of choice.
Since the appraisals involved the estimation of the aggregate market value
of the leased and ownership interests of each Income Funds' restaurant property
portfolio, Valuation Associates determined that only the income approach
provided a true test of market value for the restaurant properties. The value
of the restaurant properties was developed by the capitalization of the lease
payments into present value using the discounted cash flow analysis, whereby
anticipated future income streams over a ten-year holding period were
discounted
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at a market-derived rate of 8.25% to 12.50%, depending on the restaurant
property, to a net present value estimate using a cash flow model and a
revisionary value, which is the value resulting from sale at the end of the
tenth year, was discounted at a market-derived terminal capitalization rate of
9.00% to 12.50%. Valuation Associates made the following assumptions in
determining its cash flow analysis with respect to its market value analysis of
each Income Fund:
1. a 10 year holding period for each property.
2. a 4% annual allowance related to normal day-to-day operations,
including functions relating to compliance with the SEC reporting
requirements, investor relations and communications and management issues
not specifically related to property level activities.
3. a 1% annual allowance for a management fee.
4. a flat amount of $200 per restaurant property, per year for
miscellaneous expenses such as bookkeeping, legal fees and other
proportionate charges. Anticipated rental income as well as adjustments for
vacancy with no rent being paid, percentage rent, management fees and
administrative expenses were analyzed over the holding period.
The selection of the discount rate to be applied to the estimated cash flow
over the 10 year holding period for each property was based upon Valuation
Associates multi-tiered analysis of the risk involved with each restaurant
property. For each restaurant property, Valuation Associates first analyzed
both general and specific market risks, lessee/borrower risk and property risk.
Next, Valuation Associates evaluated the attitude and expectation of market
participants and compared this to a variety of alternative investment vehicles
such as stock, bonds or other real estate investments. Finally, Valuation
Associates looked at the various franchisors' company profile and financial
strength based on stock reports, investor publications, trade journals and
discussions with market participants.
At the end of the 10 year holding period, Valuation Associates assumed that
the restaurant property portfolio of each Income Fund would be sold in an
orderly manner. For purposes of such sale, Valuation Associates assumed that
the Income Fund would incur a 2% sales expense, which included any fees for
brokerage or attorneys, applicable closing costs and miscellaneous charges upon
disposition of the restaurant properties.
Property Categorization. Valuation Associates initially segregated the
restaurant properties of each Income Fund into three geographic regions:
California, the western United States, comprised of Nevada, Arizona, Oregon and
Washington, and the remaining states within the continental United States,
based on its observation that certain areas of the United States tend to have
value and demand characteristics that differ from others. Within each
geographical region, the restaurant properties were further classified relative
to their operational characteristics as either corporate, multi-unit operators
or private/single unit operator types since, in the professional opinion of
Valuation Associates, these differing operational structures tend to exhibit
variable risk characteristics and cash flows.
These second two categories were further subcategorized by their operational
status into the following groups, using Valuation Associates' terminology:
1. Store operating normally with rent being paid;
2. Closed store--corporate franchisor paying rent;
3. Closed store--franchisee paying rent;
4. Closed store--corporation in bankruptcy/no rent;
5. Closed store--private operator paying partial rent;
6. Closed store--franchisee paying no rent;
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7. Closed store--private operator paying no rent;
8. Store under construction.
Property Valuation Assumptions. The special assumptions made by Valuation
Associates in its appraisals of each Income Fund's restaurant properties are
set forth in summary form as follows:
. Client Provided Information. We provided Valuation Associates with
summarized data pertaining to sales volumes, lease data and other
property specific data. Valuation Associates assumed, for purposes of its
appraisals that this information was true and complete as of the date
given and stated in its report that it has no reason to believe that the
data with which we provided them is inaccurate in any material respect.
. Physical Inspections. We did not request that Valuation Associates
conduct personal inspections of each of the restaurant properties.
Valuation Associates, consequently, has assumed, unless otherwise
specified in the specific appraisal data, that each restaurant property
is in good physical condition and continues to exhibit good functional
utility and level of modernization in keeping with the current standards
of the individual restaurant chain.
. Litigation. Valuation Associates assumed that each of the restaurant
properties is free from any pending or proposed litigation, civil
engineering improvements or eminent domain proceedings, unless it
received specific information otherwise.
. Material Adverse Changes. The date of the appraisals is December 31,
1998. In the event that any given tenant within the portfolio files for
bankruptcy or suffers significant adverse financial or operational
changes subsequent to the date of the reports, Valuation Associates
reserves the right to revise the appraisal relating to such tenant and
such restaurant property.
. Properties Under Construction. With respect to restaurant properties
under construction, Valuation Associates assumed that the data regarding
construction cost, lease information and building specifications, among
other things, is true and correct.
. Highest and Best Use. For purposes of the appraisals, Valuation
Associates assumed that the existing building improvements represent the
highest and best use of the respective restaurant properties.
. Joint Ventures and Tenants in Common. For the restaurant properties in
each Income Fund that are under a joint venture agreement, Valuation
Associates allocated the respective proportionate value of the restaurant
property in question to each Income Fund in the joint venture agreement.
. Real Estate Only. The appraisals are for the value of the real estate
only, and do not include furniture, fixtures and equipment in the
restaurants which are not owned by the Income Funds but are typically
owned by the tenant.
. Lease Renewals. For purposes of the appraisals, Valuation Associates did
not analyze any lease renewals which would occur during the 10 year
holding period. Operators of restaurants currently performing at or above
the average restaurant sales volume of the respective restaurant chains
are assumed to have exercised the renewal options at the terms and
conditions of the last lease term or as specified in the lease renewal
option detail.
. Risk by Restaurant Operator. Valuation Associates relied solely upon
lease information supplied by us with regard to tenant-descriptive
information relating to its categorization of the type of restaurant
operators, whether corporate or private, single or multi-unit. Valuation
Associates relied upon information supplied by us, in conjunction with
publicly available and Valuation Associates' own proprietary market data,
with regard to descriptive and financial information relating to the
risks inherent with the type of restaurant operator, whether corporate or
private, single or multi-unit.
. Bankruptcies. As of the date of the reports submitted to us by Valuation
Associates, a number of restaurant properties occupied by two restaurant
chains, Long John Silver's and Boston Market, were
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protected by bankruptcy laws. Because of the uncertainty of the future
operations of these restaurant chains, Valuation Associates used market
level rents as well as capitalization rates in the analysis of the
restaurant properties vacated by these two restaurant chains.
There were no assets subject to any material qualifications by Valuation
Associates with respect to the valuation.
The date of the value of the restaurant properties of each Income Fund, as
set forth in the appraisal rendered by Valuation Associates, is December 31,
1998. As of the date of this consent solicitation, we are not aware of any
material event subsequent to the date of the appraisal that would result in any
material changes to any of the aggregate values set forth in the appraisals
rendered by Valuation Associates. The appraisals rendered by Valuation
Associates will be updated and a supplemental consent solicitation will be
provided to you and the other Limited Partners if we determine that any event
has occurred or condition has changed since the date of the appraisals that may
have caused a material change in the aggregate values reported.
Since 1997, Valuation Associates has rendered appraisals of the value of the
leased and ownership interest of the Income Funds with respect to restaurant
properties acquired by the Income Funds from third parties and received
compensation for such services of $138,750. In connection with the Acquisition,
we paid or will pay on behalf of the Income Funds, Valuation Associates
approximately $105,420 in the aggregate for its real estate appraisal services
regardless of whether one or more Income Funds are not acquired in the
Acquisition. In addition, since 1997, Valuation Associates has been retained by
APF to provide appraisal services and has received compensation for such
services of $1,179,761. We anticipate that APF may engage Valuation Associates
for future valuations and appraisals of properties of APF. There is no
contract, agreement or understanding between APF and Valuation Associates
regarding any future engagement.
Liquidation Valuation. We also requested that Valuation Associates provide
us with a liquidation value for the restaurant properties of each of the Income
Funds. In providing us with such an estimate, Valuation Associates made several
assumptions regarding the conditions under which we would be selling the
restaurant properties of each Income Fund. These assumptions were then applied
to the market value derived for each restaurant property as described above.
These assumptions include:
. Time Period. We asked that Valuation Associates assume that the
liquidation of the Income Funds' restaurant property portfolios occur
over a 12-month period. According to Valuation Associates, this would
shorten the normal marketing period estimate by as much as 50%. Thus,
Valuation Associates assumed that for a 12-month period, a discount of 5%
from the appraised present value would be necessary.
. Marketing of Restaurant Properties. Each Income Fund would make an
aggressive marketing effort in the sale of the restaurant properties. In
connection with this assumption, Valuation Associates allowed for 1/2 of
one percent of the appraised present value of each restaurant property as
a reasonable amount for the increased marketing effort and contingency
costs.
. Brokered Sales. In light of the 12-month liquidation period assumption,
Valuation Associates assumed, and we agreed, that in such a liquidation,
we would enlist the assistance of brokers. Based upon that assumption and
upon current market research, Valuation Associates applied a 2% brokerage
commission to the appraised present values of the restaurant properties.
. Other Fees. Valuation Associates also assumed that we would have
attorney, consultant and appraisal fees, as well as transfer taxes,
surveys, title insurance and other related expenses that would amount to
approximately 2% of the appraised present value of the restaurant
properties in each of the Income Funds.
. Bankruptcies. In connection with the bankruptcy filings made by tenants
of Long John Silver's and Boston Market restaurant properties, Valuation
Associates reviewed the restaurant properties of these two restaurant
chains and increased their discount rates and capitalization rates to
reflect the increased risk and the increased yield that an investor would
expect.
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Fairness Opinions of Merrill Lynch to APF's Special Committee with respect to
the CNL Restaurant Businesses and the Income Funds
Opinion of the APF Special Committee's Financial Advisor
In connection with the APF Special Committee's consideration of the
acquisition of the CNL Restaurant Businesses and the Acquisition, Merrill Lynch
delivered two separate oral and written opinions on February 10, 1999 to the
APF Special Committee to the effect that, as of such date and based upon the
assumptions made, matters considered and limits of review set forth therein,
(1) the consideration to be issued by APF in connection with the CNL
Restaurant Businesses acquisitions, when viewed together as a single
transaction, is fair, from a financial point of view, to APF and
(2) the consideration to be issued by APF in connection with the
Acquisition of the Income Funds, when viewed together as a single
transaction, is fair, from a financial point of view, to APF.
We refer to both opinions in this section as the fairness opinions.
The full text of each of Merrill Lynch's fairness opinions, which sets forth
the assumptions made, matters considered, procedures followed and
qualifications and limitations of the review undertaken by Merrill Lynch, is
attached to the Registration Statement, of which this consent solicitation is a
part, as exhibits. The descriptions of the fairness opinions set forth herein
are summaries of Merrill Lynch's analyses and are qualified in their entirety
by reference to the full text of the fairness opinions.
Merrill Lynch's fairness opinions are addressed to, and are solely for the
use and benefit of, the APF Special Committee. The fairness opinions address
only the fairness, from a financial point of view, to APF of the consideration
to be issued by APF in connection with the acquisition of the CNL Restaurant
Businesses, when viewed together as a single transaction, and the Acquisition
of the 16 Income Funds, when viewed together as a single transaction. The
fairness opinions do not address the merits of the underlying decisions by APF
to engage in any of the acquisitions. The fairness opinions were not addressed
to, and should not be relied upon by, the Limited Partners. Merrill Lynch's
analysis and preparation of the fairness opinions were undertaken from the
perspective of APF. The fairness opinions do not address the fairness of any
consideration to be received by the Limited Partners in connection with the
Acquisition. The fairness opinions do not constitute, nor should they be
construed as, a recommendation to any Limited Partner as to how such Limited
Partners should vote on any matter presented to such Limited Partners,
including any matter presented in this consent solicitation. For a discussion
of Legg Mason's fairness opinions to each Income Fund, please refer to
"Reports, Opinions and Appraisals--Fairness Opinions to General Partners."
Merrill Lynch is an internationally recognized investment banking firm and,
as part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwritings, distributions of securities and similar
activities. The APF Special Committee engaged Merrill Lynch because of these
qualifications and because of its experience in valuation and financial
analysis with respect to franchised real estate, real estate investment trusts
and transactions similar to the acquisitions of the CNL Restaurant Businesses
and the Acquisition.
In preparing the CNL Restaurant Businesses fairness opinion, Merrill Lynch,
among other things:
(1) Reviewed publicly available business and financial information
relating to the CNL Restaurant Businesses and APF that it deemed to be
relevant,
(2) Reviewed information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of the CNL
Restaurant Businesses and APF, as well as the amount and timing of the cost
savings and related expenses and synergies expected to result from the CNL
Restaurant
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Businesses acquisitions, furnished to it by the respective management teams
of APF and the CNL Restaurant Businesses,
(3) Conducted discussions with members of senior management and
representatives of the CNL Restaurant Businesses and APF concerning the
matters described in clauses (1) and (2) of this paragraph, as well as
their respective businesses and prospects before and after giving effect to
the acquisitions and the CNL Restaurant Businesses expected synergies,
(4) Reviewed valuation multiples of publicly traded companies that it
deemed relevant to derive implied ranges of values for the CNL Restaurant
Businesses and APF based upon their historical and projected results of
operations, as well as conducted a discounted cash flow analysis of the
free cash flows of APF and of the CNL Restaurant Businesses' assets,
(5) Compared the proposed financial terms of the CNL Restaurant
Businesses acquisitions with the financial terms of other comparable
transactions that it deemed to be relevant,
(6) Participated in discussions among representatives of the CNL
Restaurant Businesses and APF and their financial and legal advisors,
(7) Reviewed the potential pro forma impact of the acquisitions of the
CNL Restaurant Businesses including the CNL Restaurant Businesses expected
synergies,
(8) Reviewed drafts of the merger agreements relating to the acquisition
of the CNL Restaurant Businesses, and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as it deemed necessary, including its assessment
of general economic, market and monetary conditions.
In preparing the Income Funds fairness opinion, Merrill Lynch, among other
things:
(1) Reviewed publicly available business and financial information
relating to the Income Funds and APF that it deemed to be relevant,
(2) Reviewed information, including financial forecasts relating to the
properties, earnings, cash flow, assets, liabilities and prospects of the
Income Funds and APF, as well as the amount and timing of the cost savings
and related expenses and synergies expected to result from the Acquisition,
furnished to it by the management team of APF and by us,
(3) Reviewed and analyzed the appraisals of the Income Funds prepared by
Valuation Associates, an independent real estate appraisal firm, as well as
conducted an independent summary valuation analysis of the Income Funds'
real estate assets,
(4) Conducted discussions with members of senior management and
representatives of the Income Funds and APF and with us concerning the
matters described in clauses (1) and (2) of this paragraph, as well as
their respective businesses and prospects before and after giving effect to
the Acquisition and the Income Funds' expected synergies,
(5) Reviewed valuation multiples of publicly traded companies that it
deemed relevant to derive implied ranges of values for APF based upon its
historical and projected results of operations, as well as conducted a
discounted cash flow analysis of the free cash flows of APF and of the
Income Funds' real estate assets,
(6) Compared the proposed financial terms of the Acquisition with the
financial terms of other comparable transactions that it deemed to be
relevant,
(7) Participated in discussions among representatives of the Income
Funds, APF, us, their financial and legal advisors and our financial and
legal advisors,
(8) Reviewed the potential pro forma impact of the Acquisition including
the Income Funds' expected synergies,
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(9) Reviewed drafts of the merger agreements relating to the
Acquisition, and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as it deemed necessary, including its assessment
of general economic, market and monetary conditions.
In preparing its fairness opinions, Merrill Lynch assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to it, discussed with it or reviewed by or for it. Merrill Lynch has
not assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the CNL Restaurant Businesses, APF or the Income Funds or,
except for the Income Funds fairness opinion, been furnished with an
independent evaluation or appraisal of any of the assets or liabilities such
entities. In addition, in preparing the fairness opinions, Merrill Lynch did
not assume any obligation to conduct any physical inspection of the properties
or facilities of the CNL Restaurant Businesses, the Income Funds or APF. With
respect to the financial forecast information and the expected synergies
furnished to or discussed with it by the CNL Restaurant Businesses, the Income
Funds or APF, Merrill Lynch assumed that they had been reasonably prepared and
reflected the best currently available estimates and judgment of the respective
management teams of the CNL Restaurant Businesses, us and APF as to the
expected future financial performance of the CNL Restaurant Businesses, the
Income Funds and APF, as the case may be, and the expected synergies. Merrill
Lynch also did not assume any obligation to review the income tax consequences
of the acquisitions of the CNL Restaurant Businesses, the Income Funds, APF or
their respective equity holders. Merrill Lynch also assumed that the final form
of each of the merger agreements would be substantially similar to the last
drafts of such documents reviewed by Merrill Lynch.
Merrill Lynch has not been requested to update its fairness opinions prior
to the closings of the acquisitions of the Income Funds and the CNL Restaurant
Businesses, except in the event that not all of the Income Funds are acquired
by APF, in which case Merrill Lynch will update its opinion with respect to the
Income Funds to a date shortly before the date the Acquisition of the Income
Funds is consummated. Merrill Lynch's opinions do not imply any conclusion as
to the fairness of such acquisitions on any date subsequent to the date of its
opinions. To date, APF reasonably believes that no material event has occurred
which would adversely affect the fairness determination if it were re-
determined upon information as of a more recent date.
Merrill Lynch's fairness opinions were necessarily based upon market,
economic and other conditions as they existed and could be evaluated, and on
the information made available to Merrill Lynch, as of the date of the fairness
opinions. Merrill Lynch assumed that in the course of obtaining the necessary
consents or approvals for any of the acquisitions, no restrictions would be
imposed that will have a material adverse effect on the contemplated benefits
of the acquisitions. The CNL Restaurant Businesses fairness opinion views the
acquisitions of the CNL Restaurant Businesses, when viewed together, as a
single transaction, and does not cover the acquisition of any CNL Restaurant
Business as a stand-alone transaction. The Income Funds fairness opinion views
the Acquisition as a single transaction and does not cover the acquisition of
any Income Fund as a stand-alone transaction. In addition, Merrill Lynch was
advised by the APF Special Committee, and assumed for purposes of the Income
Funds fairness opinion, that the acquisitions of each of the Income Funds would
occur at the same time. Merrill Lynch did not assume either:
(1) the completion of the Acquisition in connection with its preparation
of the CNL Restaurant Businesses fairness opinion; or
(2) the completion of the acquisition of the CNL Restaurant Businesses
in connection with its preparation of the Income Funds fairness opinion.
In connection with the rendering of the fairness opinions, Merrill Lynch
performed a variety of financial analyses. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to a partial analysis or summary description. Accordingly,
notwithstanding the separate analyses summarized below, Merrill Lynch believes
that its analyses must be
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considered as a whole and that selecting portions of the analyses and the
factors considered by it, without considering all such analyses and factors, or
attempting to ascribe relative weights to some or all such analyses and
factors, could create an incomplete view of the evaluation process underlying
the fairness opinions. The summary set forth below does not purport to be a
complete description of the analyses performed by Merrill Lynch in arriving at
its fairness opinions.
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond our control and that of Merrill Lynch,
APF, the CNL Restaurant Businesses and the Income Funds. The analyses performed
by Merrill Lynch are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Merrill Lynch did not assign any specific weight to
any of the other analyses described below and did not draw any specific
conclusions from or with regard to any one method of analysis. With respect to
the analysis of selected comparable companies and the analysis of selected
recent transactions summarized below, no comparable company utilized as a
comparison is identical to APF and the CNL Restaurant Businesses, and no
transaction is identical to either the Acquisition or the acquisition of the
CNL Restaurant Businesses. Accordingly, an analysis of comparable companies and
comparable business combinations is not mathematical; rather, it involves
complex considerations and judgments concerning the differences in financial
and operating characteristics of the companies and other factors that could
affect the values, as the case may be, of the CNL Restaurant Businesses, APF
and the companies to which they were compared. The analyses do not purport to
be appraisals or to reflect the prices at which the CNL Restaurant Businesses
or the Income Funds might actually be sold or the prices at which the APF
Shares might actually trade at the present time or any time in the future. In
addition, the fairness opinions were just one of many factors taken into
consideration by the APF Special Committee in its consideration of any of the
acquisitions. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty and Merrill Lynch does not assume responsibility for
the accuracy of such analyses or estimates.
The following is a summary of the analyses presented by Merrill Lynch to the
APF Special Committee in connection with Merrill Lynch's fairness opinions.
Valuation Analyses--CNL Restaurant Businesses
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call Corporation, a provider of real-time, commingled research, earnings
estimates and corporate information, Merrill Lynch compared financial and
operating information and ratios and projected financial performance for the
Advisor and CNL Restaurant Development Company, which the Advisor acquired in
1998, and CNL Restaurant Financial Services Group with the corresponding
financial and operating information, projected financial performance and market
valuations for corresponding groups of publicly traded companies that Merrill
Lynch deemed to be reasonably comparable to the Advisor and the CNL Restaurant
Financial Services Group, respectively, for the purpose of its analysis. With
respect to the Advisor, Merrill Lynch selected as comparable companies a group
of publicly traded companies that act primarily as advisors or managers in the
real estate business, including CB Richard Ellis Services Inc., Grubb & Ellis
Co., Insignia Financial Group, Inc., LaSalle Partners and Trammell Crow Co.,
and a group of publicly traded companies engaged primarily in asset management,
including Affiliated Managers Group, Inc., Eaton Vance Corporation, Federated
Investors Inc., Franklin Resources, Inc., John Nuveen Company, T. Rowe Price
Associates, Inc. and Waddell & Reed Financial, Inc. With respect to the CNL
Restaurant Financial Services Group, Merrill Lynch selected a group of publicly
traded mortgage companies, including AMRESCO, Franchise Mortgage Acceptance
Corporation and ContiFinancial (all of which are C-corporations) and Anthracite
Capital (which is a REIT). We refer to the four groups of comparable companies
listed above as the CNL Restaurant Businesses comparable companies.
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Merrill Lynch's comparisons resulted in the following relevant ranges for
the real estate services comparable companies as of February 5, 1999:
. a range of total market capitalization as a multiple of estimated 1998
revenue of 0.7x to 2.1x, with a mean of 1.4x and a median of 1.5x;
. a range of total market capitalization as a multiple of estimated 1998
EBITDA of 6.3x to 9.8x, with a mean of 7.9x and a median of 7.9x;
. a range of total market capitalization as a multiple of estimated 1999
EBITDA of 5.2x to 8.4x, with a mean of 6.6x and a median of 6.4x;
. a range of share price as a multiple of estimated 1998 earning per share,
or EPS of 9.1x to 25.4x, with a mean of 15.3x and a median of 11.4x;
. a range of share price as a multiple of estimated 1999 EPS of 7.5x to
24.2x, with a mean of 14.5x and a median of 9.7x;
. a range of share price as a multiple of estimated 2000 EPS of 8.3x to
21.6x, with a mean of 16.7x and a median of 20.1x; and
. five-year compounded annual growth rates in EPS of 15.0% to 25.0%, with a
mean of 20.0% and a median of 20.0%.
Merrill Lynch's comparisons resulted in the following relevant ranges for
the asset management comparable companies as of February 5, 1999:
. a range of enterprise value as a multiple of estimated 1998 EBITDA of
7.7x to 11.7x, with a mean of 9.4x and a median of 9.2x;
. a range of enterprise value as a multiple of estimated 1999 EBITDA of
6.8x to 9.4x, with a mean of 8.0x and a median of 7.9x;
. a range of share price as a multiple of estimated 1998 EPS of 14.9x to
26.2x, with a mean of 19.8x and a median of 17.3x;
. a range of share price as a multiple of estimated 1999 EPS of 12.7x to
21.8x, with a mean of 16.6x and a median of 16.3x; and
. five-year compounded annual growth rates in EPS of 10% to 35%, with a
mean of 19% and a median of 17%.
By applying what Merrill Lynch considered to be the relevant range of
multiples to the Advisor's 1998 adjusted EBITDA, this analysis yielded an
implied range of values for the Advisor of approximately $67.1 million to $86.2
million. The Advisor's 1998 EBITDA was adjusted to account for the average
acquisition fees that the Advisor earned in 1997 and the projected acquisition
fees for 1999. The adjusted 1998 EBITDA is $10.0 million less than that
actually earned by the Advisor in 1998. The Advisor's 1998 EBITDA was adjusted
downward to reflect what Merrill Lynch considered to be a normalized level of
acquisition fees.
Merrill Lynch's comparisons resulted in the following relevant ranges for
the CNL Restaurant Financial Services Group C-corporation comparable companies
as of February 5, 1999:
. a range of share price as a multiple of estimated 1998 EPS of 7.0x to
21.6x, with a mean of 14.3x and a median of 14.3x;
. a range of share price as a multiple of estimated 1999 EPS of 2.9x to
8.3x, with a mean of 5.6x and a median of 5.7x;
. a share price as a multiple of estimated 2000 EPS of 6.8x; and
. five-year compounded annual growth rates in EPS of 18.0% to 20.0%, with a
mean of 19.3% and a median of 20.0%.
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Merrill Lynch's comparisons resulted in the following relevant ranges for
the CNL Restaurant Financial Services Group REIT comparable company as of
February 5, 1999:
.a share price as a multiple of estimated 1999 funds from operations per
share of 6.5x; and
.a five-year compounded annual growth rate in FFO per share of 20.0%.
By applying what Merrill Lynch considered to be the relevant range of
multiples to CNL Restaurant Financial Services Group's 1999 projected net
income, this analysis yielded an implied range of values for CNL Restaurant
Financial Services Group of approximately $40.0 million to $62.2 million.
None of the companies utilized in the above analyses for comparative
purposes is, of course, identical to Advisor or the CNL Restaurant Financial
Services Group. Accordingly, a complete analysis of the results of the
foregoing calculations cannot be limited to a quantitative review of such
results and involves complex considerations and judgements concerning
differences in historical and projected financial and operating characteristics
of the CNL Restaurant Businesses comparable companies and other factors that
could affect the public trading value of the CNL Restaurant Businesses
comparable companies as well as that of the Advisor and the CNL Restaurant
Financial Services Group. In addition, the multiples of market value to
estimated EBITDA, funds from operations and earnings per share for the CNL
Restaurant Businesses comparable companies are based on projections prepared by
research analysts using only publicly available information. Accordingly, such
estimates may or may not be accurate.
Analysis of Selected Comparable Acquisition Transactions. Merrill Lynch
reviewed publicly available information regarding selected transactions in
which public real estate companies acquired their external advisor. These
transactions included:
. AMB Property Corporation's acquisition of AMB Realty Advisors;
. Commercial Net Lease Realty Inc.'s acquisition of CNL Realty Advisors,
Inc.;
. Criimi Mae's acquisition of C.R.I., Inc.;
. Equity Office Properties acquisition of its management business;
. Franchise Finance Corporation of America's acquisition of FFCA Management
Co.;
. Security Capital Atlantic's acquisition of Security Capital Atlantic,
Inc.;
. Security Capital Industrial's acquisition of Security Capital Industrial,
Inc.;
. Security Capital Pacific Inc.'s acquisition of Security Capital Pacific;
. Realty Income Corporation's acquisition of R.I.C. Advisor Inc.; and
. Shurgard Storage Centers' acquisition of Shurgard Inc.
Merrill Lynch then compared financial ratios for the Advisor comparable
transactions to those of APF's proposed acquisition of the Advisor. Merrill
Lynch compared the prices paid in the Advisor comparable transactions in terms
of, among other things, (a) the transaction value as a multiple of trailing
EBITDA, (b) the transaction value as a multiple of trailing revenues, (c) the
transaction value as a multiple of forward calendar year EBITDA and (d) the
transaction value as a multiple of forward calendar year revenues. An analysis
of the multiples for the Advisor comparable transactions produced the following
results:
. transaction value as a multiple of trailing EBITDA yielded a range of
5.4x to 11.4x, with a mean of 8.5x and a median of 8.2x;
. transaction value as a multiple of trailing revenues yielded a range of
2.2x to 6.2x, with a mean of 3.3x and a median of 3.0x;
. transaction value as a multiple of forward calendar year EBITDA yielded a
range of 6.6x to 8.1x, with a mean of 7.5x and a median of 7.7x; and
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. transaction value as a multiple of forward calendar year revenues yielded
a range of 1.8x to 2.5x, with a mean of 2.1x and a median of 2.1x.
The information was obtained from publicly filed documents in connection with
each of the Advisor comparable transactions. In many instances, future
operating estimates were not provided.
By applying what Merrill Lynch considered to be the appropriate range of
multiples to the Advisor's 1998 adjusted EBITDA, this analysis yielded an
implied range of values of approximately $67.1 million to $86.2 million.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses on a stand- alone basis of the Advisor based upon financial
projections provided by the Advisor's management. Utilizing these projections,
Merrill Lynch calculated a range of total equity values for the Advisor based
upon the present value of the sum of (a) the Advisor's free cash flows from
1999 through 2003 and (b) the present value of the terminal value of the
Advisor in 2003 calculated utilizing a range of multiples times the Advisor's
projected EBITDA in such year. Applying discount rates ranging from 9.0% to
11.0% and terminal multiples of projected EBITDA ranging from 6.0x to 8.0x,
Merrill Lynch calculated the implied total equity value of the Advisor in a
range from $211.7 million to $283.8 million.
Merrill Lynch also performed discounted cash flow analyses on a stand-alone
basis of the CNL Restaurant Financial Services Group based upon financial
projections provided by the CNL Restaurant Financial Services Group's
management. Utilizing these projections, Merrill Lynch calculated a range of
total equity value for the CNL Restaurant Financial Services Group based upon
the present value of the sum of (a) the CNL Restaurant Financial Services
Group's free cash flows from 1999 through 2003 and (b) the present value of the
terminal value of the CNL Restaurant Financial Services Group in 2003
calculated utilizing a range of multiples times the CNL Restaurant Financial
Services Group's projected net income in such year. Applying discount rates
ranging from 20.0% to 30.0% and terminal multiples of projected net income
ranging from 5.0x to 7.0x, Merrill Lynch calculated the implied total equity
value of the CNL Restaurant Financial Services Group in a range from $20.5
million to $73.2 million.
Pro Forma Merger Analysis--CNL Restaurant Businesses
Merrill Lynch analyzed the pro forma effects resulting from the acquisition
of the CNL Restaurant Businesses, including the potential impact on APF's
projected stand-alone funds from operations, or FFO per share and the
anticipated accretion/dilution to APF's FFO per share resulting from the
acquisition of the CNL Restaurant Businesses. Merrill Lynch observed that,
after giving effect to the acquisition of the CNL Restaurant Businesses
inclusive of cost savings, the acquisition of the CNL Restaurant Businesses
would be accretive to APF's projected FFO per share in each of the years 1999
through 2001, inclusive.
Pro Forma Contribution Analysis--CNL Restaurant Businesses
Merrill Lynch analyzed the pro forma effects resulting from the
contributions of the CNL Restaurant Businesses to APF (as further discussed
below). Using projected operating results and other information supplied by the
management teams of APF and the CNL Restaurant Businesses for the years ended
1999 and 2000, Merrill Lynch calculated that CNL Restaurant Businesses would
contribute approximately 17.1% of the FFO to the combined company in 1999 and
approximately 21.5% of the FFO to the combined company in 2000 in exchange for
equity ownership in APF of 14.1% in 1999 and 11.1% in 2000, respectively.
Relative Discounted Cash Flow Analysis--CNL Restaurant Businesses
Utilizing the discounted cash flow analyses performed on a stand-alone basis
for APF (see APF discussion below) and the CNL Restaurant Businesses, Merrill
Lynch calculated the equity value of the CNL Restaurant Businesses as a
percentage of the sum of the equity values of APF and the CNL Restaurant
Businesses and compared this to the percentage equity ownership interest
offered for the CNL Restaurant Businesses as consideration in the post-merger
APF. Based on this analysis, Merrill Lynch determined that the CNL
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Restaurant Businesses contributed between 18.8% and 31.5% of the aggregate
equity value of the combined company, in exchange for equity ownership in APF
of 14.1%.
Valuation Analyses--Income Funds
Net Asset Valuation Analysis. Merrill Lynch performed a net asset valuation,
or NAV, for the Income Funds. The NAV for each Income Fund was estimated by
combining the stabilized net operating incomes for each of the restaurant
properties comprising each of the Income Funds. Merrill Lynch relied on
restaurant property rental information included in the appraisal analyses
prepared by Valuation Associates to derive 1999 stabilized net operating income
for each restaurant property in each Income Fund. In determining the
appropriate range of capitalization rates for each Income Fund, Merrill Lynch
considered several parameters including the quality of the concepts and the
remaining term of the restaurant property leases. The capitalization rates were
estimated based on comparable sales of triple-net lease restaurant properties.
A sample of 89 comparable sales, provided by Valuation Associates, which
occurred from January 1997 through December 1998, indicated a mean
capitalization rate of 9.3% and a median capitalization rate of 9.0%. In
addition Merrill Lynch considered the capitalization rates indicated from
actual dispositions recently made by the Income Funds, which totalled 56 sales
from January 1997 through December 1998. These sales indicated a mean
capitalization rate of 9.7% and a median capitalization rate of 9.5%. Merrill
Lynch excluded seven sales with capitalization rates above 14% from the mean
and median calculations. In addition, Merrill Lynch interviewed several
brokers, investors and appraisers active in the triple-net lease market for
restaurant properties to help confirm the reasonableness of the capitalization
rates utilized in its NAV analysis. The Merrill Lynch analysis indicated an
aggregated value range for the Income Funds portfolio of $503.5 million to
$556.0 million.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses on the Income Funds based upon financial projections provided by the
General Partners of the Income Funds. Utilizing these projections, Merrill
Lynch calculated a range of total equity values for the Income Funds based upon
the present value of the sum of (1) the Income Funds' free cash flows from 1999
through 2003 and (2) the projected terminal value of the Income Funds
calculated by applying a perpetual growth rate to 2003 free cash flow and
adding to such sum the net cash outstanding as of December 31, 1998. Applying
discount rates ranging from 11.0% to 12.0% and perpetual growth rates ranging
from 1.5% to 2.5%, Merrill Lynch calculated the implied total equity value of
the Income Funds in a range from $481.4 million to $571.2 million.
Pro Forma Merger Analysis--Income Funds
Merrill Lynch analyzed the pro forma effects resulting from the Acquisition,
including the potential impact on APF's projected FFO per share and the
anticipated accretion/dilution to APF's FFO per share resulting from the
Acquisition. Merrill Lynch observed that, after giving effect to the
Acquisition, inclusive of cost savings, the Acquisition would be accretive to
APF's projected stand-alone FFO per share in each of the years 1999 and 2000
and dilutive for the year 2001. The transaction is dilutive in 2001 because APF
stand alone has a growth rate in excess of the Income Funds due to its ability
to acquire new assets over time which generates FFO per share growth in excess
of that in an unlevered, stagnant portfolio such as the Income Funds.
Pro Forma Contribution Analysis--Income Funds
Merrill Lynch also analyzed the pro forma effects resulting from the
contributions of the CNL Income Funds to APF as discussed below. For purposes
of this analysis it was assumed that the synergies associated with the
contribution of the Income Funds are included in the FFO of the Income Funds.
Using projected operating results and other information supplied by the
management teams of APF and the Income Funds for the years ended 1999 and 2000,
Merrill Lynch calculated that the Income Funds would contribute approximately
42.6% of the FFO for the combined company in 1999 and approximately 34.9% of
the FFO for the combined company in 2000 in exchange for equity ownership in
APF of 42.3% in 1999 and 34.6% in 2000, respectively.
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Relative Discounted Cash Flow Analysis -- Income Funds
Utilizing the discounted cash flow analyses performed on a stand-alone basis
for APF, as discussed below, and the Income Funds, Merrill Lynch calculated the
equity value of the Income Funds as a percentage of the sum of the equity
values of APF and the Income Funds and compared this to the percentage equity
ownership interest offered for the Income Funds as consideration in the post-
Acquisition APF. Based on this analysis, Merrill Lynch determined that the
Income Funds contributed between 32.4% and 42.4% of the aggregate equity value
of the combined company, in exchange for equity ownership in APF of 42.2%.
Valuation Analyses--APF
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results taken from
recent research reports published by First Call, Merrill Lynch compared
financial and operating information for APF, on a stand alone basis, with the
corresponding financial and operating information for a group of corresponding
publicly traded companies that Merrill Lynch deemed to be reasonably comparable
to APF for the purpose of its analysis. With respect to APF, Merrill Lynch
selected as comparable companies a group of publicly traded, triple-net lease
REITs, including Capital Automotive REIT, Captec Net Lease Realty, Inc.,
Commercial Net Lease Realty, Inc., Entertainment Property Trust, Franchise
Finance Corporation of America, National Golf Properties, Inc., Prison Realty
Trust, Inc., Realty Income Corporation, TriNet Corporate Realty Trust, Inc. and
U.S. Restaurant Properties, Inc.
Merrill Lynch's comparisons resulted in the following relevant ranges for
the APF comparable companies as of February 5, 1999:
. a range of share price as a multiple of estimated 1998 FFO per share of
7.3x to 11.3x, with a mean of 9.5x and a median of 9.7x;
. a range of share price as a multiple of estimated 1999 FFO per share of
6.7x to 9.7x, with a mean of 8.2x and a median of 8.3x;
. a range of share price as a multiple of estimated 2000 FFO per share of
6.7x to 8.9x, with a mean of 7.7x and a median of 8.0x; and
. a range of five-year compounded annual growth rates in FFO per share of
6.0% to 20.0%, with a mean of 11.0% and a median of 9.5%.
By applying what Merrill Lynch considered to be the relevant range of
multiples, this analysis yielded an implied range of values for APF shares of
$6.83 to $8.65 on a diluted basis and prior to the reverse stock split.
Although not relevant to or impacting on its fairness determination with
respect to the acquisition of CNL Restaurant Businesses or the Acquisition,
Merrill Lynch in connection with its oral delivery of the fairness opinions
supplementally advised the APF Special Committee that over the period from June
1995 through August 1998 the APF comparable companies' median share price as a
multiple of current year FFO per share was in a range of 9.5x to approximately
11.5x which, if applied to the estimated 1999 FFO per share of APF, would imply
a per share value range of $8.65 to $10.47 on a diluted basis and prior to the
reverse stock split.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses on a stand- alone basis of APF based upon financial projections
provided by APF's management. Utilizing these projections, Merrill Lynch
calculated a range of equity values per share for APF based upon the present
value of the sum of (a) APF's dividends per share from 1999 through 2003 and
(b) the projected terminal value of APF in 2003 calculated utilizing a range of
multiples of times APF's projected FFO per share in such year. Applying
discount rates ranging from 9.5% to 11.5% and terminal multiples of projected
FFO per share ranging from 7.0x to 9.0x, Merrill Lynch calculated the implied
equity value per APF Share in a range from $10.38 to $13.40 on a diluted basis,
prior to the reverse stock split. Merrill Lynch then calculated a range of
equity values per APF Share based upon the present value of the sum of (a)
APF's FFO per share from 1999 through 2003 and (b) the projected terminal value
of APF in 2003 calculated utilizing a range of multiples of APF's projected FFO
per share in such year. Applying discount rates ranging from 9.5% to 11.5% and
terminal multiples of projected FFO per share ranging from 7.0x to 9.0x,
Merrill Lynch calculated the implied equity
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value per APF Share in a range from $11.32 to $14.41 on a diluted basis, prior
to the reverse stock split. Merrill Lynch then calculated a range of equity
values per APF Share based upon the present value of the sum of (a) APF's
adjusted FFO per share from 1999 through 2003 and (b) the projected terminal
value of APF in 2003 calculated utilizing a range of multiples times APF's
projected FFO per share in such year. Applying discount rates ranging from 9.5%
to 11.5% and terminal multiples of projected FFO per share ranging from 7.0x to
9.0x, Merrill Lynch calculated the implied equity value per APF Share in a
range from $11.30 to $14.40 on a diluted basis, prior to the reverse stock
split.
Pursuant to a letter agreement dated December 4, 1998, APF agreed to pay
Merrill Lynch a fee on the date Merrill Lynch delivered its fairness opinions
to the APF Special Committee as consideration for the rendering of the fairness
opinions, and if reasonably requested by APF prior to consummation of the
Acquisition, any bring-down opinions. In addition, APF agreed to reimburse
Merrill Lynch for its reasonable out-of-pocket expenses incurred in connection
with its services provided under such letter agreement, including the
reasonable fees and disbursements of its legal counsel. APF also agreed to
indemnify Merrill Lynch and its affiliates against liabilities related to,
based upon or arising out of its rendering of services under such letter
agreement.
Merrill Lynch is currently engaged by APF, as is Salomon Smith Barney, to
act as underwriter or placement agent in connection with proposed equity
financings for APF that may in the future be undertaken by APF and, if it acts
in this capacity in connection with such financings, it will receive customary
compensation for this service as provided under the terms of such engagement.
In addition, Merrill Lynch was retained (1) in June 1998 by APF to act as
financial advisor in connection with the review of strategic alternatives
considered by APF and (2) in July 1998 by the CNL Financial Corporation and CNL
Financial Services, Inc. to act as financial advisor and lead placement agent
in connection with the structuring and issuance of franchise loan-backed
securities and has received fees for the rendering of such services. In
addition, in the ordinary course of business, Merrill Lynch may in the future
actively trade APF Shares for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
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THE ACQUISITION
In order to effect the Acquisition of the Income Funds by APF or its
subsidiaries, the Income Funds that vote in favor of the Acquisition will be
merged with and into the Operating Partnership, which is a wholly owned
subsidiary of APF. As described above, you will receive APF Shares in exchange
for your units, not Operating Partnership units. Following is an overview of
the principal components and other key aspects of the Acquisition, including
the merger. We note, however, that the description herein is a summary, and we
refer you to each of the Agreements and Plans of Merger, as amended, by and
between APF and each of the Income Funds, which we refer to as the Merger
Agreements, the copy or copies of which for your Income Fund(s) is or are
attached to the supplements accompanying this consent solicitation as Appendix
B, for a complete description of the merger of the Income Funds with and into
the Operating Partnership. By this reference to the Merger Agreements, we are
incorporating each of the Merger Agreements into this consent solicitation as
required by the federal securities laws.
Conditions to the Acquisition
We have established the conditions that must be satisfied in order for the
Acquisition to be consummated, including the following:
. the APF Shares must be listed on the NYSE prior to or concurrently with
the consummation of the Acquisition;
. the stockholders of APF must have approved the increase in the number of
shares authorized in the Articles of Incorporation to be issued by APF,
at a special meeting of APF stockholders scheduled for , 2000.
. if fewer than all of the Income Funds approve the Acquisition, the
Special Committee of APF must receive a fairness opinion from Merrill
Lynch stating that the consideration payable to the approving Income
Funds is fair to APF from a financial point of view.
As a condition to closing the Acquisition of any Income Fund, the aggregate
amount of notes to be issued to Limited Partners who elect to receive notes may
not exceed 15% of the estimated value of APF Shares otherwise payable to such
Income Fund based on the exchange value. To the extent that the aggregate
amount of notes to be issued to the Limited Partners of any Fund exceeds this
15% limitation, APF has the right, pursuant to the terms each Income Fund's
Merger Agreement, to decline to acquire the Income Fund.
It is presently APF's intention, upon listing of the APF Shares or shortly
thereafter to begin an underwritten public offering if market conditions
permit. Such a public offering, however, is not a condition to the closing of
the Acquisition.
Merger Agreements
If your Income Fund approves the Acquisition, that approval also constitutes
consent to the merger of the Income Fund with and into the Operating
Partnership pursuant to the terms and conditions of the Merger Agreement into
which your Income Fund entered. Each of the Merger Agreements generally
provides that in accordance with its terms, the Florida Revised Uniform Limited
Partnership Act (1986) and the Delaware Revised Uniform Limited Partnership
Act, at the time of filing of a merger certificate in each state, the Income
Funds that approve the Acquisition will be merged with and into the Operating
Partnership, and the Operating Partnership will continue as the surviving
entity. At the time the merger occurs, all of the restaurant properties and
other assets and the liabilities of each Income Fund approving the Acquisition
will be deemed to have been transferred to the Operating Partnership.
If your Income Fund approves the Acquisition, it will also have consented to
all actions necessary or appropriate to accomplish the Acquisition, provided
that, with respect to Income Funds XI through XVI, a
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separate vote will be required to approve any required amendments to the
partnership agreement governing that Income Fund. For information regarding how
your Income Fund's partnership agreement is being amended in connection with
approval of the Acquisition, we encourage you to read the supplement pertaining
to your Income Fund that accompanies this consent solicitation.
Approval and Recommendation of the General Partners
We, as the general partners of the Income Funds, have unanimously approved
the Acquisition. We believe that the terms of the Acquisition provide
substantial benefits and are fair to you. As such, we recommend that you vote
"For" approval of the Acquisition. For a specific description of our analysis
in reaching this recommendation, see "Our Recommendation and Fairness
Determination." You are, however, urged to consider the risks described in
"Risk Factors" and the comparison of an investment in the Income Funds versus
an investment in APF in "Comparison of Income Funds and APF and of the
Ownership of Units, Notes and APF Shares." As we have already discussed, if
your Income Fund elects to be acquired in the Acquisition, you will have tax
consequences, if you are subject to federal income tax. Accordingly, we also
recommend that you consult with your tax advisor prior to casting your vote.
Vote Required for Approval of the Acquisition
In order for APF to acquire your Income Fund, Limited Partners holding a
majority of the outstanding units of the Income Fund must vote in favor of the
Acquisition. As long as a single Income Fund votes in favor of the Acquisition
and all of the conditions to closing are met, the Acquisition will be
consummated with respect to that Income Fund regardless of whether any other
Income Fund votes in favor of the Acquisition.
Consideration
If your Income Fund is acquired by APF, you will receive APF Shares unless
you vote against the Acquisition and affirmatively elect to receive notes
described below. If your Income Fund votes against the Acquisition, your Income
Fund will continue as an independent entity which will contract with APF to
provide restaurant property management services under the same terms pursuant
to which such services were previously provided by the Advisor.
APF Shares. The consideration payable to each Income Fund will consist of
APF Shares. The number of APF Shares that you will receive upon the
consummation of the Acquisition will be in accordance with your Income Fund's
partnership agreement which specifies how consideration is distributed to
partners in the event of a liquidation of your Income Fund. In addition, in the
event that your Income Fund approves the Acquisition, the aggregate number of
APF Shares paid to your Income Fund will be reduced by your Income Fund's
proportionate share of its expenses of the Acquisition. You will receive APF
Shares unless you vote "Against" the Acquisition and expressly elect to receive
the notes, in which case you would receive notes in an amount equal to 97% of
your portion of the APF Share consideration that would have otherwise been paid
to your Income Fund, based on the exchange value.
Notes. If your Fund votes in favor of and you have voted "Against" the
Acquisition, but you do not wish to own APF Shares, you can elect to receive
notes. The payment received by you or other Limited Partners who elect the
notes will be equal to 97% of your portion of the APF Share consideration that
would have otherwise been paid to your Income Fund, based on the exchange
value. The notes will bear interest at a rate of 7.0% annually and will mature
on , 2005 callable at any time.
General Partners. Assuming that all of the Income Funds are acquired in the
Acquisition, we, as the general partners of the Income Funds, also will receive
an estimated aggregate of 139,519 APF Shares as a result of our general partner
interests in the Income Funds. The APF Shares allocated to your Income Fund
will be issued to and allocated between you and the other Limited Partners,
excluding those amounts that will be allocated to Limited Partners that elected
to receive the notes, and us in the same manner as net liquidation
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proceeds would be distributed under your Income Fund's partnership agreement as
if your Income Fund's restaurant properties and other assets were sold, and
your Income Fund were distributing net liquidation proceeds in an amount equal
to the value of the number of APF Shares paid to each Income Fund by APF. For a
discussion of the portion of the consideration payable to us if your Income
Fund is acquired, see the supplement accompanying this consent solicitation.
Estimated Value of APF Shares Payable to Income Funds
The following table sets forth information for each Income Fund regarding
the estimated value of the consideration that your Income Fund will receive in
the Acquisition. The data in these tables assumes that none of the Limited
Partners has elected the notes. You should note that the APF Shares may trade
at prices significantly below the exchange value upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Investments
Original less
Limited Distributions
Partner of Net Sales Number of Estimated Value
Investments Proceeds per APF Estimated of APF Shares per
less Average Shares Value of Estimated Value Average $10,000
Distributions $10,000 Offered APF Shares Estimated of APF Shares Original Limited
of Net Sales Original to Income Payable to Acquisition after Acquisition Partner
Income Fund Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ----------- ------------- ------------- --------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
I....................... $12,001,150 $8,001 578,880 $11,577,600 $153,000 $11,424,600 $7,616
II...................... 23,046,408 9,219 1,196,634 23,932,680 285,000 23,647,680 9,459
III..................... 22,253,502 8,901 1,041,451 20,829,020 258,000 20,571,020 8,228
IV...................... 28,226,458 9,409 1,334,008 26,680,160 333,000 26,347,160 8,782
V....................... 22,258,682 8,903 1,024,516 20,490,320 273,000 20,217,320 8,087
VI...................... 35,000,000 10,000 1,865,194 37,303,880 409,000 36,894,880 10,431
VII..................... 30,000,000 10,000 1,601,186 32,023,720 378,000 31,645,720 10,441
VIII.................... 35,000,000 10,000 2,021,318 40,426,360 446,000 39,980,360 11,263
IX...................... 35,000,000 10,000 1,850,049 37,000,980 424,000 36,576,980 10,353
X....................... 40,000,000 10,000 2,121,622 42,432,440 467,000 41,965,440 10,393
XI...................... 40,000,000 10,000 2,197,098 43,941,960 464,000 43,477,960 10,763
XII..................... 45,000,000 10,000 2,384,248 47,684,960 504,000 47,180,960 10,405
XIII.................... 40,000,000 10,000 1,943,093 38,861,860 430,000 38,431,860 9,608
XIV..................... 45,000,000 10,000 2,156,521 43,130,420 464,000 42,666,420 9,481
XV...................... 40,000,000 10,000 1,866,951 37,339,020 412,000 36,927,020 9,232
XVI..................... 45,000,000 10,000 2,160,474 43,209,480 462,000 42,747,480 9,499
</TABLE>
- --------
(1) The original Limited Partner investments in CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd.
and CNL Income Fund V, Ltd. were $15,000,000, $25,000,000, $25,000,000,
$30,000,000 and $25,000,000, respectively. These columns reflect, as of
December 31, 1998 an adjustment to the Limited Partners' original
investments for special distributions of net sales proceeds from sales of
restaurant properties and net sales proceeds added to these Income Funds'
working capital and subsequently distributed to Limited Partners of CNL
Income Fund, Ltd. through CNL Income Fund V, Ltd.
No Fractional APF Shares
No fractional APF Shares will be issued by APF in the Acquisition. Each
Limited Partner who would otherwise be entitled to fractional APF Shares will
receive one APF Share for each fractional APF Share of 0.5 or greater. No APF
Shares will be issued for fractional APF Shares of less than 0.5. The maximum
amount which a Limited Partner could forfeit if such Limited Partner's
fractional share was 0.4999 is approximately $9.99, on a per Limited Partner,
not a per unit, basis, assuming the exchange value.
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Effect of the Acquisition on Limited Partners Who Vote Against the Acquisition
If you vote "Against" the Acquisition, you do not have a statutory right to
elect to be paid the appraised value of your interest in the Income Fund. If
you vote "Against" the Acquisition, you do have the right to elect to receive
notes if your Income Fund otherwise approves the Acquisition. Under this option
you would receive as consideration an amount of notes equal to 97% of your
portion of the APF Share consideration that would otherwise have been paid to
your Income Fund, based on the exchange value. The terms of the notes are
described in more detail under "Description of Notes" on page 173. Holders of
the notes will be entitled to receive only the principal and interest payments
required by the terms of the notes and will not have the rights of APF
stockholders to participate in APF's dividends and distributions or in any
growth in the value of APF's stockholders' equity.
Effect of Acquisition on Income Funds Not Acquired
If APF does not acquire your Income Fund in the Acquisition, it will
continue to operate as a separate limited partnership with its own assets and
liabilities. There will be no change in the investment objectives of the Income
Fund, and the Income Fund will remain subject to the terms of its partnership
agreement. Since APF acquired the Advisor in its acquisition of the CNL
Restaurant Businesses, APF has assumed all of the management functions formerly
performed by the Advisor for the Income Funds. Thus, for any Income Funds not
acquired in the Acquisition, APF will provide such management functions.
Acquisition Expenses
If APF acquires your Income Fund in the Acquisition, your Income Fund will
pay a portion of the transaction costs as reflected in the supplement attached
to this consent solicitation. The number of APF Shares that you receive will
reflect a reduction for your Income Fund's expenses of the Acquisition.
If your Income Fund votes "Against" the Acquisition, then your Income Fund
will bear the portion of its Acquisition expenses based upon the percentage of
votes "For" the Acquisition, and we, as the general partners of the Income
Fund, will bear the portion of such Acquisition expenses based upon the
percentage of votes "Against" the Acquisition, plus any abstentions.
Accounting Treatment
The Acquisition will be accounted for as a purchase under GAAP.
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BENEFITS OF THE ACQUISITION
The Acquisition is being proposed at this time because we believe, after
considering the risks described above, that the expected benefits of the
Acquisition outweigh the risks of the Acquisition, and we believe that it is
the best way for you to maximize returns on your investment. You should
carefully compare the risks of approving the Acquisition described in "Risk
Factors" with the expected benefits of your Income Fund being acquired. The
expected benefits include the following:
Growth Potential
We believe that there is greater potential for increased distributions to
you as an APF stockholder and for appreciation in the price of your APF Shares
than there would be for you as a Limited Partner of your Income Fund holding
units. This growth potential results from future acquisitions of additional
restaurant properties, making mortgage loans and engaging in financing
activities. In addition, as a result of APF's acquisition of the Advisor, we
believe that the value of APF Shares will be enhanced because, as discussed
previously, the investing public prefers internally-advised REITs. We believe
that substantial opportunities currently exist to acquire additional restaurant
properties at attractive prices and to make mortgage loans on favorable terms.
Your Income Fund cannot take advantage of such opportunities because its
partnership agreement generally restricts it from borrowing, making additional
acquisitions, developing restaurant properties and making mortgage loans.
Greater Access to Capital
In addition, because APF can use cash, APF Shares or indebtedness to acquire
additional restaurant properties, APF will have a greater degree of flexibility
in making future acquisitions on advantageous economic terms. APF may also take
advantage of its structure as an umbrella partnership REIT, or an UPREIT, to
acquire additional portfolios of restaurant properties by using, as
consideration, units of its Operating Partnership. The use of Operating
Partnership units enables APF to make acquisitions in a structure that permits
the seller to defer the federal taxes due on the sale while providing to
sellers the same opportunities to participate in APF's growth as the holders of
APF Shares have. This ability gives APF a tremendous advantage over other
potential acquirors who do not have the option of using partnership units, but
instead may only acquire these portfolios in a taxable manner using cash or
capital stock, particularly in instances where the sellers would have to
recognize a substantial amount of taxable gain as a result of the transaction.
APF's ability to acquire portfolios in a tax-deferred structure for the seller
may allow APF to pay less consideration than would otherwise be necessary in a
taxable transaction due to the seller's ability to control the timing of its
gain recognition. We believe that as a result of its publicly traded equity
securities, large base of assets and ability to incur indebtedness, APF will
have substantial access to the capital necessary for funding its operations,
consummating future acquisitions and making mortgage loans on attractive terms.
However, APF currently intends to maintain a ratio of total indebtedness to
total assets of not more than 45%.
Diversification Benefit
The combination of the restaurant properties owned by the Income Funds with
APF's existing restaurant properties, as well as future property acquisitions
made by APF, will diversify your investment over a larger number of properties,
a broader group of restaurant types and tenants and geographic locations. As of
June 30, 1999, approximately 94% of APF's tenants were either the franchisor of
the restaurant chain or top franchisee of a particular restaurant chain based
on sales. Your investment also will become more diversified because a portion
of your investment in APF would be represented by the mortgage loans that APF
makes and by its other financing activities. Your investment will also change
from being an interest in a closed, finite-life entity to an investment in a
growing operating company. This diversification will reduce the dependence of
your investment upon the performance of, and the exposure to the risks
associated with, the limited portfolio of restaurant properties currently owned
by your Income Fund.
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Operational Economies of Scale
The combination of the Income Funds into the business already owned by APF
will result in administrative and operational economies of scale and cost
savings for APF. Particularly because the Income Funds are all public entities
subject to the SEC's reporting requirements, the combination of the Income
Funds into a single public company in APF would save considerable compliance
costs. In addition, if your Income Fund is acquired, you will no longer receive
a Schedule K-1 for your tax reporting which generally was provided to you each
February. You will instead receive a Form 1099-DIV, a much simpler reporting
form, which will be provided to you each January.
Liquidity
We believe the Acquisition provides you with liquidity of your investment,
which means your APF Shares would be freely tradable. As a holder of APF Shares
and assuming APF acquires all of the Income Funds, you will be a stockholder of
a NYSE-listed company that will have total assets of approximately $1.5 billion
and more than 71,000 stockholders and is expected to be one of the largest
triple-net lease REITs in the United States. Concurrently with or shortly
following the Acquisition, APF intends to engage in an underwritten public
offering, if market conditions permit. Such a public offering would promote a
following of APF by market analysts and institutional interest in APF which, in
turn, could further enhance the liquidity of the APF Shares.
We believe this is an advantage over your current Income Fund investment
primarily for two reasons:
. the market for the units you own is very limited because the units are
not listed on an exchange and, therefore, you may have limited access to
potential buyers; and
. your Income Fund's partnership agreement contains limitations on the
transfer of your units, and you may not be able to sell your units even
if you were able to locate a willing buyer.
Additionally, because the units are not listed on an exchange and the market
for the units is limited, a potential buyer has no immediate basis on which to
value the units. Also, any buyer would likely acquire your units at a discount
because of the limitations on transfers contained in your Income Fund's
partnership agreement.
Future Development and Mortgage Loan Opportunities
As a result of APF's acquisition of the CNL Restaurant Businesses, APF
acquired restaurant property development capabilities, mortgage origination,
securitization and servicing capabilities. Because APF has acquired these
capabilities, APF now has an additional pool of operators of national and
regional restaurant chains to which it can offer triple-net lease and mortgage
loan financing. APF's current financing commitments with operators of national
and regional restaurant chains either through triple-net lease financing or
mortgage loan financing are $441 million. APF is now in the position to
capitalize on these mortgage commitments and the corresponding potential to
grow the restaurant development and mortgage financing businesses in the
future.
In addition, we believe APF's relationship with CNL Advisory Services, Inc.
will enhance APF's financing business. CNL Advisory Services provides merger,
acquisition, divestiture and strategic planning services to operators of
national and regional restaurant chains which desire to grow or streamline
their business operations. For the six months ended June 30, 1999, CNL Advisory
Services negotiated the acquisition of 39 restaurant properties having an
aggregate purchase price of in excess of $33.1 million. Through a 10 year
contractual arrangement, CNL Advisory Services has granted to APF the right of
first refusal to provide triple-net lease or mortgage loan financing to CNL
Advisory Services' clients. We believe this represents an additional pipeline
of potential customers to which APF can target its financial products.
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<PAGE>
Public Market Valuation of Assets
We believe that the public market valuations of the equity securities of
many publicly traded real estate companies, including REITs that focus on the
restaurant industry, are in part based on the growth potential of such
companies and have historically exceeded the net book values of their real
estate assets. You should be aware, however, that the APF Shares may not trade
at a premium to the net book value per share of APF's real estate assets, and,
to the extent the APF Shares do trade at a premium, that the relative pricing
differential may change or be eliminated in the future.
Regular Quarterly Cash Distributions
We expect that APF will make regular quarterly cash distributions to its
stockholders. While these distributions may not be higher than the Income
Funds' current distributions, we believe that these distributions would be
enhanced, because, unlike the Income Funds, APF can increase its portfolio of
assets by leveraging its existing restaurant properties and the restaurant
properties acquired in the Acquisition and can benefit from synergies created
as a result of the acquisition of the CNL Restaurant Businesses and the Income
Funds, including the elimination of fees payable to the Advisor. Historically,
APF's annualized distribution rate on the APF Shares has been 7.625% based on
the exchange value. While APF cannot guarantee an increase in its distribution
rate, APF believes that as a result of its acquisition of the CNL Restaurant
Businesses and the Income Funds that it will be able to increase its
distribution rate.
Greater Reduction of Conflicts of Interest
APF is operated as an internally-advised REIT with management employed by
APF, thereby eliminating fees previously paid to the Advisor, reducing various
conflicts of interest and creating an alignment of the interests of the
stockholders and management. The persons engaged to manage APF are directly
accountable to APF. They are not employees of a separate management company or
investment advisor whose activities could be determined by objectives and goals
inconsistent with APF's financial objectives. Management owes its duty of
loyalty only to APF. By contrast, externally-advised limited partnerships and
REITs may have no such commitment from a management team to focus exclusively
on their portfolios.
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<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of the Income Funds, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners in each Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to each Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to all of the other
Income Funds and also on APF's Board of Directors. Additionally, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Funds and with their own as general partners of the Income Funds.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming all of the Income Funds are
acquired, we expect to receive four material benefits. These benefits include:
. With respect to our ownership in the Income Funds, we may be issued up to
an estimated aggregate of 139,519 APF Shares in accordance with the terms
of the Income Funds' partnership agreements, if CNL Income Funds VI
through XII approve the Acquisition. The 139,519 APF Shares issued to us
will have an estimated value, based on the exchange value, of $2,790,380.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of the Income Funds, we are legally liable for all of
the Income Funds' liabilities to the extent that the Income Funds are
unable to satisfy such liabilities. Because the partnership agreement for
each Income Fund prohibits the Income Funds from incurring indebtedness,
the only liabilities the Income Funds have are liabilities with respect
to their ongoing business operations. In the event that one or more
Income Funds are acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund or
Income Funds.
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COMPARISON OF THE INCOME FUNDS AND APF AND OF THE OWNERSHIP OF UNITS,
NOTES AND APF SHARES
The information below highlights a number of the significant differences
between the Income Funds and APF relating to, among other things, form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, compensation and fees
and investor rights, and compares material legal rights associated with the
ownership of units, notes and APF Shares assuming APF's stockholders approve
amendments to APF's Articles of Incorporation regarding, among other items, an
increase in the APF Shares authorized for issuance. We have included these
comparisons to assist you in understanding how your investment will be changed
if, as a result of the Acquisition, your units are exchanged for APF Shares or
notes, if you choose to receive notes. This discussion is only a summary and
does not constitute a complete discussion of these matters, and we strongly
encourage you to carefully review the rest of this consent solicitation as well
as the accompanying supplement for additional important information.
Form of Organization and Purpose
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Each of the Income Funds is a
Florida limited partnership. The APF is a Maryland corporation which
Income Funds' primary business is to has qualified as a REIT during 1995,
invest in fast-food, family-style 1996, 1997 and 1998 and expects to
and casual dining restaurant continue to qualify as a REIT under
properties. The Income Funds lease the Code. APF's primary business,
the restaurant properties on a like the Income Funds, is the
triple-net lease basis to operators ownership and management of
of national and regional restaurant restaurant properties leased to
chains. operators of national and regional
restaurant chains on a triple-net
basis. Upon APF's acquisition of the
CNL Restaurant Businesses described
on page 128, APF became a full-
service REIT with the ability to
offer a complete range of restaurant
property services to prospective
operators of national and regional
restaurant chains, from mortgage
loan financing, triple-net lease
financing and securitizing mortgage
loans to site selection and
development.
APF will have broader business opportunities than your Income Fund and will
have access to additional financing opportunities which are currently not
accessible to your Income Fund. However, several of the additional financing
opportunities involve risks which do not exist in the case of your Income Fund,
and we encourage you to review "Risk Factors" for detailed description of such
risks.
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Length and Type of Investment
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Each Income Fund is a finite-life APF will have a perpetual term and
entity with a stated term which intends to continue its operations
expires between 2017 and 2031. As a for an indefinite time period. To
Limited Partner of your Income Fund, the extent APF sells or refinances
you are entitled to receive cash its assets, the net proceeds from
distributions out of your Income such sale or refinancing will
Fund's net operating income, if any, generally be reinvested in
and to receive cash distributions, additional restaurant properties or
if any, upon liquidation of your retained by APF for working capital
Income Fund's real estate and other corporate purposes, except
investments. to the extent distributions thereof
must be made to permit APF to
continue to qualify as a REIT for
tax purposes and that, pursuant to
the terms of the notes, repayments
of notes must be made to former
Limited Partners if APF sells
restaurant properties formerly held
by their Income Funds. As an APF
stockholder, you are entitled to
receive cash distributions, to the
extent APF's Board of Directors
determines. As a result of APF's
Shares being listed on the NYSE,
your shares will be freely tradable.
Therefore, you may decide to sell
your APF Shares at any time you so
determine.
The Income Funds are structured to dissolve when the assets of the Income
Funds are liquidated or after a period ranging between 30 and 40 years,
depending on the Income Fund, if no liquidation occurs sooner. In contrast, APF
generally is and will continue to be an operating company and will reinvest the
proceeds of asset dispositions, if any, in new restaurant properties or other
appropriate investments consistent with APF's investment objectives.
Business and Property Diversification
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
<S> <C>
The investment portfolio of each Assuming the acquisition of the CNL
Fund currently consists of between Restaurant Businesses had occurred
17 and 56 restaurant properties and on June 30, 1999, APF would have had
other non-real estate assets, such triple-net leases or mortgage loans
as cash and accounts receivable. with respect to 1,193 restaurant
properties. Assuming the CNL
Restaurant Businesses and all of the
Income Funds had been acquired by
APF as of June 30, 1999, APF would
have owned an interest in, directly
or indirectly through the Operating
Partnership, a portfolio of 1,764
restaurant properties.
</TABLE>
The investment portfolio of each Income Fund currently consists of between
17 and 56 restaurant properties. Through the Acquisition, and through
additional investments that may be made by APF from time to time, APF intends
to maintain an investment portfolio substantially larger and more diversified
than the assets of any of the Income Funds individually. APF's ability to make
mortgage loans further diversifies APF's business by providing it with the
ability to offer a full range of financing opportunities to operators of
national and regional restaurant chains. As a result of APF's acquisition of
the CNL Restaurant Financial Services Group, we believe that the pool of
targeted customers to which APF markets its financial products will increase.
In addition, the larger portfolio will diversify your investment over a broader
group of restaurant properties and type of financial investment, such as
mortgage loans and securitizations, with multiple brands
97
<PAGE>
and market segments and will reduce the dependence of your investment upon the
performance of, and the exposure to the risks associated with, any particular
group of restaurant properties currently owned by an individual Income Fund.
Borrowing Policies
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Your Income Fund cannot incur debt
or is restricted in the amount and APF is not restricted under its
nature of debt. Further, your Income Articles of Incorporation from
Fund does not incur debt in the incurring debt. APF currently has a
ordinary course of business. policy of incurring debt only if
immediately following such
incurrence the debt-to-total assets
ratio would be 45% or less. APF's
Board of Directors has the ability
to alter or eliminate this policy at
any time.
As a holder of APF Shares, you will become an investor in an entity that may
incur debt in the ordinary course of business and that invests proceeds from
borrowings. The ability of APF to incur debt in the ordinary course of business
increases the risk of your investment in APF Shares. APF currently has a policy
of incurring debt only if immediately following such occurrence the debt-to-
total assets ratio would be 45% or less.
Other Investment Restrictions
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
The partnership agreements of the
Income Funds contain provisions that Neither APF's Articles of
prohibit (i) the investment in Incorporation nor its bylaws impose
restaurant properties of cash any restrictions upon the types of
available for distribution, (ii) the investments that may be made by APF,
purchase or lease of any real except that under the Articles of
property without the support of an Incorporation, the Board of
appraisal report of an independent Directors is prohibited from taking
appraiser of restaurant properties, any action that would terminate
(iii) the acquisition of any APF's status as a REIT, unless the
property in exchange for interests holders of majority of the common
in the Income Fund, (iv) the stock outstanding vote to terminate
acquisition of securities of other such status. APF's Articles of
issuers or (v) the making of Incorporation and bylaws do not
mortgage loans, junior deeds of impose any restrictions upon the
trust or similar obligations. The vote to terminate APF's status as a
Income Funds generally cannot raise REIT. APF's Articles of
additional funds for, or reinvest Incorporation and Bylaws do not
net sales or refinancing proceeds impose any restrictions on dealings
in, new investments, without between APF and directors, officers
amendments to their partnership and APF's affiliates. Section 2-419
agreements. In addition, a of the Maryland General Corporation
substantial number of the Income Law, which we refer to as the MGCL,
Funds cannot reinvest net sales or however, requires that the material
refinancing proceeds in new facts of the relationship, the
investments or redeem or repurchase interest and the transaction must be
units. (1) disclosed to the Board of
Directors and approved by the
affirmative vote of a majority of
the disinterested directors, (2)
disclosed to the stockholders and
approved by the affirmative vote of
a majority in interest of the
disinterested stockholders, or (3)
in fact fair and reasonable. In
addition, APF has adopted a policy
which requires that all contracts
and transactions between APF and
directors, officers or APF's
affiliates must be approved by the
affirmative vote of a majority of
the disinterested directors.
Some of the Income Fund's partnership agreements contain provisions which
prohibit or hinder further investment by the Income Fund. The organizational
documents of APF, however, provide APF with wide latitude in choosing the type
of investments it may pursue.
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Management Control
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
As the general partners of the
Income Funds, we generally have the The Board of Directors will direct
exclusive right and power to conduct the management of APF's business and
the business and affairs of the affairs subject to restrictions
Income Funds and may appoint, contained in APF's Articles of
contract or otherwise deal with any Incorporation and bylaws and
person, including employees of our applicable law. The Board of
affiliates, to perform any acts or Directors, the majority of which
services for the Income Funds will be independent directors, will
necessary or appropriate for the be elected at each annual meeting of
conduct of the business and affairs the stockholders. The policies
of the Income Funds. As a Limited adopted by the Board of Directors
Partner of an Income Fund, you have may be altered or eliminated without
no right to participate in the a vote of the stockholders.
management and control of your Accordingly, except for their vote
Income Fund and have no voice in in the elections of directors and
your Income Fund's affairs except on their vote in major corporate
limited matters that may be transactions specified in APF's
submitted to a vote of the Limited Articles, stockholders will have no
Partners under the terms of your control over the ordinary business
Income Fund's partnership agreement. policies of APF. The Board of
Under each Income Fund's partnership Directors cannot take any action
agreement, Limited Partners have the that would terminate APF's status as
right to remove us by a majority a REIT, without the majority vote of
vote in interest with or without the stock entitled to be voted.
cause. In all cases, however, our
removal can only occur if the
Limited Partners find a successor
general partner.
Under the partnership agreements for the Income Funds, we generally have the
exclusive right and power to conduct the business and affairs of the Income
Funds. As a Limited Partner, you have no voice in the affairs of the Income
Funds except on limited matters. All of the Income Funds permit our removal by
the Limited Partners without cause. Under APF's Articles of Incorporation and
bylaws, the Board of Directors directs management of APF. Except for their vote
in the elections of directors and their vote in major transactions specified in
the Articles of Incorporation and Maryland law, stockholders have no control
over the management of APF.
Fiduciary Duties
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
As a Florida limited partnership, Under the MGCL, the directors must
Florida law provides that we, as the perform their duties in good faith,
general partners of the Income in a manner that they reasonably
Funds, are accountable as believe to be in the best interests
fiduciaries to the Income Funds and of APF and with the care of an
owe the Income Funds and their ordinary prudent person in a like
Limited Partners a duty of loyalty position. Directors of APF who act
and a duty of care, and are required in such a manner generally will not
to exercise good faith and fair be liable to APF for monetary
dealing in conducting the affairs of damages arising from their
the Income Funds. The duty of good activities.
faith requires that we deal fairly
and with complete candor toward the
Limited Partners. The duty of
loyalty requires that, without the
Limited Partners' consent, we may
not have business or other interests
that are adverse to the interests of
the Income Funds. The duty of fair
dealing also requires that all
transactions between ourselves and
the Income Funds be fair in the
manner in which the transactions are
effected and in the amount of the
consideration received by us.
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<PAGE>
We, as the general partners of the Income Funds, and the Board of Directors
of APF, respectively, owe fiduciary duties to their constituent parties. Some
courts have interpreted the fiduciary duties of the Board of Directors in the
same way as the duties of a general partner in a limited partnership. Other
courts, however, have suggested that our duties to you and the other Limited
Partners may be greater than the fiduciary duties of the directors of APF to
APF's stockholders. It is unclear, however, whether, or to what extent, there
are actual differences in such fiduciary duties.
Management's Liability and Indemnification
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Under Florida law, we, as the APF's Articles of Incorporation
general partners of the Income provide that the liability of APF's
Funds, are liable for the repayment directors and officers to APF and
of Income Fund obligations and its stockholders for money damages
debts, unless limitations upon such is limited to the fullest extent
liability are expressly stated in permitted under the MGCL. The
the document or instrument Articles of Incorporation and the
evidencing the obligation such as MGCL provide broad indemnification
the case in a loan structured as a to directors and officers, whether
nonrecourse obligation in which the serving APF or, at its request, any
lender has agreed not to pursue the other entity, to the fullest extent
Income Fund or us in case of default permitted under the MGCL. APF will
on the loan. Each Income Fund's indemnify its present and former
partnership agreement generally directors and officers, among
provides that we will not be held others, against judgments,
liable for any costs arising out of penalties, fines, settlements and
our action or inaction that we reasonable expenses actually
reasonably believed to be in the incurred by them in connection with
best interests of a Income Fund any proceeding to which they may be
except that we will be liable for made a party by reason of their
any costs which arise from our own service in those or other
fraud, negligence, misconduct or capacities, unless it is established
other breach of fiduciary duty. In that (a) the act or omission of the
cases in which we are indemnified, director or officer was material to
any indemnity is payable only from the matter giving rise to the
the assets of the Income Fund. proceeding and (1) was committed in
bad faith or (2) was the result of
active and deliberate dishonesty,
(b) the director or officer actually
received an improper personal
benefit in money, property or
services, or (c) in the case of any
criminal proceeding, the director or
officer had reasonable cause to
believe that the act or omission was
unlawful. Under the MGCL, however,
APF may not indemnify for an adverse
judgment in a suit by or in the
right of the corporation. The bylaws
of APF require that APF, as a
condition to advancing
indemnification expenses, obtain (a)
a written affirmation by the
director or officer of his good
faith belief that he has met the
standard of conduct necessary for
indemnification by APF as authorized
by the Bylaws and (b) a written
statement by or on his behalf to
repay the amount paid or reimbursed
by APF if it shall ultimately be
determined that the standard of
conduct was not met.
In each of the Income Funds, we will only be held liable for costs which
arise from our own fraud, negligence, misconduct or other breach of fiduciary
duty, and may be indemnified in the situations described above. The liability
of APF's directors and officers is limited to the fullest extent permitted
under the MGCL and such directors and officers are indemnified by APF to the
fullest extent permitted by the MGCL.
100
<PAGE>
Antitakeover Provisions
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
For each Income Fund, a change in
management may be effected only by APF's Articles of Incorporation and
our removal as the general partners bylaws contain a number of
of the Income Fund. In addition, we provisions that may delay or
may restrict transfers of your discourage a change in control of
units. If a Limited Partner APF, even if the change in control
transfers his, her or its units to might be in the best interests of
another person, such person may not stockholders. These provisions
become a substitute Limited Partner, include, among others, (1)
entitling him, her or it to vote on authorized capital stock that may be
matters that may be submitted to the classified and issued as a variety
partners for approval, unless we of equity securities in the
consent to such substitution. discretion of the Board of
Directors, including securities
having superior voting rights to the
APF Shares, (2) a requirement that
directors be removed only for cause
and only by a vote of stockholders
holding at least a majority of all
of the shares entitled to be cast
for the election of directors, and
(3) ownership limitations which are
designed to protect APF's status as
a REIT under the Code.
Provisions of the governing documents of the Income Funds and APF could be
used to deter attempts to obtain control of the Income Funds or APF in
transactions not approved by us or by APF's Board of Directors, respectively.
Sale
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Each Income Fund's partnership Under Section 3-105(d) of the MGCL,
agreement allows the sale of all or the Board of Directors is required
substantially all of the assets of to obtain approval of the
the Income Fund with the consent of stockholders by the affirmative vote
the Limited Partners holding a of two-thirds of all the votes
majority of the outstanding units. entitled to be cast on the matter in
order to sell all or substantially
all of the assets of APF. No
approval of the stockholders is
required for the sale of less than
substantially all of APF's assets.
Under each of the Income Fund's partnership agreements and APF's Articles of
Incorporation, the sale of assets may be effected with various specified levels
of Limited Partner or stockholder consent. Under the partnership agreements and
applicable law, the sale of assets which do not amount to all or substantially
all of the assets of the Income Funds or APF does not require any consent of
the Limited Partners or APF's stockholders, as applicable.
101
<PAGE>
Merger
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Each Income Fund's partnership
agreement is silent with respect to Generally, under the MGCL, the Board
the vote required for an Income Fund of Directors is required to obtain
to participate in a merger. Under approval of the stockholders by the
Florida law, a merger may be affirmative vote of two-thirds of
effected upon our approval and the all the votes entitled to be cast on
approval of the Limited Partners the matter in order to merge or
holding a majority of the consolidate APF with another entity
outstanding units, and the not at least 90% controlled by it.
satisfaction of other procedural
requirements.
Under applicable law and the partnership agreements of the Income Funds,
mergers by the respective Income Funds are permitted upon approval of a
majority of the outstanding units. Generally, a merger involving APF is
permitted subject to the affirmative vote of two-thirds of APF stockholders.
Dissolution
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Each Income Fund may be dissolved Under the MGCL, the Board of
with the consent of the Limited Directors is required to obtain
Partners holding a majority of the approval of the stockholders by the
outstanding units. affirmative vote of two-thirds of
all votes entitled to be cast on the
matter in order to dissolve APF.
Under each Income Fund's partnership agreement and APF's Articles of
Incorporation, the respective entities may be dissolved with the consent of the
same percentages of the outstanding units or APF Shares, as is described above
in "Merger".
Amendments
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Each Income Fund's partnership Amendments to APF's Articles of
agreement permits amendment of most Incorporation must be approved by
of its provisions with the consent the Board of Directors and by
of Limited Partners holding a holders of a majority of the
majority of the outstanding units. outstanding APF Shares entitled to
Amendments to the Income Funds' be voted. An amendment relating to
partnership agreements that require termination of REIT status requires
unanimous consent include: (1) a vote of the holders of a majority
converting the interest of a Limited of the stock entitled to be voted.
Partner into a general partner's
interest, (2) any act adversely
affecting the liability of a Limited
Partner, (3) altering the interest
of a Limited Partner in net profits,
net losses, gain, loss, or
distributions of cash available for
distribution, sale proceeds or
refinancing proceeds, (4) reducing
the percentage of partners required
to consent to any action in the
partnership agreements, or (5)
limiting in any manner our liability
as general partners.
We may amend an Income Fund's
partnership agreement without the
consent of the Limited Partners to
reflect a ministerial amendment.
102
<PAGE>
Amendment to each Income Fund's partnership agreement may be made with the
consent of Limited Partners holding greater than 50% of the outstanding units.
Amendment of APF's Articles of Incorporation requires the consent of both the
Board of Directors and a majority of the outstanding APF Shares entitled to be
voted.
Compensation and Fees
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Share of Distributable Net Cash Flow
APF will pay all management
Each Income Fund's partnership expenses, including salaries and
agreement provides that we, as other compensation payable to
general partners of the Income Fund, employees of APF, but as an
are entitled to receive a percentage internally-advised REIT, APF will
of the net cash available for not otherwise pay a portion of net
distribution to the partners equal cash flow or allocations to
to 1%. management, except to the extent
they are entitled to such as a
result of owning APF Shares. Such
management expenses will reduce the
funds available for distribution by
APF.
In each of the Income Funds, our
right to receive a portion of
distributable cash flow is
subordinated to your right to
receive a preferred return on your
investment.
Management Fees
The officers and directors of APF
Each Income Fund's partnership will receive compensation for their
agreement provides for the payment services as described herein under
of a management fee to APF through a "Management." APF will not otherwise
wholly owned subsidiary, CNL Fund pay any management fees. In
Advisors, Inc., which provides the addition, some employees of APF may
day-to-day management operation of receive incentive compensation based
the Income Fund's assets. For CNL upon APF's profitability.
Income Fund, Ltd. through CNL Income
Fund III, Ltd. the management fee
equals 0.5% of the value of the
total assets under management valued
at cost. For CNL Income Fund IV,
Ltd. through CNL Income Funds XVI,
Ltd., the management fee equals 1%
of the gross revenues derived from
the restaurant properties.
In each of the Income Funds, APF's
right to receive this fee is
subordinated to your right to
receive a preferred return on your
investment.
Real Estate Disposition Fee
None.
Each Income Fund's partnership
agreement provides for the payment
to APF of a real estate disposition
fee upon the sale of a restaurant
property equal to the lesser of (1)
a competitive real estate brokerage
commission, or (2) 3% of sales price
of the restaurant property or
properties.
In each of the Income Funds, APF's
right to receive this fee is
subordinate to your right to receive
a cumulative preferred return on
your investment plus your aggregate
adjusted capital contributions.
103
<PAGE>
Share of Distributions of Net Sales Proceeds (Not in Liquidation)
Each Income Fund's partnership None. Distributions made by APF to
agreement provides for the payment its stockholders will be based
to us of a portion of distributable solely on the profitability of APF
net sales proceeds following the and will not be based on asset
payments to the Limited Partners of dispositions.
preferred returns and returns of
capital required by the partnership
agreements. For all of the Income
Funds, our portion of distributable
net sales proceeds equals 5% of the
Income Fund's distribution of the
net sale proceeds from the
disposition of a restaurant
property.
Our right to receive this fee is
subordinated to your right to
receive a cumulative preferred
return on your investment plus your
aggregate invested capital.
Reimbursement of Expenses
As a full-service REIT, APF's
Each Income Fund's partnership expenses will be paid from its
agreement provides that operating revenues as expenses are incurred.
expenses, which, in general, are
those expenses relating to the
administration of the Income Fund by
APF, will be reimbursed at the lower
of cost or 90% percent of the
prevailing rate at which comparable
services could have been obtained by
the Income Fund in the same
geographical area.
One of the benefits of the Acquisition is to eliminate the conflicts
currently existing among the Income Funds and us, as the general partners of
the Income Funds.
Review of Investor Lists
- --------------------------------------------------------------------------------
Income Funds APF
- --------------------------------------------------------------------------------
Under the MGCL, as a stockholder you
Under your Income Fund's partnership must hold at least 5% of the
agreement, you are entitled, at your outstanding APF Shares before you
expense and upon reasonable request, have the right to request a list of
to obtain a list of the other APF's stockholders. If you meet this
Limited Partners in your Income Fund requirement, you may, upon written
upon the representation by the request, inspect and, at your
requesting Limited Partner that the expense, copy during normal business
list will not be sold or used for hours the list of APF's
commercial purposes unrelated to the stockholders.
Limited Partners.
Subject to these limitations, the Limited Partners of Income Funds and the
stockholders of APF can inspect and, at their own expense, make copies of
investor lists.
104
<PAGE>
The following discussion describes the investment attributes and legal
rights associated with your ownership of units, notes and APF Shares.
Nature of Investment
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
The units you hold The APF Shares
constitute equity The notes will be constitute equity
interests entitling you senior, unsecured interests in APF. As a
to your proportionate obligations of APF and holder of APF Shares,
share, as determined by will be issued pursuant you will be entitled to
the number of units you to an indenture your proportionate
own, of cash qualified under the share, as determined by
distributions made to Trust Indenture Act of the number APF Shares
the partners of your 1939, as amended. APF you own, of any
Income Fund. The may issue additional dividends or
partnership agreement senior debt, which may distributions paid with
for each Income Fund be secured, only in respect to the APF
specifies how the cash compliance with the Shares. The dividends
available for covenants contained in payable to you are not
distribution, whether the notes and the fixed in amount and are
arising from operation indenture for the only paid if, when and
or sales or refinancing, issuance of senior debt. as declared by the Board
is to be shared among The notes will bear of Directors. In order
us, as general partners interest at 7.0% to continue to qualify
of your Income Fund, and annually and will mature as a REIT, APF must
you and the other on , 2005. Prior to distribute at least 95%
Limited Partners of your maturity, interest only of its taxable income,
Income Fund. The payments will be made to excluding capital gains,
distributions payable by you, on a semi-annual and any taxable income,
your Income Fund to its basis, and on , including capital gains,
partners are not fixed 2005, the outstanding not distributed will be
in amount and depend principal balance, plus subject to corporate
upon the operating interest accruing since income tax.
results and net sales or the last payment, will
refinancing proceeds be payable to you.
available from the
disposition of your
Income Fund's assets.
Your Income Fund cannot
raise additional funds
for and generally cannot
reinvest net sales or
refinancing proceeds in
new investments, without
amendments to the
partnership agreement of
your Income Fund.
The units and the APF Shares constitute equity interests. As a Limited
Partner of your Income Fund, you are entitled to your proportionate share of
the cash distributions of your Income Fund, and as a stockholder of APF, you
will be entitled to your proportionate share of any dividends or distributions
of APF which are paid with respect to the APF Shares. Distributions and
dividends payable with respect to units and APF Shares depend on the
performance of the Income Funds and APF, as applicable. In contrast, the notes
constitute senior unsecured debt obligations of APF providing for semi-annual
payments of interest only until the notes mature, at which time accrued
interest and the principal balance must be paid.
105
<PAGE>
Additional Equity/
Potential Dilution
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
Since your Income Fund Since the notes will be
cannot issue additional unsecured debt At the discretion of the
equity securities, there obligations of APF, Board of Directors, APF
can be no dilution of their payment will have may issue additional
distributions to you and priority over dividends equity securities,
the other Limited or distributions payable including APF Shares and
Partners. to APF's stockholders. shares which may be
However, there are no classified as one or
restrictions on APF's more classes or series
authority to grant of common or preferred
secured debt shares and contain
obligations, such as preferences. The
mortgages, liens or issuance of additional
other security interests equity securities by APF
in APF's real and will reduce your
personal property, and percentage ownership
such security interests, interest in APF.
if granted, would permit
the holders thereof to
have a priority claim
against such collateral
in the event of APF's
default under the
secured obligations.
Also, such secured
obligations would have
payment priority over
the notes and other
unsecured indebtedness
of APF.
As an APF stockholder, your percentage ownership interest in APF will be
decreased if APF issues additional APF Shares. Furthermore, APF may issue
preferred stock with priorities or preferences with respect to dividends and
liquidation proceeds. Payment of the notes will have priority over
distributions on the APF Shares you hold or any class of equity securities that
might be issued by APF. Any senior secured obligations issued by APF, however,
will have superior claims against the collateral given for security in the
event APF defaults in the payments of those secured obligations and will have
payment priority over the notes and other unsecured indebtedness of APF.
Liability of Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
Under your Income Fund's As a holder of notes, Under Maryland law, you
partnership agreement you will not be will not be personally
and under Florida law, personally liable for liable for the debts or
your liability for your the debts and obligations of APF.
Income Fund's debts and obligations of APF.
obligations is generally
limited to the amount of
your investment in the
Income Fund, together
with an interest in
undistributed income, if
any.
As a holder of units, your liability for the debts and obligations of your
Income Fund is limited to the amount of your investment. As a holder of notes
or APF Shares, you generally would have no liability for the debts and
obligations of APF.
106
<PAGE>
Voting Rights
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Generally, with some Under the Indenture, you APF is managed and
exceptions, you and the will be entitled, as a controlled by a Board of
other Limited Partners holder of notes, to vote Directors elected by the
of your Income Fund have on the merger of APF, stockholders at the
voting rights only on the sale of all or annual meeting of APF.
significant Income Fund substantially all of The MGCL requires that
transactions to the APF's assets and actions major transactions such
extent provided in your detrimental to as the sale of all or
Income Fund's noteholders. substantial all of APF's
partnership agreement. assets, and amendments
Such voting rights to APF's Articles of
include incurrence of Incorporation, may not
debt, sale of all or be consummated without
substantially all of the the approval of
assets of your Income stockholders. You will
Fund, material have one vote for each
amendments to the APF Share you own. APF's
partnership agreement or Articles of
our removal. Incorporation permits
the Board of Directors
to classify and issue
shares of capital stock
in one or more series
having voting power
which may differ from
that of your APF Shares.
</TABLE>
As a Limited Partner of your Income Fund or as a holder of notes of APF, you
have or will have limited voting rights. As a stockholder of APF, you will have
voting rights that permit you to elect the Board of Directors and to approve or
disapprove major corporate transactions.
Liquidity
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
The units that represent While the notes you hold The APF Shares will be
your ownership interest will be freely freely transferable upon
in your Income Fund are transferable, APF will registration under the
relatively illiquid not list the notes, and Securities Act. The APF
investments, which means no market for the notes Shares will be listed on
not freely tradeable or is expected to develop. the NYSE, and APF
transferable, with a You should not elect to expects a public market
limited resale market. receive notes unless you for the APF Shares to
The trading volume of are prepared to hold the develop. The breadth and
the units in the resale notes until their strength of this market
market is limited and, maturity which is will depend, among other
generally, the prices at approximately five years things, upon the number
which the Income Funds' from the date that the of APF Shares
units trade are Acquisition occurs. You outstanding, APF's
generally not equal to should note that, due to financial results and
their net book value. In the lack of market in prospects, and the
addition, applicable the notes and their general interest in
federal income tax rules consequent lack of APF's dividend yield and
and the partnership liquidity, your tax growth potential
agreements of the Income liability as a result of compared to that of
Funds effectively the Acquisition may other debt and equity
prevent the development exceed the liquid assets securities.
of a more active or that you receive if you
substantial market for have elected to receive
these units. Neither you notes.
nor any other Limited
Partner, individually,
can require an Income
Fund to dispose of its
assets or redeem your or
any other Limited
Partner's interest in
the Income Fund.
</TABLE>
107
<PAGE>
Your units have a limited resale market. If APF acquires your Income Fund in
the Acquisition and you receive APF Shares, the APF Shares you receive will be
freely transferable upon listing on the NYSE. As a stockholder of APF, you will
have the opportunity to achieve liquidity by trading the APF Shares in the
public market. If you elect to receive notes, however, your ability to achieve
liquidity in the notes will be much more limited since the notes will not be
listed on the NYSE.
Expected Distributions and Payments
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Your Income Fund makes As a holder of notes, APF intends to make
quarterly distributions. you will generally be quarterly distribution
Amounts distributed to entitled to receive only payments to its
you are derived from the principal and stockholders. The amount
your proportionate share interest payments of such distributions
of cash flow from required under the will be established by
operations or cash flow notes. You will have no the Board of Directors,
from sales or right to participate in taking into account the
financings. any profits derived from cash needs of APF, funds
operations of any of from operations, yields
APF's assets, including available to
restaurant properties stockholders, the market
acquired as part of the price for the APF Shares
Acquisition. and the requirements of
the Code for
qualification as a REIT.
Under the Code, APF is
required to distribute
at least 95% of REIT
taxable income. REIT
taxable income generally
includes taxable income
from operations,
including depreciation
and deductions, but
excludes gains from the
sale or distributions
from refinancing of
properties. Unlike the
Income Funds, APF is not
required to distribute
net proceeds from the
sale or refinancing of
restaurant properties.
</TABLE>
If you become a stockholder of APF, you will receive your proportionate
share of the distributions made with respect to the APF Shares. The amount of
such distributions will depend upon APF's revenues, operating expenses, debt
service payments, capital expenditures, reserves and funds set aside for
expansion. Interest payments made on the notes will be paid prior to any
distributions with respect to the APF Shares and will reduce the amount
otherwise distributable to APF's stockholders.
108
<PAGE>
Taxation of Taxable Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
Your Income Fund, as a Interest payments made
partnership for federal on the notes will APF intends to continue
income tax purposes, is constitute portfolio to qualify and be taxed
not subject to tax, but income which cannot be as a REIT. As a REIT,
you must report your offset by "passive APF generally is
allocable share of losses" from other permitted to deduct
partnership income and investments. During distributions to its
loss on your tax return, January of each year, stockholders, which
whether or not cash holders of notes will effectively eliminates
distributions are made receive from APF IRS the corporate level of
to you. Income from your Form 1099-INT to show the "double taxation"
Income Fund generally the interest payments (imposed at the
constitutes "passive made by APF during the corporate and
income" to you, which prior calendar year. stockholder levels) that
can generally be offset typically results when a
by "passive losses" from corporation earns income
your other investments. and distributes that
Generally, by February income to stockholders
15th of each year, you in the form of
receive an annual dividends. Dividends
Schedule K-1 with received by you as an
respect to information APF stockholder will
about your Income Fund constitute portfolio
for inclusion on your income, which cannot be
federal income tax offset by "passive
returns. losses" from other
investments. However,
income that you receive
from APF may be used to
offset investment
interest expense from
other investments.
Generally, distributions
from earnings and
profits will be reported
as ordinary income and
distributions in excess
of earnings and profits
(generally, as a result
of depreciation
deductions) will be
reported as non-taxable
distributions and reduce
your basis in your APF
Shares. During January
of each year, APF
stockholders will be
mailed the less complex
Form 1099-DIV used by
corporations that pay
dividends to their
stockholders. APF
stockholders are not
required to file state
income tax returns
and/or pay state income
taxes outside of their
state of residence with
respect to APF's
operations. APF will be
required to pay state
income taxes in states
where it is qualified to
do business.
You must file state
income tax returns and
incur state income tax
in most states in which
your Income Fund has
restaurant properties.
Each Income Fund is a pass-through entity whose income and loss is not taxed
at the entity level but instead allocated directly to us, as the general
partners, and to you and the other Limited Partners. You are taxed on income or
loss allocated to you whether or not cash distributions are made to you. In
contrast, APF intends to continue to qualify as a REIT allowing it to deduct
dividends paid to its stockholders. To the extent
109
<PAGE>
APF has taxable income, after taking into account the "dividends paid"
deduction, such income is taxed at APF's level at the standard corporate tax
rates. Dividends paid to APF stockholders will constitute portfolio income and
not passive income. Holders of notes will recognize portfolio income on the
interest payments received on the notes.
Taxation of Tax-Exempt Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
None of the type of Dividends received from
income distributed by Generally, interest APF by tax-exempt
the Income Funds is income received by tax- investors should not
characterized as exempt investors will constitute UBTI if the
unrelated business not be characterized as tax-exempt APF
taxable income, or UBTI, UBTI so long as the tax- stockholder did not
if the tax-exempt exempt investor does not finance its acquisition
investor did not finance hold its notes subject of the APF Shares with
its acquisition of the to acquisition indebtedness.
units with indebtedness. indebtedness.
A tax-exempt entity is treated as owning and carrying on the business
activity conducted by a partnership in which such entity owns an interest.
Accordingly, to the extent a tax-exempt entity owns units in the Income Funds,
the income received by the Income Funds must not constitute UBTI in order for
the tax-exempt investor to avoid taxation. In general, income attributable to
the APF Shares is not UBTI. Similarly, as a general matter, interest income
received under the notes is not UBTI.
110
<PAGE>
VOTING PROCEDURES
Distribution of Solicitation Materials
This consent solicitation, together with the accompanying transmittal
letter, the power of attorney and the Limited Partner consent, constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain their votes "For" or "Against" your Income Fund's participation in
the Acquisition. Please note that we refer, collectively, to the power of
attorney and Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, which is an indirect, wholly owned limited partnership of APF, in
the manner described below and in the supplement relating to your Income Fund.
Therefore, if you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and vote in person, you should complete and return
the consent form before the expiration of the solicitation period, which is the
time period during which Limited Partners may vote "For" or "Against" the
Acquisition. The solicitation period will commence upon delivery of the
solicitation materials to you on or about , 1999, and will continue until
the later of (a) , 2000, a date not less than 60 calendar days from the
initial delivery of the solicitation materials, or (b) such later date as we
may select and as to which we give you notice. At our discretion, we may elect
to extend the solicitation period. Under no circumstances will the solicitation
period be extended beyond March 31, 2000. Any consent form received by the
company that we hired to tabulate your votes, Corporate Election Services,
prior to 5:00 p.m., Eastern time, on the last day of the solicitation period
will be effective provided that such consent form has been properly completed
and signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition and you will receive APF Shares if your Income Fund is acquired.
The consent forms for each Income Fund are filed as exhibit 99.2 to
Amendment No. 2 to the Registration Statement on Form S-4 (File No. 333-74329)
filed on September 27, 1999, of which this consent solicitation constitutes a
part. A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with this consent solicitation. The
consent form consists of two parts. Part A seeks your consent to the
Acquisition and related matters. The exact matters which a vote in favor of the
Acquisition will be deemed to approve differ for each Income Fund and are
explained in detail in the individual supplement for each Income Fund. CNL
Income Funds XI through XVI are required to have amendments to their
partnership agreements in order to permit APF to acquire such Income Funds in
the Acquisition. You should review the supplement to see if or how your Income
Fund's partnership agreement will require amendment. If you have interests in
more than one Income Fund, you will receive multiple supplements and consent
forms which will provide for separate votes for each Income Fund in which you
own an interest. If you return a signed consent form but fail to indicate
whether you are voting "For" or "Against" any matter you will be deemed to have
voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without needing to obtain your signature on multiple
documents.
Special Meetings
We, as general partners of the Income Funds, have scheduled special meetings
of the Limited Partners of each of the Income Funds to discuss the solicitation
materials and the terms of the Acquisition prior to voting on the Acquisition.
The special meetings will be held at 10:00 a.m., Eastern time, on , 2000,
at CNL Center at City Commons, 450 South Orange Avenue, Orlando, Florida 32801.
We, APF's management, and D.F. King & Co. intend to solicit actively your
support for the Acquisition and would like to use the
111
<PAGE>
special meetings to answer questions about the Acquisition and the solicitation
materials and to explain the reasons for the recommendation that you vote to
approve the Acquisition. Costs of solicitation will be allocated as set forth
in "The Acquisition--Acquisition Expenses." No person will receive compensation
contingent upon solicitation of a favorable vote.
Required Vote and Other Conditions
In order for APF to acquire your Income Fund, Limited Partners of your
Income Fund holding greater than 50% of the outstanding units must approve the
Acquisition and, with respect to certain Income Funds, approve the amendments
to the Income Fund's partnership agreement. For a more detailed discussion
relating to your Income Fund and whether any amendment is required, please
review the accompanying supplement.
Record Date and Outstanding Partnership Units. The record date is ,
1999 for all Income Funds. As of June 30, 1999, the following number of units
were held of record by the number of Limited Partners indicated below:
<TABLE>
<CAPTION>
Number of Units
Number of Number of Units Held Required for Approval
Income Fund Limited Partners of Record of Acquisition
- ----------- ---------------- -------------------- ---------------------
<S> <C> <C> <C>
CNL Income Fund, Ltd.... 1,063 30,000 15,001
CNL Income Fund II,
Ltd.................... 2,205 50,000 25,001
CNL Income Fund III,
Ltd.................... 2,034 50,000 25,001
CNL Income Fund IV,
Ltd.................... 2,917 60,000 30,001
CNL Income Fund V, Ltd.. 2,476 50,000 25,001
CNL Income Fund VI,
Ltd.................... 2,981 70,000 35,001
CNL Income Fund VII,
Ltd.................... 3,148 30,000,000 15,000,001
CNL Income Fund VIII,
Ltd.................... 3,429 35,000,000 17,500,001
CNL Income Fund IX,
Ltd.................... 3,393 3,500,000 1,750,001
CNL Income Fund X, Ltd.. 3,521 4,000,000 2,000,001
CNL Income Fund XI,
Ltd.................... 3,190 4,000,000 2,000,001
CNL Income Fund XII,
Ltd.................... 3,453 4,500,000 2,250,001
CNL Income Fund XIII,
Ltd.................... 3,048 4,000,000 2,000,001
CNL Income Fund XIV,
Ltd.................... 3,009 4,500,000 2,250,001
CNL Income Fund XV,
Ltd.................... 2,705 4,000,000 2,000,001
CNL Income Fund XVI,
Ltd.................... 3,020 4,500,000 2,250,001
</TABLE>
You are entitled to one vote for each unit held. Accordingly, the number of
units entitled to vote with respect to the Acquisition is equivalent to the
number of units held of record at the record date.
Investor Lists. Under Rule 14a-7 of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, your Income Fund is required, upon your written
request, to provide you with the following information:
. a statement of the approximate number of Limited Partners in your Income
Fund and
. the estimated cost of mailing a proxy statement, form of proxy or other
similar communication to your Income Fund's Limited Partners.
In addition, you have the right, at our option, either (1) to have your
Income Fund mail, at your expense, copies of any consent statement, consent
form or other soliciting materials furnished by you to the other Limited
Partners of your Income Fund or (2) to have the Income Fund deliver to you,
within five business days of the receipt of the request, a reasonably current
list of the names, addresses and units held by the Limited Partners of your
Income Fund. The right to receive the list of Limited Partners is subject to
your payment of the cost of mailing and duplication at a rate of $0.25 per
page.
Tabulation of Votes. A tabulation system administered by Corporate Election
Services will tabulate the votes. Abstentions will be tabulated with respect to
the Acquisition and related matters. Abstentions will have the effect of a
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vote against the Acquisition, as will the failure to return a consent form and
broker nonvotes where a broker submits a consent but does not have authority to
vote a Limited Partner's units on one or more matters.
Revocability of Consent. You can change your vote at any time before your
consent is voted at the special meeting. You can do this in three ways: first,
you can send us a written statement that you would like to revoke your consent;
second, you can send us a new consent form; or third, you can attend the
special meeting and vote in person.
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SELECTED HISTORICAL FINANCIAL DATA OF APF AND SUBSIDIARIES
The following table sets forth selected financial information for APF and
subsidiaries, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations of APF and
Subsidiaries" and the financial statements included elsewhere in this consent
solicitation. The share data and per share data in the table reflect a one-for-
two reverse stock split effective as of June 3, 1999.
<TABLE>
<CAPTION>
May 2, 1994
(Date of
Six Months Ended Inception)
June 30, Year Ended December 31, through
------------------------- -------------------------------------------------- December 31,
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 32,150,355 $ 17,629,078 $ 42,187,037 $ 19,457,933 $ 6,206,684 $ 659,131 --
Net earnings............ 22,853,308 14,015,473 32,152,408 15,564,456 4,745,962 368,779 --
Cash distributions (1).. 28,476,150 15,992,806 39,449,149 16,854,297 5,436,072 638,618 --
Earnings per APF Share.. 0.61 0.65 1.21 1.33 1.18 0.39 --
Cash distributions
declared per APF
Share.................. 0.76 0.76 1.52 1.49 1.41 0.62 --
Weighted average number
of APF Shares
outstanding (2)........ 37,347,883 21,583,217 26,648,219 11,711,934 4,035,835 949,175 --
<CAPTION>
June 30, December 31,
------------------------- ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $822,225,342 $470,119,410 $680,352,013 $339,077,762 $134,825,048 $33,603,084 $929,585
Total stockholders'
equity................. 655,201,826 456,518,346 660,810,286 321,638,101 122,867,427 31,980,648 200,000
</TABLE>
- --------
(1) Approximately 20%, 12%, 18%, 8%, 13% and 42% of cash distributions ($0.15,
$0.09, $0.28, $0.11, $0.18 and $0.26 per APF Share) for the six months
ended June 30, 1999 and 1998, and the years ended December 31, 1998, 1997,
1996 and 1995, respectively, represent a return of capital in accordance
with generally accepted accounting principles ("GAAP"). Cash distributions
treated as a return of capital on a GAAP basis represent the amount of cash
distributions in excess of accumulated net earnings (including deductions
for depreciation expenses) on a GAAP basis. For the period May 2, 1994
(date of inception) through December 31, 1994, APF did not make any cash
distributions because operations had not commenced.
(2) The weighted average number of APF Shares outstanding for the year ended
December 31, 1995 is based upon the period APF was operational.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF APF AND SUBSIDIARIES
The following discussion relates to APF's financial condition and results of
operations as of June 30, 1999. Accordingly, it does not reflect the
acquisition of the CNL Restaurant Businesses which occurred on September 1,
1999, as discussed on pages 128-131 of this consent solicitation.
The following information, including, without limitation, the Year 2000
readiness disclosure and the quantitative and qualitative disclosures about
market risk that are not historical facts, may be 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. These statements generally are
characterized by the use of terms such as "believe," "expect" and "may."
Although APF believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, APF's actual results could
differ materially from those set forth in the forward-looking statements.
Factors that might cause such a difference include:
. changes in general economic conditions,
. changes in real estate conditions,
. availability of capital from borrowings under APF's credit facility,
. the availability of other debt and equity financing alternatives,
. increases in interest rates under APF's credit facility and under any
additional variable rate debt arrangements that APF may enter into in the
future,
. the ability of APF to refinance amounts outstanding under its credit
facility at maturity on terms favorable to APF,
. the ability of APF to locate suitable tenants for its restaurant
properties and borrowers for its mortgage loans, and
. the ability of tenants and borrowers to make payments under their
respective leases, secured equipment leases or mortgage loans and the
ability of APF to re-lease properties that are currently vacant or that
become vacant.
Given these uncertainties, readers are cautioned not to place undue reliance on
such statements.
Overview
APF provides real estate financing to operators of national and regional
restaurant chains primarily through triple-net lease financing. As of June 30,
1999, APF had invested the $670 million it received from net offering proceeds
from three separate public offerings of common stock along with proceeds from
its credit facility, in 578 restaurant properties, diversified among 42
restaurant chains in 40 states.
The financial results for the six months ended June 30, 1999 and 1998 and
the years ended December 31, 1998, 1997, and 1996 reflect the consolidated
historical results of APF prior to the acquisition of the CNL Restaurant
Businesses. During 1998, APF formed two wholly owned subsidiaries, which serve
as the general partner and limited partner of a newly formed UPREIT, an
operating partnership. As shown in the organizational chart below, APF expects
eventually to place all restaurant properties currently owned by APF into the
UPREIT and operate APF as a holding company which will conduct its business
through this operating partnership called APF Partners, LP, or, as we have
referred to it in this consent solicitation, the Operating Partnership. Upon
listing the APF Shares with the NYSE, APF may use the Operating Partnership
units, which mirror APF Shares and will be exchangeable into APF Shares on a
one-for-one basis, as currency in acquisitions of restaurant properties in the
future. APF's ability to acquire restaurant properties using Operating
Partnership units may make certain acquisitions more attractive to potential
sellers because the transactions would permit a tax deferral and would give the
seller control over the timing of gain recognition and payment of federal
income taxes. Management anticipates that the use of the Operating Partnership
units will provide APF with additional acquisition opportunities.
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<PAGE>
The following chart shows the structure of APF before the acquisitions of
the CNL Restaurant Businesses and the Acquisition. As shown in the chart, APF
had five direct qualified REIT subsidiaries:
. CFA Acquisition Corporation, which was a shell corporation that merged into
the Advisor on September 1, 1999.
. CFS Acquisition Corporation, which was a shell corporation that merged into
CNL Financial Services, Inc. on September 1, 1999.
. CNL Financial Services, LP, which is a limited partnership into which CNL
Financial Services, Inc. merged following the merger with CFS Acquisition
Corp. described in the previous bullet.
. CFC Acquisition Corporation which was a shell corporation that merged into
CNL Financial Corporation on September 1, 1999.
. CNL APF GP Corp. which serves as the general partner of APF's Operating
Partnership.
. CNL APF LP Corp. which serves as the limited partner of APF's Operating
Partnership.
. CNL APF Partners, L.P., APF's Operating Partnership, which, as previously
described, is the entity through which APF conducts its business and is the
entity into which any Income Funds approving the Acquisition will merge.
Organization Chart of APF before
the acquisition of the CNL Restaurant Businesses and the Income Funds
[MAC CHART APPEARS HERE]
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Liquidity and Capital Resources
APF was formed in May 1994 and since inception has completed three separate
public offerings of shares of common stock, the last of which was completed in
December 1998. As of June 30, 1999, APF had received aggregate proceeds from
its three offerings of approximately $750 million. As of June 30, 1999, APF had
invested the aggregate net offering proceeds along with proceeds from its
credit facility to acquire 578 restaurant properties, to provide mortgage
financing, to pay acquisition fees to the Advisor and to invest in franchised
loan certificates.
In March 1999, APF obtained a new unsecured revolving credit facility in an
amount up to $200,000,000 with a group of commercial banks. APF uses the credit
facility to acquire and develop properties and to fund mortgage loans and
secured equipment leases. In conjunction with obtaining the credit facility,
APF terminated and repaid the outstanding balance of approximately $12,600,000
under the previous line of credit. In June 1999, APF and its lenders amended
the credit facility to increase the borrowing amount up to $300,000,000. The
interest rate on advances under the credit facility is determined according to
(i) a tiered rate structure up to a maximum rate of 200 basis points above
LIBOR based upon APF's overall leverage ratio or (ii) the lenders' prime rate
plus 0.25%, whichever APF selects at the time of the advance. APF obtained
advances of $151,437,245 under the credit facility during the six months ended
June 30, 1999 and had an outstanding balance of $149,000,000 as of June 30,
1999. In connection with obtaining and amending the credit facility, APF
incurred commitment fees, legal fees and closing costs of $3,548,744. As of
June 30, 1999, $20,000,000 of the amounts advanced were subject to interest at
a rate of eight percent per annum and the remaining $129,000,000 incurred
interest at a rate of 6.71% per annum. Interest incurred on prime rate advances
on the credit facility is payable monthly. LIBOR rate advances have interest
payment periods of one, two, three or six months, with interest payable at the
end of the selected period, except for six month loans, on which interest is
payable at the end of three and six months. The principal balance on all
advances, together with all unpaid interest, is due in full upon termination of
the facility on June 9, 2002. The terms of the agreement for the credit
facility include financial covenants that provide for the maintenance of
certain financial ratios. APF was in compliance with all such covenants as of
June 30, 1999.
In June 1999, in connection with the amended credit facility, APF entered
into a new interest rate swap agreement. The purpose of the interest rate swap
agreement is to reduce the impact of changes in interest rates on its floating
rate credit facility. The agreement effectively changes APF's interest rate
exposure on a notional amount of approximately $75,000,000 of the outstanding
floating rate credit facility to a fixed rate of 6.17% per annum, as of June
30, 1999. APF is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap agreement; however, APF does not
anticipate nonperformance by the counterparty as they maintain long-term credit
ratings of "A" or better as rated by Moody's or Standard & Poors.
The effective interest rate for the outstanding balance of $149,000,000 as
of June 30, 1999 as a result of the impact of the interest rate swap in the
amount of $75,000,000 was 7.49% per annum.
Under interest rate swaps, APF agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal
amount. The table represents the notional amounts and expected interest rates
that exist by contractual dates; the notional amount is used to calculate the
contractual payments to be exchanged under the contract. The variable rates are
estimated based on implied forward rates in the yield curve at the reporting
date.
<TABLE>
<CAPTION>
2000 2001 2002
----------- ----------- -----------
<S> <C> <C> <C>
Notional Amount....................... $75,000,000 $75,000,000 $75,000,000
Average Pay Rate...................... 6.17% 6.17% 6.17%
Average Receive Rate.................. 5.93% 6.32% 6.42%
</TABLE>
Subsequent to June 30, 1999, APF obtained additional advances under its
credit facility described above, to acquire additional restaurant properties,
to pay acquisition fees to the Advisor and to reimburse the Advisor for
acquisition expenses.
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At June 30, 1999 and December 31, 1998, APF had $20.8 million and $125.2
million, respectively, invested in short-term investments, including a
certificate of deposit in the amount of $2 million. The decrease in the amount
invested in short-term investments is primarily attributable to the purchase of
restaurant properties during the six months ended June 30, 1999.
APF expects to meet its short-term liquidity requirements, other than for
acquisition and development of restaurant properties and investment in mortgage
loans and secured equipment leases, through cash flow provided by operating
activities. APF believes that cash flow provided by operating activities will
be sufficient to fund normal recurring operating expenses, regular debt service
requirements and distributions to stockholders. To the extent that APF's cash
flow provided by operating activities is not sufficient to meet such short-term
liquidity requirements, as a result, for example, of unforeseen expenses due to
tenants defaulting under the terms of their lease agreements, APF will use
borrowings under its credit facility.
Due to the fact that APF leases its restaurant properties on a triple-net
basis, meaning that tenants are generally required to pay all repairs and
maintenance, property taxes, insurance and utilities, management does not
believe that working capital reserves are necessary at this time. Management
believes that the restaurant properties are adequately covered by insurance. In
addition, the Advisor has obtained contingent liability and property coverage
for APF. This insurance policy is intended to reduce APF's exposure in the
unlikely event a tenant's insurance policy lapses or is insufficient to cover a
claim relating to a restaurant property.
APF expects to meet its other short-term liquidity requirements, including
property acquisition and development and investment in mortgage loans and
secured equipment leases, with additional advances under its credit facility.
In addition, if APF's common stock is listed on the NYSE or another national
securities exchange or over-the-counter market, APF may obtain additional
unsecured or secured financing.
APF expects to meet its long-term liquidity requirements through short or
long-term, unsecured or secured debt financing or equity financing. As of June
30, 1999, APF's only long-term liquidity requirement is the maturity of its
credit facility in June 2002.
During the six months ended June 30, 1999 and 1998, and the years ended
December 31, 1998, 1997 and 1996, APF generated cash from operations of $28.3
million, $16.6 million, $39.1 million, $17.1 million and $5.5 million,
respectively. Based primarily on cash from operations, APF declared and paid
distributions to its stockholders of $28.5 million, $16.0 million, $39.4
million, $16.9 million and $5.4 million, during the six months ended June 30,
1999 and 1998, and the years ended December 31, 1998, 1997 and 1996,
respectively. For the six months ended June 30, 1999 and 1998, and for the
years ended December 31, 1998, 1997 and 1996, approximately 20%, 12%, 18%, 8%
and 13%, respectively, of the distributions received by stockholders
represented a return of capital in accordance with GAAP. Cash distributions
treated as a return of capital on a GAAP basis represent the amount of cash
distributions in excess of a accumulated net earnings, including deductions for
depreciation expenses, on a GAAP basis. Management anticipates that cash
generated from operations will be sufficient to meet operating requirements and
provide the level of stockholder distributions required to maintain APF's
status as a REIT.
During the six months ended June 30, 1999, APF entered into agreements to
acquire (1) the Advisor, (2) CNL Financial Corp. and CNL Financial Services,
Inc., and (3) the Income Funds. In connection therewith, APF agreed to issue
6,150,000 APF Shares for the CNL Restaurant Businesses and up to 27,343,243 APF
Shares for the Income Funds. The acquisition of each Income Fund is contingent
upon the following closing conditions: listing of the APF Shares on the NYSE,
approval by APF's stockholders to increase the number of authorized shares of
common stock, approval by a majority of the outstanding units held by Limited
Partners of such Income Fund and the issuance of a new fairness opinion by
Merrill Lynch if fewer than all of the Income Funds are acquired.
On May 11, 1999, four Limited Partners in several Income Funds served a
lawsuit against us and APF in connection with the proposed Acquisition of the
Income Funds. The plaintiffs are alleging that we breached our fiduciary duties
and violated provisions of the Income Fund partnership agreements in connection
with the proposed Acquisition of the Income Funds by APF. The plaintiffs are
seeking unspecified damages and equitable relief. We and management of APF
believe that the lawsuit is without merit and intend to defend
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vigorously against such claims. On July 8, 1999, the plaintiffs filed an
amended complaint which includes allegations of aiding and abetting and
conspiring to breach fiduciary duties, negligence and breach of duty of good
faith against certain of the defendants and seeks additional equitable relief.
The amended complaint also added three additional plaintiffs. In addition, on
June 22, 1999, a Limited Partner of several Income Funds served a lawsuit
against us and APF alleging that we breached our fiduciary duties and that APF
aided and abetted our breach of fiduciary duties in connection with the
Acquisition. The plaintiff is seeking unspecified damages and equitable relief.
We and the management of APF believe that the lawsuit is without merit and
intend to defend vigorously against such claims.
Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
APF's revenues increased 82% for the six months ended June 30, 1999 as
compared to the same period in 1998. Revenues increased $14.5 million primarily
as a result of the acquisition of restaurant properties and funding of mortgage
loans totalling $213 million during the six months ended June 30, 1999,
compared to $102 million for the same period in 1998. APF continues to focus on
providing net-lease and mortgage financing to restaurant chains and top
franchisees of restaurant chains. As of June 30, 1999, approximately 94% of
APF's tenants were either the franchisor or top franchisee in a particular
chain based on sales. Weighted average base lease rates and mortgage rates on
the new investments were 9.73% for the six months ended June 30, 1999 as
compared to 10.18% for the corresponding period in 1998. APF's growth has
resulted in increased chain diversification as APF's tenants and borrowers
include 47 restaurant chains compared to 35 at June 30, 1998. In addition,
APF's restaurant properties are geographically dispersed among 41 states at
June 30, 1999, versus 37 states at June 30, 1998.
In October 1998, Boston Chicken, Inc. and its affiliates, which lease 27
Boston Market restaurant properties from APF, filed a voluntary petition for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Two
additional Boston Market operators, which lease three additional Boston Market
restaurant properties from APF, also filed voluntary petitions for bankruptcy
protection. As a result of these bankruptcy filings, the tenants have the legal
right to either reject or affirm one or more of their leases with APF. As of
December 31, 1998, the tenants had closed 13 properties, had rejected 12 of the
related leases and had continued making rental payments on the restaurant
property that had been closed but whose lease had not been rejected. The
rejected leases accounted for approximately three percent of APF's rental,
earned and interest income for the year ended December 31, 1998. During the six
months ended June 30, 1999, APF re-leased four of the restaurant properties to
new tenants. In each of April and August 1999, APF sold one of the restaurant
properties to a third party, as described above, and reinvested the net sales
proceeds in additional restaurant properties. In April 1999, one of the Boston
Market tenants who had filed for bankruptcy during 1998, rejected the lease of
an additional restaurant property. As of August 11, 1999, of the 28 restaurant
properties remaining in APF's portfolio relating to these tenants, excluding
the two restaurant properties sold in 1999, described above, four restaurant
properties had been re-leased to new tenants, as described above, seven
restaurant properties had been rejected, ceased making rental payments to APF
and remained vacant, and 17 restaurant properties, including the restaurant
property that was closed in October 1998 but has not been rejected, have
continued to receive rental payments in accordance with their lease agreements.
While the tenants have not rejected or affirmed the remaining 17 leases, there
can be no assurance that some or all of these leases will not be rejected in
the future. The lost revenues resulting from the seven vacant restaurant
properties remaining in the portfolio whose leases were rejected and the
possible rejection of the remaining 17 leases could have an adverse effect on
the liquidity and results of operations of APF, if APF is unable to re-lease
the restaurant properties in a timely manner. Currently, APF is actively
marketing the seven restaurant properties with rejected leases to existing and
prospective clients and local and regional restaurant operators.
During the six months ended June 30, 1999, one of APF's lessees, S & A
Restaurant Properties Corporation, contributed more than 10% of APF's total
rental, earned, investment and interest income relating to its restaurant
properties, mortgage loans, secured equipment leases and franchised loan
certificates. In the
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event that any lessee, borrower or restaurant chain contributes more than 10%
of APF's rental, earned, investment and interest income in future years, any
failure of such lessees, borrowers or restaurant chains could materially affect
APF's income.
Operating expenses, including depreciation and amortization, increased to
$8.6 million for the six months ended June 30, 1999 compared to $3.6 million
for the six months ended June 30, 1998. The increase in expenses was a function
of a larger restaurant property portfolio.
Approximately 89% of APF's leases provide an option that allows the tenant
to purchase the property pursuant to a defined formula. Approximately 12% of
these purchase options are currently exercisable. Generally, the purchase
options are exercisable at the greater of fair market value or 120% of the cost
of the restaurant property. APF does not expect the exercise, if any, of
purchase options to be significant.
The Years Ended December 31, 1998, 1997 and 1996
As of December 31, 1998, net proceeds to APF from its three offerings and
capital contributions, after deduction of stock issuance costs, totalled $670.3
million. As of December 31, 1998, APF had invested or committed for investment
approximately $549.9 million of the net offering proceeds in 409 restaurant
properties, and to provide mortgage financing to pay acquisition fees to the
Advisor and to invest in franchised loan certificates.
APF's revenues and net earnings increased over the three year period.
Revenues increased to $42.2 million for the year ended December 31, 1998 from
$19.5 million and $6.2 million for the years ended December 31, 1997 and 1996,
respectively. The increase was primarily a result of increased acquisition of
restaurant properties and funding of mortgage loans totalling $276.9 million
during the year ended December 31, 1998, compared to $179.1 million and $68.9
million for 1997 and 1996, respectively. At December 31, 1998, approximately
88% of APF's tenants were either the franchisor or top franchisee in a
particular restaurant chain based on sales. Weighted average base lease rates
and mortgage rates on the new investments were 9.90% in 1998 as compared to
10.68% and 11.07% in 1997 and 1996, respectively. APF's growth has resulted in
increased restaurant chain and geographic diversification. APF's tenants and
borrowers include 38 restaurant chains at December 31, 1998 compared to 29 at
December 31, 1997 and 13 at December 31, 1996. In addition, APF's restaurants
were dispersed among 38 states at December 31, 1998 versus 35 at December 31,
1997 and 20 at December 31, 1996.
The increase in investment and interest income to $5.9 million for the year
ended December 31, 1998 compared to $1.9 million and $773,404 during 1997 and
1996, respectively, was primarily a result of higher cash and cash equivalent
balances pending investment in restaurant properties and mortgage loans. APF's
weighted average cash and cash equivalents balance for 1998 was $103.5 million
compared to $42.1 million and $17.8 million in 1997 and 1996, respectively.
This increased cash balance resulted from equity proceeds of $385.5 million
raised during 1998 compared to $222.5 million in 1997 and $100.8 million in
1996. As a result of using all remaining net offering proceeds, during the
quarter ended March 31, 1999, to acquire properties and fund mortgage loans,
interest income it expected to decrease in future years.
During 1998, one of APF's lessees, Foodmaker, Inc., contributed more than
10% of APF's total rental, earned income, investment and interest income
relating to its restaurant properties, mortgage loans, secured equipment leases
and franchise loan certificates. Foodmaker operates and franchises Jack in the
Box restaurants. In addition, two restaurant chains, Golden Corral Family
Steakhouse Restaurants and Jack in the Box, each accounted for more than 10% of
APF's total rental, earned income, investment and interest income relating to
restaurant properties, mortgage loans, secured equipment leases and franchise
loan certificates. In the event that any lessee, borrower or restaurant chain
contributes more than 10% of APF's rental, earned income, investment and
interest income in future years, any failure of such lessees, borrowers or
restaurant chains could materially affect APF's income.
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Operating expenses, including depreciation and amortization, increased to
$9.4 million during 1998 from $3.9 million in 1997 and $1.4 million in 1996.
The increase in expenses was a function of a larger portfolio. Total assets
increased to $680 million at December 31, 1998 from $339 million at December
31, 1997 and $135 million at December 31, 1996.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The Year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
Year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The information technology system of APF consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the company are primarily
facility related and include building security systems, elevators, fire
suppressions, HVAC, electrical systems and other utilities. APF has no
internally generated programmed software coding to correct, because
substantially all of the software utilized by APF is purchased or licensed from
external providers. The maintenance of non-information technology systems at
APF's properties is the responsibility of the tenants of the properties in
accordance with the terms of the APF's leases.
The Y2K Team
In early 1998, APF and its affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the Year 2000 problem. The Y2K Team consists of
representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing Year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential Year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of APF's systems could have a potential
Year 2000 problem.
The information system of APF is comprised of hardware and software
applications from mainstream suppliers. Accordingly, the Y2K Team has contacted
and is evaluating documentation from the respective vendors and manufacturers
to verify the Year 2000 compliance of their products. The Y2K Team has also
requested and is evaluating documentation from the non-information technology
systems providers of APF.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which APF has material third party relationships. These
third parties, in addition to the providers of information and non-information
technology systems, consist of APF's transfer agent and financial institutions.
APF depends on its transfer agent to maintain and track investor information
and its financial institutions for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently Year
2000 compliant.
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Although the Y2K Team continues to receive positive responses from the
companies with which APF has third party relationships regarding their Year
2000 compliance, APF cannot be assured that the third parties have adequately
considered the impact of the Year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
APF's tenants and borrowers and expects to complete this process by September
30, 1999. The Y2K Team expects to begin the process of evaluating the responses
on or about October 1, 1999 and to complete this process by October 31, 1999.
APF has also instituted a policy of requiring all new tenants and borrowers to
indicate that their systems are Year 2000 compliant or are expected to be Year
2000 compliant prior to the Year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become Year 2000 compliant. The Y2K
Team expects all of these upgrades, as well as any other necessary remedial
measures on the information technology systems and non-information technology
systems used in the business activities and operations of APF, to be completed
by September 30, 1999, although, APF cannot be assured that the upgrade
solutions provided by the vendors have addressed all possible Year 2000 issues.
As of September 15, 1999, the cost to APF for these upgrades and other
remedial measures was approximately $5,000. All of this amount was incurred by
CNL Fund Advisors, Inc. prior to its acquisition by APF. The Y2K Team does not
expect that APF will incur any additional costs in achieving Year 2000
compliance. APF does not expect the aggregate cost of the Year 2000 remedial
measures to have a material impact on its results of operations.
Assessing the Risks to APF of Non-Compliance and Developing Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used
by APF
The Y2K Team believes that the reasonably likely worst case scenario with
regard to the information and non-information technology systems used by APF is
the failure of one or more of these systems as a result of Year 2000 problems.
Because APF's major source of income is rental payments under long-term triple-
net leases and loan payments under mortgage loans and secured equipment leases,
any failure of information or non-information technology systems used by APF is
not expected to have a material impact on APF's results of operations. Even if
such systems failed, the payments under APF's leases, mortgage loans and
secured equipment leases would not be affected. In addition, the Y2K Team is
expected to correct any Year 2000 problems within its control before the Year
2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the Year 2000 compliance of the information or non-
information technology systems used by APF or if the progress of the Y2K Team
in remediating Year 2000 problems with such systems deviates from the
anticipated timeline, the Y2K Team will develop a contingency plan if deemed
necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain APF's Records
The Y2K Team believes that the reasonably likely worst case scenario with
regard to APF's transfer agent is that the transfer agent will fail to achieve
Year 2000 compliance of its systems and will not be able to accurately maintain
the records of APF. This could result in the inability of APF to accurately
identify its stockholders for purposes of distributions, delivery of disclosure
materials and transfers of common stock. The Y2K Team has received
certification from APF's transfer agent of its Year 2000 compliance. Despite
the positive response from the transfer agent, APF cannot be assured that the
transfer agent has addressed all possible Year 2000 issues.
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The Y2K Team has developed a contingency plan pursuant to which APF would
maintain its stockholders records manually, in the event that the systems of
the transfer agent are not Year 2000 compliant. APF would have to allocate
resources to internally perform the functions of the transfer agent. APF does
not anticipate that the additional cost of these resources would have a
material impact on its results of operations.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The Y2K Team believes that the reasonably likely worst case scenario with
regard to APF's financial institutions is that some or all of APF's funds on
deposit with such financial institutions may be temporarily unavailable. The
Y2K Team has received responses from 93% of APF's financial institutions
indicating that their systems are currently Year 2000 compliant. Despite the
positive responses from the financial institutions, APF cannot be assured that
the financial institutions have addressed all possible Year 2000 issues. The
loss of short-term liquidity could affect APF's ability to pay its expenses on
a current basis. APF does not anticipate that a loss of short-term liquidity
would have a material impact on its results of operations.
Based upon the responses received from APF's financial institutions and the
inability of the Y2K Team to identify a suitable alternative for the deposit of
funds that is not subject to potential Year 2000 problems, the Y2K Team has
determined not to develop a contingency plan to address this risk.
Risks of Late Payment or Non-Payment by Tenants and Borrowers
The Y2K Team believes that the reasonably likely worst case scenario with
regard to the tenants under the APF's leases and the borrowers under APF's
mortgage loans and secured equipment leases is that some of the tenants or
borrowers may make payments late as the result of the failure of the tenants or
borrowers to achieve Year 2000 compliance of their systems used in the payment
of rent, the failure of the tenants' or borrowers' financial institutions to
achieve Year 2000 compliance, or the temporary disruption of the tenants' or
borrowers' businesses. The Y2K Team is in the process of requesting responses
from APF's tenants and borrowers indicating the extent to which their systems
are currently Year 2000 compliant or are expected to be Year 2000 compliant
prior to the Year 2000. APF cannot be assured that the tenants and borrowers
have addressed all possible Year 2000 issues. The late payment by one or more
tenants or borrowers would affect APF's results of operations in the short-
term. APF is not able to estimate the impact of late payments on its results of
operations.
The Y2K Team is also aware of predictions that the Year 2000 problem, if
uncorrected, may result in a global economic crisis. The Y2K Team is not able
to determine if such predictions are true. A widespread disruption of the
economy could affect the ability of APF's tenants and borrowers to make rental
and loan payments and, accordingly, could have a material impact on APF's
results of operations.
Because rental and loan payments are under the control of APF's tenants and
borrowers, the Y2K Team is not able to develop a contingency plan to address
these risks. In the event of late payment or non-payment of rental or loan
payments, APF will assess the remedies available to it under its lease
agreements and loan agreements.
Quantitative and Qualitative Disclosures About Market Risk
APF has provided fixed rate mortgage loans and equipment financing to
borrowers. APF has also invested in franchised loan certificates with fixed and
adjustable rates. Management believes that the estimated fair value of the
mortgage loans, equipment financing and franchised loan certificates at June
30, 1999 approximated the outstanding
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principal amounts. APF is exposed to equity loss in the event of changes in
interest rates. The following table presents the expected cash flows of
principal that are sensitive to these changes as of June 30, 1999:
<TABLE>
<CAPTION>
Mortgage and
equipment notes Certificates
--------------- -------------------------
Fixed
Fixed Rates Rates Floating Rates
--------------- ---------- --------------
<S> <C> <C> <C>
1999.................................. $24,229,880 $ 0 $ 0
2000.................................. 6,198,852 0 0
2001.................................. 2,543,741 0 0
2002.................................. 2,814,822 0 0
2003.................................. 3,188,208 0 0
Thereafter............................ 23,194,739 9,514,215 6,568,839
----------- ---------- ----------
$62,170,242 $9,514,215 $6,568,839
=========== ========== ==========
</TABLE>
Future Business Plans
Subsequent to consummating the Acquisition, APF anticipates further
increasing its line of credit to fund future growth. APF's unsecured revolving
loan facility will be used as a warehousing line until a sufficiently large
volume of investments is accumulated to warrant the issuance of equity
securities or additional unsecured or secured financing.
Assuming the Acquisition is completed in the first quarter of 2000, APF
anticipates a public offering of APF Shares either contemporaneously with or
shortly after completing the Acquisition. Management is unable to estimate the
size or exact timing of that offering but estimates it to be in the range of
$200 million to $300 million. In addition, as a result of the acquisition of
the CNL Restaurant Businesses on September 1, 1999, APF has credit facilities
with third parties representing aggregate borrowing capacity of $700 million,
which will serve as APF's primary warehouse facilities for mortgage loans prior
to securitization. This facility will permit APF to sell loans on a regular
basis to a trust at an agreed upon advance rate. APF will act as the servicer
for such loans following the sale to the trust. APF believes that the
combination of equity financing, conduit facilities, secured financing,
unsecured revolving credit facility and cash flow from operations will
adequately provide the necessary financing for APF through the year 2000.
APF expects to periodically securitize mortgage loans by issuing classes of
trust certificates. Periodic securitization is an effective method for
accessing capital and reducing debt on APF's balance sheet, and makes APF less
dependent on the equity markets. APF anticipates holding non-related classes of
the securitizations that management believes will enhance APF's return on
capital. APF expects to use financial instruments to hedge against fluctuations
in interest rate risk, as described above in "Risk Factors."
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APF'S BUSINESS
General
Overview
APF is a real estate investment trust that provides a full range of
financial, development, advisory and other real estate services to operators of
national and regional restaurant chains. Unlike a number of its competitors,
APF has positioned itself in the restaurant industry as a provider of a
complete range of restaurant financing options and development services. APF's
ability to offer complete "turn-key," build-to-suit development services, from
site selection to construction management, together with its ability to provide
its clients with financing options, such as triple-net leasing, mortgage loans
and secured equipment financing, makes APF a preferred provider for all the
real estate related business needs of operators of national and regional
restaurant chains. Relying on APF's senior management team, which has an
average of more than 17 years of experience in the real estate and financial
services industries, permits the restaurant chain or restaurant chain operator
to focus on its core business objectives of operating its restaurant business
while avoiding the distractions associated with the acquisition, construction,
development and financing of additional restaurant properties. Throughout their
years in the real estate and financial services industries, APF's management
has entered into contractual, business relationships with national restaurant
chains, such as, Applebee's, Arby's, Bennigan's(R), Black-eyed Pea, Burger
King(R), Chevy's Fresh Mex, Darryl's, Denny's, Golden Corral, Ground Round,
Houlihan's, Jack in the Box, KFC, Pizza Hut, Ruby Tuesday's, Steak and Ale(R)
Restaurant, Taco Bell, T.G.I. Friday's and Wendy's, and with operators of
national and regional restaurant chains such as S&A Restaurant Corporation,
Foodmaker, Inc., Golden Corral Corporation, IHOP, and Chevy's, Inc.
Since APF's inception in 1994 through June 1999, APF raised approximately
$750 million in three public offerings, the proceeds of which have been used to
acquire restaurant properties and to make mortgage loans. As of June 30, 1999
and assuming the completion of the acquisition of the CNL Restaurant Businesses
as described on page 128, APF's portfolio consisted of investments in 1,193
restaurant properties. Of these restaurant properties APF has provided triple-
net lease financing and/or mortgage financing on 905 restaurant properties, and
holds a securitized mortgage interest in 288 properties. APF also had secured
equipment leases on the equipment, such as kitchen and dining room fixtures and
food preparation appliances directly related to the restaurant property, on
approximately 7% of these restaurant properties as of June 30, 1999. Generally,
the real estate owned by APF consists of land and buildings.
During 1999, APF increased its financing and development capabilities and
became a full-service restaurant REIT by acquiring the CNL Restaurant
Businesses. In its determination of whether APF should acquire the CNL
Restaurant Businesses, APF's Board of Directors considered the longstanding
working relationships that APF had with the management and personnel of the CNL
Restaurant Businesses and concluded that such a relationship would permit APF
to integrate efficiently into its corporate structure the services offered by
the CNL Restaurant Businesses.
Through triple-net leases and mortgage loans on restaurant properties, APF
endeavors to structure its real estate investments in a manner that permits it
to provide its stockholders with a stable annual return on their investment.
APF's portfolio is diversified geographically, by restaurant chain, restaurant
chain operator and investment type, with more than 45 restaurant chains and
more than 100 operators of national and regional restaurant chains in 47 states
as of June 30, 1999. APF's restaurant property portfolio includes national and
regional brands that are leased to restaurant chain operators on a long-term
triple-net lease basis, typically for 15 to 20 years. APF's current portfolio
of triple-net leases has an average remaining lease term of 16 years, and its
current portfolio of mortgage loans has an average remaining loan term of
approximately 16 years.
APF's address and telephone number are CNL Center at City Commons, 450 South
Orange Street, Orlando, Florida 32801, (407) 540-2000.
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Business Objectives and Strategies
APF seeks to enhance its financial position and increase results of
operations by pursuing the following business objectives and strategies:
Providing a full range of real estate development and financing services to
operators of national and regional restaurant chains. APF is structured as a
"one-stop shop" for real estate services and financial products that allows the
operators of national and regional restaurant chains to concentrate on their
core business of operating restaurants. APF provides operators of national and
regional restaurant chains with a variety of financing options such as triple-
net leasing, mortgage financing and secured equipment financing. APF also
provides restaurant property development services such as site selection, due
diligence, construction management and build-to-suit development to operators
of national and regional restaurant chains. APF seeks to be perceived by
operators of national and regional restaurant chains as their long-term,
strategic partner by providing all of their real estate financing and
development needs.
APF also has entered into a ten-year contractual agreement with CNL Advisory
Services, Inc., an affiliate of CNL Group, Inc. that provides financial
advisory services to restaurant property purchasers. Pursuant to the contract,
APF has the right to provide financing for restaurant properties where CNL
Advisory Services has been retained by a restaurant property purchaser. APF
believes this arrangement provides APF with enhanced financing opportunities.
The agreement also provides that CNL Advisory Services will use its best
efforts to ensure that APF is given the opportunity to compete for financing of
restaurant acquisitions where CNL Advisory Services is engaged to provide
financial advisory services to a restaurant property seller. In addition, CNL
Advisory Services is required to pay APF an origination fee equal to 10% of all
fees it receives in conjunction with any restaurant advisory engagement.
Focusing on strong, recognized brand name operators of national and regional
restaurant chains. APF believes that one of the reasons for its success has
been its focus on servicing operators of national and regional restaurant
chains. As of June 30, 1999, approximately 94% of APF's tenants were either the
franchisor or top franchisee based on sales of the particular restaurant chain.
APF's management believes that, due to the continuing consolidation of the
national and regional restaurant chain industry, it has additional growth
opportunities through the financing of restaurant chains' acquisitions and
development. APF's focus on operators of national and regional restaurant
chains also reduces its exposure to risks such as tenant defaults. In addition
to being better capitalized and more diversified, an operator of a large
restaurant chain of numerous restaurants is better equipped than an operator of
a small restaurant chain to absorb the financial repercussions of an
unprofitable or underperforming restaurant and is more likely than smaller
restaurant chain operators to remain financially reliable and to adhere to
their contractual obligations to APF, whether for a lease, a mortgage or a
secured equipment loan.
Structuring for long-term, stable cash flows. APF's restaurant properties
are generally leased on a long-term basis, generally 15 to 20 years, and are
structured as triple-net leases through which the tenant bears responsibility
for substantially all property costs and expenses associated with ongoing
maintenance and operation, including utilities, property taxes, insurance and
roof and structural repairs. Further, APF acquires restaurant properties that
are subject to an existing lease which reduces the risks inherent in initial
leasing. These factors combine to yield stable cash flows for APF's restaurant
property investments.
APF's mortgage loans are similarly structured to provide consistent returns.
The mortgage loans are normally structured with a 15 to 20 year base term and
bear interest at a targeted premium over the prevailing treasury bond rate. The
mortgage loans contain strict operating covenants, including a requirement to
maintain a fixed charge coverage ratio of 1.20 and a prohibition on the
borrower to own an interest in or operate any other restaurant in the same
chain within a three-mile radius of the property, and are fully amortizing. In
addition, the borrower may not amend their organizational documents or any
management agreement of the property without prior written consent of APF. The
fixed charge coverage ratio is calculated by adding EBITDA and the rent
obligation, and dividing that total by the debt service plus the rent
obligation. Therefore,
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in order to have a fixed charge coverage ratio of 1.20, a borrower must have
$1.20 in EBITDA plus the rent obligation, for every $1.00 of debt service plus
the rent obligation. A borrower's failure to meet its fixed charge coverage
ratio is a technical default, but not a payment default. If such failure
occurs, APF may determine whether or not to place the borrower in default and
pursue remedies provided in the mortgage loan agreement. APF will often modify
the frequency with which the borrower is monitored, or adjust the covenants in
the loan, rather than declare the borrower to be in default.
Maintaining high-quality acquisition and development pipelines. As a one-
stop shop for operators of national and regional restaurant chains, APF is able
to tailor its services, ranging from turn-key, build-to-suit development to
mortgage financing, to provide exactly the real estate services that its
clients need. This range of services has allowed APF to develop strategic
relationships with operators of national and regional restaurant chains that,
in turn, lead to a steady pipeline of restaurant property acquisitions and
development opportunities. APF's pipeline for restaurant property financing
includes a combination of new construction, refinancing by operators of their
existing restaurant properties or portfolios and purchasing existing triple-net
leased restaurant properties. APF's current financing commitments with
operators of national and regional restaurant chains either through triple-net
lease financing or mortgage loan financing are $441 million.
Applying proven underwriting standards. APF performs extensive due diligence
before investing in a restaurant property and applies strict conservative
underwriting criteria to all potential acquisitions and financings. APF
evaluates factors such as restaurant-level profitability, restaurant chain
operator experience, the position of the restaurant chain in the industry
overall, local market conditions, fixed charge coverage ratios, underlying
property value, physical condition of the restaurant property and environmental
considerations. APF also evaluates the financial strength of the tenant,
borrower, if different from the tenant, and, if applicable, guarantor to assess
the availability of alternate sources of payment in the event that a tenant or
borrower defaults on its obligations to APF. APF's investments generally have
full tenant or borrower recourse, and many of APF's leases and mortgage loans
also have terms that give APF recourse to guarantors who are owners or
affiliates of the tenant or borrower.
Maintaining diversification. As of June 30, 1999 and assuming the
acquisition of the CNL Restaurant Businesses, APF's real estate investments are
comprised of 1,193 restaurant properties which are diversified geographically,
by restaurant chain, restaurant chain operator and investment type. APF's
management has focused on diversifying APF's investments to mitigate risk and
impact returns positively through the following methods:
Geographic Diversification. APF's restaurant property portfolio is
geographically diverse with investments in restaurant properties
located in 47 states as of June 30, 1999.
Restaurant Chain Diversification. APF's portfolio contains
restaurant properties operated by many different restaurant chains. As
of June 30, 1999, APF had investments in more than 45 restaurant
chains. Major restaurant chains included in the portfolio are
Applebee's, Arby's, Bennigan's(R), Black-eyed Pea, Burger King(R),
Chevy's Fresh Mex, Darryl's, Denny's, Golden Corral, Ground Round,
Houlihan's, Jack in the Box, KFC, Pizza Hut, Ruby Tuesday's, Steak and
Ale(R), Taco Bell, T.G.I. Friday's and Wendy's.
Restaurant Chain Operator Diversification. APF focuses its
investments in restaurant properties operated by top franchisors and
franchisees of national brands in the restaurant chain industry. As of
June 30, 1999, approximately 94% of APF's tenants were the franchisor
or top franchisee based on sales of the particular restaurant chain.
Investment Type Diversification. APF further diversifies its risk
profile by offering a variety of financial services to its operators of
national and regional restaurant chains including triple-net lease
financing, mortgage financing and secured equipment financing.
Managing and Monitoring Investments. APF, through its asset management
group, actively manages its restaurant property portfolio and administers its
investments. APF monitors property level issues including restaurant sales,
real estate taxes, assessments and insurance payments and actively analyzes
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diversification, reviews tenant/borrower financial statements and restructures
investments in the case of underperforming and non-performing investments. APF
believes that the active management of its investments is responsible, in large
part, for the high tenant occupancy rate for the restaurant properties. As of
June 30, 1999, APF's restaurant properties were approximately 98% leased.
Maintaining a conservative capital structure. APF operates with a moderate
use of indebtedness with the objective, set by its Board of Directors, of
maintaining a debt-to-total assets ratio of less than 45%. As of June 30, 1999
and assuming the acquisition of the CNL Restaurant Businesses as of that date,
APF's debt to total assets ratio was approximately 361. APF believes that its
lack of substantial indebtedness combined with its predictable cash flows will
permit it to continue to procure attractive debt and equity financing.
Competitive Advantages
APF believes it will have competitive advantages that will enable it to be
selective with respect to real estate investment opportunities. These
advantages, listed below, will enable APF to meet its investment objectives of
stockholder distributions, growth and enhanced stockholder value.
. Size. APF believes that its large capitalization will permit it to obtain
capital from numerous sources at competitive rates.
. Variety of Financing Options. Because APF has a modest amount of
leverage, APF is in a favorable position to borrow funds at competitive
rates to expand its portfolio while maintaining a conservative capital
structure. APF's ability to borrow and to securitize its mortgage loans
enables it to continue to acquire additional restaurant properties
without the necessity of accessing the equity capital markets by selling
additional capital stock and exposing current stockholders to potential
dilution. Also, APF's UPREIT structure with the Operating Partnership
provides it with additional potential access to capital through the sale
of the Operating Partnership's units.
. Established Relationships with Clients. Through its acquisition of the
CNL Restaurant Businesses, APF has enhanced its strong tenant
relationships and contacts with potential future tenants and mortgage
loan recipients. APF's management believes that its long-standing
relationships with its clients gives APF the opportunity to provide
additional restaurant property services and financial products to such
clients for their future business needs.
. Broad Array of Products and Services. Established in-house acquisition,
development and financing capabilities provide APF with a competitive
advantage over most other triple-net lessors and traditional real estate
lenders that typically provide more limited scope of services to their
prospective restaurant clients. APF believes that its ability to provide
operators of national and regional restaurant chains with a variety of
financing alternatives, site-selection and development services, as well
as providing merger and acquisition advisory services through CNL
Advisory Services, provides APF with a competitive advantage in the
restaurant finance business.
. Experienced Management. APF has developed a senior management team with
an average of more than 17 years of experience in developing and
operating restaurant properties and in the real estate and financial
services industry. APF believes that its management has a specialized
ability to invest in and manage restaurant real estate that will decrease
investment risk and enhance stockholders' returns.
APF'S Recent Expansion of Services
On September 1, 1999, APF increased its financing and development
capabilities and became a full-service restaurant REIT by acquiring the CNL
Restaurant Businesses, which are essentially all of the restaurant management,
asset management, financing and development businesses conducted by affiliates
of CNL Group, Inc. The acquisition of the CNL Restaurant Businesses allows APF
to offer comprehensive restaurant property service functions to operators of
national and regional restaurant chains.
As discussed earlier, the CNL Restaurant Businesses consisted of CNL Fund
Advisors, Inc., which managed APF's business, and the CNL Restaurant Financial
Services Group, which originated mortgage loans
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to operators of national and regional restaurant chains comparable to the
restaurant chains that are currently APF tenants. The CNL Restaurant Financial
Services Group also "securitized" a portion of the mortgage loans originated
and retained the servicing rights to such loans.
As a result of the acquisition of the CNL Restaurant Businesses, APF now
provides the following comprehensive restaurant property service functions to
operators of national and regional restaurant chains:
. Restaurant Acquisition, Development and Management Services. In its
acquisition of the CNL Restaurant Businesses, APF acquired complete
acquisition, development and in-house asset management functions by
acquiring the Advisor. Because APF had no employees, the Advisor provided
these functions on behalf of APF. APF now has responsibility for its day-
to-day operations, including raising capital, investment analysis,
acquisitions, due diligence, asset management, loan servicing and
accounting services. APF also provides restaurant development services
including site selection, construction management and build-to-suit
development. As of June 30, 1999, APF was managing approximately 80
restaurant development projects. Having the ability to provide these
service functions internally eliminates APF's obligation to pay fees to
the Advisor and any perceived conflicts of interest that may arise from
APF's transactions with the Advisor. We also believe that in-house
acquisition, financing and development capability enhance APF's
performance through increased control over functions that are important
to the growth of its business.
Investment analysts specializing in REITs in recent years have emphasized
their strong preference for internally-advised REITs. These analysts
suggest that the nature of the relationship between externally-advised
REITs and their external advisors is susceptible to conflicts of
interest, most of which can be avoided through self-administration. Of
the 45 REITs that are traded on the NYSE and have an equity market
capitalization of more than $1 billion, approximately 88% are internally-
advised. Accordingly, we believe that investors and analysts will view
APF's new, internally-advised structure more favorably.
Historically, APF did not have a large enough asset base to provide the
economies of scale needed to support efficiently the extensive general
and administrative expenses of an in-house management team. APF's
management believed that the efficiencies experienced by employing a
third-party advisor would diminish as APF grew and expected that as APF
grew it would be more cost effective to become internally-advised. APF
believes that APF's asset base has grown sufficiently large to now
support such an infrastructure efficiently.
. Restaurant Financial Services. APF provides comprehensive financing
options including real estate sale-leaseback financing, mortgage
financing, construction financing and equipment financing to the
restaurant industry. APF expanded its financing capabilities by acquiring
the CNL Restaurant Financial Services Group, which made and serviced
mortgage loans to operators of national and regional restaurant chains
comparable to the operators of national and regional restaurant chains
that currently are tenants of APF. In addition, the CNL Restaurant
Financial Services Group "securitized" mortgage loans. A mortgage loan
securitization involves raising capital by combining a group of mortgage
loans into a pool, creating securities that are backed by the combined
pool and then issuing those securities to investors. The CNL Restaurant
Financial Services Group made loans and securitized them by selling them
to a special purpose entity which is organized solely for the purpose of
issuing certificates representing beneficial interests in the pool of
mortgage loans. The CNL Restaurant Financial Services Group received the
following from its securitization:
(1) the net proceeds from the sale of the certificates;
(2) income in the form of the "spread" or difference between the interest
that is earned on the securitized mortgage loans, less transaction
fees and expenses and any portfolio losses, and the interest earned
on the certificates sold to third parties; and
(3) fees for servicing mortgage loans that were securitized.
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Additionally, the CNL Restaurant Financial Services Group generally
retained a subordinated interest in the mortgage loans, which because it
is subordinated, generally bears interest at a higher rate than the
mortgage loans as a whole. APF expects to continue these business
practices. The acquisition of the CNL Restaurant Financial Services Group
has provided a platform for the expansion of APF's existing financing
capabilities to include such securitization transactions, which APF
believes enables it to access more financing opportunities and,
ultimately, to increase cash available to be distributed to its
stockholders. APF believes securitization transactions may permit it to
obtain additional capital with greater ease and at a lower cost at times
when market conditions are not suitable for raising funds on economically
attractive terms through the issuance of APF's equity or debt securities.
APF estimates that a hypothetical one percentage point increase or
decrease in long-term interest rates at December 31, 1998 would have
impacted the mortgage loans and securitized mortgage interest that it
holds and result in a change to net income of approximately 13%. This
sensitivity analysis contains simplifying assumptions (for example, it
does not consider the impact of prepayment risk or credit spread risk).
Therefore, although it gives an indication of APF's exposure to interest
rate changes at December 31, 1998, it is not intended to predict future
results and APF's actual results will likely vary.
In addition to enhancing APF's expertise in providing mortgage loans and
establishing a platform from which to engage in securitization
transactions, APF also acquired an existing mortgage loan portfolio,
including the servicing rights of such portfolio and assumed the
warehouse lines of credit of the CNL Restaurant Financial Services Group.
As of June 30, 1999, the CNL Restaurant Financial Services Group had made
$607 million in mortgage loans on 604 restaurant properties in 44 states
and had securitized approximately $269 million of the $607 million of
originated mortgage loans. Also as of that date, the CNL Restaurant
Financial Services Group had signed commitments to originate an
additional $194 million in mortgage loans.
As consideration in its acquisition of the CNL Restaurant Businesses, APF
paid 6.15 million APF Shares. Of the 6.15 million APF Shares issued, 1.0
million are held in escrow. The APF Shares held in escrow will be released to
the former stockholders of the CNL Restaurant Businesses based on the value of
restaurant properties acquired, mortgage loans made and development projects
completed by APF during the "escrow term." The "escrow term" begins on the date
the CNL Restaurant Businesses were acquired and ends a date that is 18 months
after the APF Shares are listed on the NYSE. If APF fails, during the escrow
term, to acquire restaurant properties, make mortgage loans and complete
development projects of at least $750 million in the aggregate, all APF Shares
remaining in the escrow at the end of the escrow term will be returned to APF,
and the former stockholders of the CNL Restaurant Businesses will no longer
have any rights to such APF Shares. APF's Board of Directors may, in its
reasonable discretion, extend the escrow term for an additional six months
following the escrow term if it reasonably believes that it is in APF's best
interests to do so. In connection with the acquisition of the CNL Restaurant
Businesses, Merrill Lynch, without regard to the escrow, has provided to APF an
opinion that the aggregate consideration paid by APF for the CNL Restaurant
Businesses was fair to APF from a financial point of view.
APF also has entered into a strategic alliance with CNL Advisory Services, a
wholly-owned subsidiary of CNL Group, Inc., which advises operators of national
and regional restaurant chains on the merger and acquisition of restaurant
businesses. Under the terms of the agreement, APF has the right of first
refusal to provide financing for restaurant properties in connection with any
merger or acquisition with respect to which CNL Advisory Services is providing
advisory services. APF did not attempt to acquire CNL Advisory Services because
the income generated by this company does not qualify under the gross income
tests for a REIT for tax purposes. APF's management believes, however, that its
agreement with CNL Advisory Services will generate additional financing
opportunities for APF and further enhance its relationships with operators of
national and regional restaurant chains.
Because of APF's ability to offer a full range of financing opportunities to
operators of national and regional restaurant chains, APF believes that the
pool of targeted restaurant chain operators to which APF
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<PAGE>
markets its financial products will increase. In addition, APF will be able to
compete more effectively with other restaurant chain finance companies because
of its ability to offer a full range of financial products and services to a
restaurant chain operator.
Evaluation of Investment Opportunities
Restaurant properties acquired by APF are undeveloped, newly constructed or
existing restaurant properties. The average age of the buildings in APF's
property portfolio is approximately 7 years. In addition, APF generally
acquires restaurant properties for which there is an existing lease in order to
avoid the risks inherent in initial leasing.
In addition to acquiring restaurant properties, APF also provides mortgage
loans to operators of national and regional restaurant chains. APF endeavors to
structure the mortgage loans so that the returns are comparable to the returns
that APF receives on its triple-net leases. To a lesser extent, APF offers
secured equipment leases to operators of national and regional restaurant
chains pursuant to which APF will finance, through direct financing leases or
loans, the furniture, fixtures and equipment located at the restaurant
properties. This service is traditionally provided as an accommodation to APF's
tenants.
APF evaluates each of its investment opportunities through the following
departments:
. Acquisitions. This department is responsible for originating new
investments with, and maintaining relationships within, the restaurant
chain industry. Through June 30, 1999 and assuming the acquisition of the
CNL Restaurant Businesses, this group originated, for APF or other
affiliates, a total of $2.1 billion in triple net-leases and mortgage
loans in the restaurant chain industry. In analyzing potential restaurant
property acquisitions and investments, APF carefully underwrites each
aspect of the transaction, including the tenant or borrower, the real
estate and the lease or mortgage loan, to satisfy the acquisition
criteria and enhance the value of returns as described below.
To seek creditworthy tenants and borrowers--Each potential tenant or
borrower is subjected to an extensive evaluation of its credit,
management, ranking in the industry, operating history and
profitability. APF seeks clients who have established credit. APF may
also seek a letter of credit or guaranty of lease or loan obligations
from the tenant's or borrower's corporate parent providing additional
financial security.
To ensure economic benefits from the leases--Generally, clauses are
included in the leases providing for increases in rent over the term of
the leases. The increases are scheduled rental increases, a percentage
of gross sales above a specific level or tied to indices such as the
consumer price index.
To obtain lease provisions that protect value--As appropriate, APF
attempts to include provisions in its leases that require its consent
to certain tenant activities or the satisfaction of specific operating
tests. These provisions include, for example, operational and financial
covenants, prohibitions on a change of control, and indemnification
from the tenant against environmental and other contingent liabilities.
These provisions enable APF to protect its investment from operational
and financial changes that could impact the client's ability to satisfy
its obligations or could reduce the value of the restaurant properties.
. Underwriting. This department performs detailed underwriting of
individual restaurant operators as well as restaurant chains. APF
believes that its conservative underwriting has led to its historically
low default and loss experience.
APF's investment committee, which is comprised of senior management,
functions as a separate and final step in the investment approval
process. As part of the underwriting process, APF's investment committee
independently evaluates each investment opportunity. As a transaction is
structured, it is evaluated for its expected financial returns,
creditworthiness of the tenant, the real estate characteristics,
guarantors or other collateral, and the lease or mortgage loan terms. As
one of the industry leaders in
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<PAGE>
triple-net lease financing and mortgage loan origination, APF has proven
systems in place to enable it to effectively underwrite tenant or
borrower financings.
. Development Services. This group provides a full range of real estate
development services, including market evaluation, site selection, due
diligence, construction management and turn-key, build-to-suit
development. The development services group provides APF with a pipeline
of restaurant property financing transactions by overseeing the initial
development of sites for the client and establishing a relationship with
the client at the start of its use of the restaurant property.
. Asset Management. This group is comprised of restaurant property real
estate and servicing specialists who monitor and manage the portfolio of
real estate and the real estate financings as well as any secured
equipment financing. The asset management group seeks to optimize the
performance of the current portfolio of restaurant properties through
timely dispositions and favorable lease modifications. It also monitors
payment receipts, property tax and insurance compliance, administers
underperforming and non-performing investments and oversees dispositions
and tenant substitutions. The asset management group is also responsible
for performing due diligence in advance of purchasing restaurant
properties, interfacing with legal counsel and other third-party service
providers, and tracking the performance of tenants and restaurant
concepts to identify potential concerns in advance of default.
. Finance/Treasury. This group is responsible for securitizing APF's
mortgage loan portfolios in the capital markets and ensuring that APF has
adequate capital sources and lending capacity to continue to develop
APF's triple-net lease and mortgage loan business. Additionally, this
group is responsible for SEC compliance and financial and tax reporting.
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Financial Products and Services
Triple-Net Lease Restaurant Properties
The following table provides information by restaurant chain with respect to
the restaurant properties owned and leased on a triple-net basis by APF for
restaurant properties owned as of June 30, 1999.
<TABLE>
<CAPTION>
Total Number of Average Age Percent of
Restaurant of Building Annualized Total Total Rental
Restaurant Chain Properties (years) Rental Revenue(1) Revenue
- ---------------- --------------- ----------- ----------------- ------------
<S> <C> <C> <C> <C>
Golden Corral........... 46 2.0 $ 6,200,000 10.5%
Jack in the Box......... 57 1.8 5,748,000 9.7
Chevy's Fresh Mex....... 26 1.4 4,689,000 8.0
IHOP.................... 37 2.6 4,335,000 7.3
Bennigan's.............. 21 15.1 4,080,000 6.9
Steak and Ale Restau-
rant................... 20 20.7 3,397,000 5.8
Burger King............. 34 11.4 3,335,000 5.7
Boston Market(2)........ 29 2.4 2,401,000 4.1
Darryl's................ 15 17.6 2,349,000 4.0
Arby's.................. 29 4.4 2,298,000 3.9
Applebee's.............. 16 3.4 2,226,000 3.8
Black-eyed Pea.......... 26 4.6 1,835,000 3.1
Big Boy................. 30 10.6 1,811,000 3.0
Pollo Tropical.......... 11 4.7 1,781,000 3.0
Denny's................. 15 10.1 1,497,000 2.5
Ground Round............ 13 18.3 1,419,000 2.4
Other................... 153 8.0 9,603,000 16.3
--- ----------- -----
Total................. 578 $59,004,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) Annualized rental revenue is straight-lined in accordance with generally
accepted accounting principles. Excludes original base rental income of
$810,000 attributable to 9 restaurant properties, including the restaurant
properties discussed in footnote 2, which have terminated their leases.
Also excludes base rental income attributable to 55 restaurant properties
under construction at June 30, 1999.
(2) In October and November 1998, tenants of 29 Boston Market restaurant
properties filed voluntary petitions for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code. As of August 31, 1999, seven of these restaurant
properties remain closed, two have been sold, four have been re-leased and
APF continues to receive lease payments on the remaining 16 restaurant
properties. APF is actively marketing these restaurant properties for re-
lease or sale.
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<PAGE>
The following table provides the same material restaurant property
information by tenant with respect to the restaurant properties owned on a
triple-net basis by APF as of June 30, 1999.
<TABLE>
<CAPTION>
Average
Total Number of Age of Percent of
Restaurant Buildings Annualized Total Total Rental
Tenant Properties (years) Rental Revenue Revenue
------ --------------- --------- ---------------- ------------
<S> <C> <C> <C> <C>
S&A Properties
Corporation............ 41 17.8 $ 7,477,000 12.7%
Foodmaker, Inc. ........ 57 1.8 5,748,000 9.7%
Chevy's, Inc. .......... 26 1.4 4,689,000 8.0%
Golden Corral
Corporation............ 38 1.6 4,560,000 7.7%
IHOP Corp............... 37 2.6 4,335,000 7.3%
Houlihan's Restaurants,
Inc. .................. 20 19.4 3,290,000 5.6%
Phoenix Restaurant
Group, Inc............. 31 6.0 2,408,000 4.1%
Carrols Corporation..... 14 6.5 2,127,000 3.6%
Boston Chicken, Inc. ... 17 2.4 2,090,000 3.5%
Elias Brothers
Restaurants, Inc. ..... 30 10.6 1,811,000 3.1%
RTM, Inc. .............. 20 3.2 1,730,000 2.9%
Woodland Group, Inc. ... 10 4.4 1,607,000 2.7%
The Ground Round,
Inc. .................. 13 18.3 1,419,000 2.4%
Burger King
Corporation............ 14 18.1 1,162,000 2.0%
Other .................. 210 7.3 14,551,000 24.7%
--- ----------- -----
Total................... 578 $59,004,000 100.0%
=== =========== =====
</TABLE>
Description of Restaurant Properties. As of June 30, 1999, APF leased on a
triple-net basis 578 restaurant properties in 40 states and substantially all
of the restaurant properties were being leased. All nonperforming restaurant
properties owned by APF are actively being remarketed for either re-lease or
sale. Upon completion of the Acquisition and assuming that APF had acquired all
of the Income Funds as of June 30, 1999, APF would own 1,149 restaurant
properties available for triple-net leasing located in 45 states.
APF typically either acquires, owns and manages freestanding restaurant
properties leased to, or makes mortgage loans to, operators of national and
regional restaurant chains. The restaurant properties typically are located
within intensive commercial traffic corridors near traffic generators such as
regional malls, business developments and major thoroughfares. APF's management
believes that restaurant properties with these characteristics are desired by
tenants because they offer high visibility to passing traffic, ease of access,
tenant control over the site's hours of operation and maintenance standards and
distinctive building design which promotes greater customer identification. In
addition, APF's management believes that freestanding restaurant properties
permit tenants to open new restaurants quickly, due to the short development
cycles generally associated with such restaurant properties, and provide
tenants with flexibility in responding to changing retail trends.
The buildings on the restaurant properties owned by APF or with respect to
which APF extends mortgage loans are generally of the current design of the
restaurant chain. The restaurants are generally rectangular buildings and are
constructed from various combinations of stucco, steel, wood, brick and tile.
Buildings generally range from 1,000 to 12,700 square feet, with the larger
restaurants having a greater seating and equipment area. Building and site
preparation vary depending upon the size of the building and the site and the
area in which the restaurant is located. As of June 30, 1999 buildings and site
preparation costs ranged from $168,000 to $2,692,000 for each restaurant. All
buildings owned by APF or with respect to which APF extends mortgage loans are
freestanding and surrounded by paved parking areas.
Description of Leases. Initial lease terms for the restaurant properties
typically are, or are expected to be, 15 to 20 years, with up to five renewal
options for five year periods. As of June 30, 1999, the average remaining
initial lease term with respect to APF's 578 restaurant properties was
approximately 16 years. Leases accounting for 63.7% of annualized base rent for
restaurant properties owned as of June 30, 1999, have initial lease terms
extending until at least December 31, 2014.
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<PAGE>
The following table shows the number of leases in APF's restaurant property
portfolio which expire each calendar year through the year 2014, as well as the
number of leases which expire after December 31, 2014. The table does not
reflect the exercise of any of the renewal options provided to the tenant under
the terms of such leases.
Lease Expiration Table
<TABLE>
<CAPTION>
Base Rent(/1/)
-------------------
Year Number Amount Percent
- ---- ------ ----------- -------
<S> <C> <C> <C>
2000................................................. -- $ -- -- %
2001................................................. -- -- --
2002................................................. 2 224,000 0.4
2003................................................. 1 87,000 0.1
2004................................................. 1 77,000 0.1
2005................................................. 8 708,000 1.2
2006................................................. 7 534,000 0.9
2007................................................. -- -- --
2008................................................. 3 265,000 0.4
2009................................................. 2 154,000 0.3
2010................................................. 9 1,034,000 1.8
2011................................................. 24 2,654,000 4.5
2012................................................. 40 4,974,000 8.4
2013................................................. 45 4,459,000 7.6
2014................................................. 70 6,242,000 10.6
Thereafter........................................... 357 37,592,000 63.7
--- ----------- -----
Totals(2).......................................... 569 $59,004,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) Annualized rental revenue is straight-lined in accordance with generally
accepted accounting principles.
(2) Excludes the leases of 9 restaurant properties with aggregate original base
rental income of $810,000, including 7 Boston Market restaurant properties,
which have been terminated. APF is actively marketing the restaurant
properties for re-lease or sale. Also excludes base rental income
attributable to 55 restaurant properties under construction at June 30,
1999.
As of June 30, 1999, leases in APF's restaurant property portfolio
representing approximately 37% of base rent include periodic contractual
increases in base rent only; leases representing approximately 14% of base rent
include percentage rent provisions only; and leases representing approximately
48% of base rent include both contractual increases in base rent and percentage
rent provisions. The contractual increases in base rent and the percentage rent
formulas are generally tied to increases in indices such as the consumer price
index, participation in gross sales above a stated level, mandated rental
increases on specific dates or by other methods. Leases which provide for
increases in annual base rent do so on a periodic basis. The first such
increase generally occurs after five years of the lease term. These increases
generally range in amount from 2% to 15% after every five years of the lease
term. Since all of APF's restaurant properties were acquired in 1995 or
thereafter, a significant number of such contractual rent increases will not
become effective until 2000 or later. In addition, for those restaurant
properties that provide for the payment of percentage rent, such rent is
generally in the range of 4% to 8% of the tenant's annual gross sales, less the
amount of annual base rent payable in that lease year. For the six months ended
June 30, 1999, APF recognized percentage rent of $5,188, representing less than
0.02% of total revenues.
APF's leases are triple-net leases that provide for the tenants to bear
responsibility for substantially all of the costs and expenses associated with
the ongoing maintenance and operation of the leased properties, including
utilities, property taxes and insurance. APF's leases generally also provide
that the tenants are responsible for roof and structural repairs. Structural
repairs generally are repairs and improvements required
135
<PAGE>
by law, long-term capital items such as roof repair or replacement, and, in
limited cases, replacement of heating and air conditioning systems. It is not
possible, however, in all instances to completely insulate APF, which
ultimately may, under some of its leases, bear some of the costs and expenses
normally associated with property ownership. APF's management expects APF will
be able to pay these expenses through retained cash from operations or
borrowings.
Lease provisions relating to casualty loss and condemnation vary among APF's
leases. The leases on restaurant properties generally obligate the tenant to
repair and restore the restaurant property or to substitute another restaurant
property for the damaged or condemned restaurant property. Under the leases of
the remaining restaurant properties, APF generally is required to repair or
restore a restaurant property in the event of casualty loss or condemnation,
although it is entitled to casualty insurance proceeds, including proceeds, if
any, for loss of rent, or condemnation proceeds in such circumstances. To the
extent that the tenant may abate its rent payments pending the repair or
restoration of a restaurant property and such abatement is not offset by
insurance proceeds, APF's rental income may be adversely affected. In a number
of APF's leases, the tenant may terminate its lease upon casualty or
condemnation. In substantially all of these leases, the tenant's right to
terminate the lease is conditioned on one or more of the following factors: (1)
the damage or the taking being of a material nature; (2) the damage or taking
occurring within the last few years of the lease term and the tenant not
exercising its option to extend the lease; or (3) the period of time necessary
to repair the premises exceeding a specified number of months.
A substantial number of APF's leases include purchase options in favor of
the tenant, generally at no less than fair market value, or a right of first
refusal if APF should seek to sell a restaurant property. Under certain
circumstances, a tenant generally may assign its lease or sublet the property
without APF's approval, although the tenant typically remains liable under the
lease and the guarantor, if any, typically remains liable under its guaranty
subsequent to assignment or sublease. Under certain of the leases, the tenant
has a right, under specified circumstances, to substitute a comparable property
for a property leased from APF.
Mortgage Financing
APF also provides mortgage loans to operators of national and regional
restaurant chains. Upon the acquisition of the CNL Restaurant Financial
Services Group on September 1, 1999, APF significantly increased its financing
capabilities and added securitization capabilities. If the acquisition of the
CNL Restaurant Businesses had occurred as of June 30, 1999, APF would have
originated more than $628 million in mortgage loans, of which $269 million
would have been securitized. As of June 30, 1999, APF, through its acquisition
of the CNL Restaurant Financial Services Group, would have had $194 million of
signed commitments to originate mortgage loans.
APF's management believes that the criteria for investing in the mortgage
loans are substantially the same as those involved in APF's investments in its
triple-net lease restaurant properties. Therefore, APF uses the same
underwriting criteria as described above in "--Evaluation of Investment
Opportunities."
Generally, APF's management structures its mortgage loans so that the rate
of return and the maturity of the mortgages are similar to those of the leases.
The borrower is responsible for all of the expenses of owning the building and
improvements, as with the triple-net leases, including expenses for insurance
and repairs and maintenance. The mortgage loans are fully amortizing loans,
generally over a period of 15 to 20 years, with payments of principal and
interest due monthly. The interest rates charged under the terms of the
mortgage loans are fixed over the term of the loan and generally are comparable
to, or slightly lower than, lease rates charged to tenants for the restaurant
properties.
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<PAGE>
The following table shows information regarding mortgage loans made by APF
on restaurant properties in which APF owned an interest as of June 30, 1999,
and assuming the acquisition of the CNL Restaurant Businesses as of such date.
<TABLE>
<CAPTION>
Total
Number of Annualized Percent of Total Percent of
Restaurant Interest Interest Outstanding Outstanding
Restaurant Chain Properties Income Income Balance Balance
- ---------------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Applebee's.......... 61 $ 5,932,000 20.8% $ 73,661,000 23.8%
Taco Bell........... 90 5,712,000 20.1 65,292,000 21.0
T.G.I. Friday's..... 18 3,860,000 13.6 36,916,000 11.9
Burger King......... 37 2,594,000 9.1 30,624,000 9.9
Pizza Hut........... 50 1,901,000 6.7 17,984,000 5.8
Ruby Tuesday's...... 22 1,517,000 5.3 17,423,000 5.6
Friendly's.......... 9 1,081,000 3.8 8,485,000 2.7
Denny's............. 10 1,043,000 3.7 11,711,000 3.8
KFC................. 16 996,000 3.5 11,028,000 3.6
Wendy's............. 9 689,000 2.4 4,201,000 1.4
Fazoli's............ 8 670,000 2.4 7,281,000 2.3
Shoney's............ 7 610,000 2.1 6,086,000 2.0
Houlihan's.......... 2 372,000 1.3 3,732,000 1.2
Golden Corral....... 2 348,000 1.2 3,799,000 1.2
Papa John's......... 18 336,000 1.2 3,709,000 1.2
Del Taco............ 4 328,000 1.2 3,209,000 1.0
Sam & Harry's....... 2 172,000 0.6 1,575,000 0.5
Captain D's......... 2 115,000 0.4 1,312,000 0.4
Popeyes............. 2 71,000 0.2 785,000 0.3
Black Angus......... 1 70,000 0.2 668,000 0.2
Arby's.............. 1 57,000 0.2 737,000 0.2
--- ----------- ----- ------------ -----
Total............. 371 $28,474,000 100.0% $310,218,000 100.0%
=== =========== ===== ============ =====
</TABLE>
The following table shows material information regarding mortgage loans made
by APF, on restaurant properties by obligor, assuming the acquisition of the
CNL Restaurant Businesses as of June 30, 1999.
<TABLE>
<CAPTION>
Total Percent of
Number of Annualized Total Total Percent of
Restaurant Interest Interest Outstanding Outstanding
Obligor Properties Income Income Balance Balance
- ------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Wisconsin Hospitality
Group.................. 19 $ 2,594,000 9.1% $ 31,607,000 10.2%
Cosentino Companies,
Inc. .................. 22 2,576,000 9.0 23,334,000 7.5
Castle Hill Holdings.... 46 1,730,000 6.1 16,192,000 5.2
Burger Busters, Inc..... 27 1,579,000 5.5 22,149,000 7.2
Quality Restaurant
Concepts, LLC.......... 12 1,418,000 5.0 16,811,000 5.4
Briad Restaurant Group,
LLC.................... 7 1,405,000 4.9 18,119,000 5.9
Border Patrol, LLC...... 19 1,325,000 4.7 16,744,000 5.4
The Westwind Group,
Inc.................... 12 1,110,000 3.9 13,454,000 4.3
El Rancho Foods, Inc.... 22 959,000 3.4 12,604,000 4.1
DAVCO Restaurants....... 17 919,000 3.2 11,901,000 3.8
WCM Oregon, LLC......... 6 796,000 2.8 10,205,000 3.3
Cypress Restaurants..... 7 772,000 2.7 8,381,000 2.7
Other................... 155 11,291,000 39.7 108,717,000 35.0
--- ----------- ----- ------------ -----
Total................. 371 $28,474,000 100.0% $310,218,000 100.0%
=== =========== ===== ============ =====
</TABLE>
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<PAGE>
The following table shows, for restaurant properties in which APF owned an
interest as of June 30, 1999 and assuming the acquisition of the CNL Restaurant
Businesses, information by restaurant chain for mortgage loans that APF has
securitized.
<TABLE>
<CAPTION>
Total
Number of Total Percent of
Restaurant Outstanding Outstanding
Restaurant Chain Properties Balance Balance
- ---------------- ---------- ------------ -----------
<S> <C> <C> <C>
T.G.I. Friday's............................ 35 $ 52,765,000 20.2%
Wendy's.................................... 50 47,215,000 18.1
Bennigan's................................. 22 35,988,000 13.8
Taco Bell.................................. 56 33,249,000 12.7
Burger King................................ 36 31,594,000 12.1
Ruby Tuesday's............................. 13 17,019,000 6.5
Steak and Ale Restaurant................... 6 8,426,000 3.2
KFC........................................ 10 8,255,000 3.2
Applebee's................................. 4 5,848,000 2.2
Fazoli's................................... 5 5,106,000 2.0
Papa John's................................ 33 4,664,000 1.8
Sonny's Real Pit Bar-B-Q................... 8 4,113,000 1.6
Morton's of Chicago........................ 2 2,147,000 0.8
Denny's.................................... 2 1,570,000 0.6
Arby's..................................... 3 1,511,000 0.6
Del Taco................................... 2 1,004,000 0.4
Popeyes.................................... 1 657,000 0.2
--- ------------ -----
Total.................................... 288 $261,131,000 100.0%
=== ============ =====
</TABLE>
The following table shows information by obligor for mortgage loans that APF
has securitized, assuming the acquisition of the CNL Restaurant Businesses, as
of June 30, 1999.
<TABLE>
<CAPTION>
Number Percent of
of Restaurant Total Outstanding
Obligor Properties Outstanding Balance Balance
- ------- ------------- ------------------- -----------
<S> <C> <C> <C>
S&A Restaurant Corporation...... 28 $ 44,414,000 17.0%
Valenti Management, Inc. ....... 31 28,892,000 11.1
El Rancho Foods, Inc. .......... 38 20,531,000 7.9
Mainstreet & Main, Inc. ........ 16 19,796,000 7.6
Old Dominion, Inc. ............. 19 18,324,000 7.0
Judy Fenwick Corporation........ 14 10,637,000 4.1
S. Wisconsin Foods, LLC......... 12 9,835,000 3.8
Briad Restaurant Group, LLC..... 4 9,810,000 3.8
RT Denver Franchise, LP......... 6 9,315,000 3.5
Bistate Bistro.................. 6 9,102,000 3.5
Nailen Properties/GGG, LP and
GGG Foods, Inc. ............... 10 8,255,000 3.2
RT Southwest Franchise, LLC..... 7 7,703,000 2.9
Cosentino Companies, Inc. ...... 13 6,862,000 2.6
Main Street California II, Inc.
and CNL California Restaurants,
Ltd. .......................... 5 6,829,000 2.6
Casual Restaurant Concepts,
Inc. .......................... 4 5,848,000 2.2
Other........................... 75 44,978,000 17.2
--- ------------ -----
Total......................... 288 $261,131,000 100.0%
=== ============ =====
</TABLE>
Build to Suit Development. APF also provides build-to-suit construction
services, including market analysis, site selection, contract negotiation,
permitting and construction. APF can provide all or a selected portion of these
services to operators of national and regional restaurant chains.
APF will review the appropriate trade areas in the markets identified by
each restaurant operator, and, by analyzing demographics, site criteria, costs
and traffic patterns, APF will determine the best potential target
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<PAGE>
areas for developing its client's restaurants. After consulting with its
clients, APF will then negotiate the real estate contract or lease agreement,
as appropriate. As part of its site acquisition/development services, APF will
perform preliminary due diligence on the restaurant property. APF will
coordinate all necessary architectural and engineering services related to the
restaurant property and will prepare preliminary and final construction
budgets. As the project progresses into the construction phase, APF will pre-
qualify various general contractors prior to issuing an invitation to bid and
will then select the general contractor from the bidding process, provide cost
comparisons among bidders and select the general contractor with approval of
client.
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<PAGE>
Geographic Diversification of Restaurant Properties
The following table sets forth information regarding the geographic
diversification of APF's real estate investments, including mortgage financings
and securitizations, assuming the acquisition of the CNL Restaurant Businesses,
by geographic region as of June 30, 1999:
Regional Property Distribution
<TABLE>
<CAPTION>
Total Number of
Restaurant
Restaurant Chain Properties West Central South East
- ---------------- --------------- ---- ------- ----- ----
<S> <C> <C> <C> <C> <C>
Taco Bell............................. 156 0 30 40 86
Burger King........................... 107 13 19 40 35
Applebee's............................ 81 18 0 42 21
Wendy's............................... 68 5 0 24 39
T.G.I. Friday's....................... 58 23 9 12 14
Jack in the Box....................... 57 28 29 0 0
Papa John's........................... 51 2 0 23 26
Pizza Hut............................. 50 0 4 11 35
Golden Corral......................... 49 0 23 19 7
Ruby Tuesday's........................ 48 9 18 15 6
Bennigan's............................ 43 0 16 19 8
IHOP.................................. 37 6 14 13 4
KFC................................... 34 0 16 11 7
Arby's................................ 33 4 0 21 8
Boston Market......................... 29 6 10 3 10
Big Boy............................... 28 0 21 0 7
Denny's............................... 27 1 5 18 3
Black-eyed Pea........................ 26 8 16 1 1
Chevy's Fresh Mex..................... 26 3 5 13 5
Steak and Ale Restaurant.............. 26 0 8 15 3
Darryl's.............................. 15 0 0 14 1
Sonny's Real Pit Bar-B-Q.............. 15 0 0 15 0
Fazoli's.............................. 14 0 0 13 1
Hardee's.............................. 14 0 0 14 0
Ground Round.......................... 13 0 2 1 10
Pollo Tropical........................ 11 0 0 11 0
Shoney's.............................. 11 3 0 8 0
Friendly's............................ 9 0 0 2 7
Del Taco.............................. 7 7 0 0 0
Roadhouse Grill....................... 7 0 0 5 2
Tumbleweed Southwest Mesquite Grill &
Bar.................................. 7 0 1 6 0
Popeyes............................... 6 0 0 6 0
Houlihan's............................ 5 0 1 1 3
Other................................. 25 3 4 13 5
----- --- --- --- ---
1,193 139 251 449 354
===== === === === ===
</TABLE>
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The following table provides a breakdown, by state, of the number of
restaurant properties in which APF had an interest, including mortgage
financings and securitizations, assuming the acquisition of the CNL Restaurant
Businesses as of June 30, 1999.
<TABLE>
<CAPTION>
Total Number of
State Restaurant Properties
- ----- ---------------------
<S> <C>
Alabama................................................... 38
Arizona................................................... 31
California................................................ 59
Colorado.................................................. 23
Connecticut............................................... 9
Delaware.................................................. 2
District of Columbia...................................... 1
Florida................................................... 137
Georgia................................................... 41
Idaho..................................................... 3
Illinois.................................................. 17
Indiana................................................... 9
Iowa...................................................... 8
Kansas.................................................... 13
Kentucky.................................................. 15
Louisiana................................................. 19
Maine..................................................... 1
Maryland.................................................. 36
Massachusetts............................................. 5
Michigan.................................................. 17
Minnesota................................................. 18
Mississippi............................................... 9
Missouri.................................................. 50
Montana................................................... 1
Nebraska.................................................. 4
Nevada.................................................... 5
New Hampshire............................................. 2
New Jersey................................................ 49
New Mexico................................................ 5
New York.................................................. 33
North Carolina............................................ 23
North Dakota.............................................. 2
Ohio...................................................... 53
Oklahoma.................................................. 12
Oregon.................................................... 18
Pennsylvania.............................................. 67
Rhode Island.............................................. 1
South Carolina............................................ 16
South Dakota.............................................. 1
Tennessee................................................. 86
Texas..................................................... 91
Utah...................................................... 6
Virginia.................................................. 70
Washington................................................ 17
Wisconsin................................................. 53
West Virginia............................................. 14
Wyoming................................................... 3
-----
1,193
=====
</TABLE>
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APF After the Acquisition
The Restaurant Properties
Assuming that APF acquires all of the Income Funds and that the Acquisition
had occurred on June 30, 1999, APF would have owned and leased on a triple-net
basis 1,149 restaurant properties of which 571 would have been acquired from
the Income Funds. The restaurant properties would be leased to more than 140
tenants, operated by more than 60 different restaurant chains, located in 45
states and approximately 98% leased as of June 30, 1999. The average age of the
buildings on restaurant properties in the portfolio would be approximately 8.1
years. The following table sets forth material restaurant property information
for restaurant properties owned as of June 30, 1999, assuming the Acquisition
occurred on this date, with respect to significant restaurant chains operating
a restaurant property. The annualized rental revenue is straight-lined in
accordance with generally accepted accounting principles. Annualized rental
revenue excludes original base rental income of $2,093,000 attributable to 23
restaurant properties, including the Boston Market and Long John Silver's
restaurant properties discussed below. Annualized rental revenue also excludes
base rental income attributable to 55 restaurant properties under construction
at June 30, 1999.
<TABLE>
<CAPTION>
Total Number Average Annualized
of Age of Total Percent of
Restaurant Buildings Rental Total Rental
Restaurant Chain Properties (years) Revenue Revenue
- ---------------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Golden Corral................. 108 5.5 $ 14,604,000 13.8%
Jack in the Box............... 107 4.6 10,462,000 9.9
Burger King................... 96 11.6 8,684,000 8.2
Denny's....................... 69 10.4 6,511,000 6.1
IHOP.......................... 45 2.9 5,444,000 5.1
Hardee's...................... 78 7.1 5,326,000 5.0
Chevy's Fresh Mex............. 28 1.6 5,150,000 4.9
Bennigan's.................... 22 15.2 4,246,000 4.0
Boston Market................. 42 2.7 3,447,000 3.2
Steak and Ale Restaurant...... 20 20.7 3,397,000 3.2
Arby's........................ 38 5.5 2,907,000 2.7
Shoney's...................... 30 7.9 2,869,000 2.7
Darryl's...................... 17 17.9 2,572,000 2.4
Long John Silver's............ 40 7.8 2,381,000 2.2
Wendy's....................... 26 8.1 2,252,000 2.1
Applebee's.................... 16 3.4 2,226,000 2.1
Other......................... 367 9.4 23,843,000 22.4
----- ------------ -----
Total....................... 1,149 $106,321,000 100.0%
===== ============ =====
</TABLE>
The tenants of two restaurant chains have filed voluntary petitions for
bankruptcy. In October and November 1998, tenants of 38 Boston Market
restaurant properties filed voluntary petitions for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code. As of August 31, 1999, 10 of these restaurant
properties remain closed, two restaurant properties have been sold, six
restaurant properties have been re-leased and APF and the relevant Income Funds
continue to receive lease payments on the remaining 20 restaurant properties.
The tenant of 36 Long John Silver's restaurant properties has also filed a
voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.
As of August 31, 1999, five of these restaurant properties remain closed, three
restaurant properties have been sold, eight restaurant properties have been re-
leased and the Income Funds continue to receive lease payments on the remaining
20 restaurant properties. APF and the relevant Income Funds are currently
actively marketing these closed restaurant properties to existing and
prospective clients and believe that their prospects for re-leasing vacant
restaurant properties are good.
Since the acquisition of one Income Fund is not dependent upon the
acquisition of any other Income Fund, it is possible that APF would not acquire
all of the Income Funds in the Acquisition. Consequently, after the
Acquisition, APF will not necessarily own all of the restaurant properties
listed above.
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<PAGE>
The following table sets forth the same material restaurant property
information for APF, assuming all of the Income Funds were acquired on June 30,
1999, by tenant for the restaurant properties.
<TABLE>
<CAPTION>
Total Average Percent
Number of Age of Annualized of Total
Restaurant Buildings Total Rental Rental
Tenant Properties (years) Revenue Revenue
- ------ ---------- --------- ------------ --------
<S> <C> <C> <C> <C>
Golden Corral Corporation.......... 98 5.6 $ 12,638,000 11.9%
Foodmaker, Inc. ................... 107 4.6 10,462,000 9.9
S & A Properties Corporation....... 42 17.8 7,643,000 7.2
Phoenix Restaurant Group, Inc. .... 66 8.7 5,849,000 5.5
IHOP Corp. ........................ 44 2.8 5,341,000 5.0
Chevy's Inc. ...................... 27 1.5 4,935,000 4.6
CKE Restaurants, Inc. ............. 66 6.8 4,573,000 4.3
Houlihan's Restaurants, Inc. ...... 22 19.5 3,513,000 3.3
Burger King Corporation............ 39 14.0 3,497,000 3.3
Carrols Corporation................ 28 10.4 3,238,000 3.0
Restaurant Management Services,
Inc. ............................. 35 11.1 2,630,000 2.5
Boston Chicken, Inc. .............. 20 2.4 2,408,000 2.3
RTM, Inc. ......................... 27 5.1 2,229,000 2.1
Advantica Restaurant Group, Inc. .. 23 7.8 2,124,000 2.0
Checkers Drive-In Restaurant....... 48 5.2 2,074,000 2.0
Other.............................. 457 8.9 33,167,000 31.1
----- ------------ -----
Total............................ 1,149 $106,321,000 100.0%
===== ============ =====
</TABLE>
Other Business Information
The Food Service Industry
The food service industry, as defined by the U.S. Department of Commerce, is
one of the largest sectors of the nation's economy. During 1998, the industry
generated an estimated $338.4 billion of revenue, representing over 4% of the
Gross Domestic Product of the United States.
The food service industry is typically divided into three major food
segments: commercial, institutional and military. The commercial food service
sector includes full-service and fast-food restaurants, cafeteria/buffet
restaurants, social caterers and ice cream/yogurt retail stores. Within the
restaurant industry, the fast-food group is typically defined as those
restaurants perceived by consumers as fast-food or take-out establishments
without table service, specializing in pizza, chicken, hamburgers and similar
food items. Full-service restaurants include those in the family, steak and
casual dining sections that have table service and generally have a broader
selection of menu items with longer preparation times than do fast-food
restaurants. Although these segments can be further differentiated by price, it
is consumer perception, as well as average meal price, that influences how
individual restaurant chains are categorized.
APF's business is focused exclusively on the restaurant industry. According
to the 1999 National Restaurant Association Pocket Factbook, the restaurant
industry sales have grown at an average annual rate of 7.6% since 1970.
According to the National Restaurant Association, the restaurant industry
currently employs more than 10.2 million people, or 8% of those employed in the
United States, making it the nation's largest retail employer. According to the
1999 National Restaurant Association Pocket Factbook, there were nearly 815,000
restaurants in the United States as of August 1999. According to NPD Recount, a
national consulting group which specializes in the restaurant industry,
restaurant chains having three or more properties accounted for approximately
47% of all restaurants in the United States in 1997. The majority of these
properties are fast
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food restaurants, with others generally in the full service segment. Of the
210,000 chain restaurants having an identified restaurant concept as of
December 31, 1997, approximately 117,500 were within the 100 largest restaurant
chains. Each of these restaurant chains had 1997 projected total system-wide
sales exceeding $182 million. According to Nation's Restaurant News, the top
200 restaurant chains represented 42% of restaurant properties. According to
the National Restaurant Association, fast-food restaurants experienced a 5.6%
increase in overall sales and full-service restaurants experienced a 5.3%
increase in 1998.
Sales in the restaurant industry have increased from $173.7 billion in 1985
to $354 billion as projected for 1999 according to the National Restaurant
Association. The top 200 franchisees of national restaurant chains based on
sales volume, which is APF's target market, increased from $10.8 billion in
1995 to $11.7 billion in 1996 to $13.1 billion in 1997. The number of
restaurant properties for the same top franchisees increased from 12,325 in
1995 to 12,846 in 1996 and to 14,170 in 1997, reflecting a growth rate of 10.3%
compared with 1996.
As the restaurant chain industry has matured, APF has seen a trend toward
consolidation which offers opportunities for APF to provide its restaurant
property service and financing to leading franchisors which are accounting for
the majority of the growth in the industry. During the past decade, restaurant
chains have increased market position in comparison to independent restaurant
companies by achieving economies of scale and by developing strong brand
equity. Much of the chains' market share gains in the past came at the expense
of small, independent operators, who tended to be less sophisticated and less
focused on new restaurant development. The top chains may face greater chain-
versus-chain competition, however, rather than chain-versus-independent
competition. APF's target market remains national and regional franchisors and
franchisees within the top 200 restaurant operating companies. The top 100
restaurant chains increased their share of restaurant units from 25% in 1980 to
32% of current U.S. units, and their revenues have increased in the same period
from 40% to 48% of total current domestic revenues.
Growth in the fast-food, family-dining and casual-dining sectors of the
restaurant industry are expected to remain strong for several reasons, but
primarily because the income of households continues to rise through the
maturation of the baby boomers as well as the number of women working outside
the home. Today's dual income lifestyle in American families continues to be
the norm. Consequently, the need for convenience food outside the home
continues to grow.
Environmental Matters
APF will undertake a third-party Phase I investigation of potential
environmental risks when evaluating an acquisition. A "Phase I investigation"
is an investigation for the presence or likely presence of hazardous substances
or petroleum products under conditions which indicate an existing release, a
post release or a material threat of a release. A Phase I investigation does
not typically include any sampling. Where warranted, further assessments are
performed by third-party environmental consulting and engineering firms. APF
may acquire a restaurant property with environmental contamination, subject to
a determination of the level of risk and potential cost of remediation. APF
generally will require restaurant property tenants to fully indemnify it
against any environmental problem or condition existing as of the date of
purchase and will obtain environmental insurance for any contaminations on
restaurant properties. In some instances, APF will be the assignee of or
successor to the buyer's indemnification rights. Additionally, APF will
generally structure its leases to require the tenant to assume all
responsibility for environmental compliance or environmental remediation and to
provide that non-compliance with environmental laws be deemed a lease default.
Insurance
Under their leases, APF's tenants are generally responsible for providing
adequate insurance on the restaurant properties. APF believes the restaurant
properties are covered by adequate fire, flood, liability and property
insurance provided by reputable companies. Some of the restaurant properties,
however, are not
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covered by disaster-type insurance with respect to hazards such as,
earthquakes, for which coverage is not available or available only at rates
which, in the opinion of APF, are prohibitive.
Competition
In general, the fast-food, family-style, and casual dining restaurant
business is characterized by intense competition. The operators of the
restaurants located on the restaurant properties will compete with
independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
Many successful fast-food, family-style, and casual dining restaurants are
located in "eating islands," which are areas to which customers tend to return
frequently and within which they can diversify their eating habits, because in
many cases the presence of some 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 restaurants in the same area.
APF itself will compete with other persons and entities both to locate
suitable restaurant properties for acquisition and to locate purchasers for its
restaurant properties. APF also will compete with other financing sources such
as banks, mortgage lenders, and sale/leaseback companies for suitable
restaurant properties, tenants, mortgage loan borrowers and equipment tenants.
Because of APF's ability to offer complete "turn-key," build-to-suit
development services, from site selection to construction management, together
with its ability to provide clients with financing options, such as triple-net
leasing, mortgage loans and secured equipment financing, APF believes that it
will be a preferred provider for all the real estate related business needs of
operators of national and regional restaurant chains. Specifically APF has
positioned itself in the restaurant industry as a provider of a complete range
of restaurant financing options and development services. In addition, APF
believes that it will be able to finance its growth from numerous sources at
competitive rates. APF believes that its principal competitors include U.S.
Restaurant Properties, Inc., Franchise Finance Corporation of America, Inc. and
Realty Income Corporation.
Regulation of Mortgage Loans and Equipment Leases
The mortgage loans and secured equipment leases may be subject to regulation
by federal, state and local authorities and subject to various laws and
judicial and administrative decisions imposing various requirements and
restrictions, including:
. regulating credit granting activities,
. establishing maximum interest rates and finance charges,
. requiring disclosures to customers,
. governing secured transactions, and
. setting collection, repossession, claims handling procedures and other
trade practices.
In addition, certain states may have enacted legislation requiring the
licensing of mortgage bankers or other lenders, and these requirements may
affect APF's ability to effectuate its mortgage loans and secured equipment
leases. Whether APF can operate in these or other jurisdictions may be
dependent upon a finding by the appropriate authority in the jurisdiction of
financial responsibility, character and fitness of APF. APF may determine not
to make mortgage loans or enter into secured equipment leases in any
jurisdiction in which it believes APF has not complied in all material respects
with applicable requirements.
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Franchise Regulation
Many states regulate the franchise or license relationship between a
tenant/franchisee and a restaurant chain. APF will not be an affiliate of any
restaurant chain, and is not currently aware of any states in which the
relationship between APF as lessor and the tenant will be subjected to those
regulations, but it will comply with such regulations in the future, if
required. Additionally, restaurant chains which franchise their operations are
subject to regulation by the Federal Trade Commission.
Employees
APF employs approximately 135 individuals, none of whom are covered by
collective bargaining agreements. APF believes that its relationship with its
employees is good.
Legal Proceedings
On May 11, 1999, four Limited Partners in several Income Funds served a
lawsuit, originally filed on April 22, 1999, against us and APF in the Circuit
Court of the Ninth Judicial Circuit of Orange County, Florida, alleging that we
breached our fiduciary duties and violated the provisions of the partnership
agreements of the Income Funds in which the plaintiffs hold units in connection
with the proposed Acquisition. The plaintiffs are seeking unspecified damages.
In addition, the plaintiffs are seeking equitable relief that would enjoin the
proposed Acquisition. On July 8, 1999, the plaintiffs filed an amended
complaint which, in addition to naming three additional plaintiffs, includes
allegations of aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the defendants
and seeks additional equitable relief. As amended, the case is captioned Jon
Hale, Mary J. Hewitt, Charles A. Hewitt, Gretchen M. Hewitt, Bernard J.
Schulte, Edward M. and Margaret Berol Trust and Vicky Berol v. James M. Seneff,
Jr., Robert A. Bourne, CNL Realty Corporation, and CNL American Properties
Fund, Inc., Case No. CIO-99-0003561.
On June 23, 1999, a Limited Partner of several Income Funds filed a lawsuit
against us and APF, Ira Gaines, individually and on behalf of a class of
persons similarly situated, v. CNL American Properties Fund, Inc., James M.
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, CNL Fund Advisors, CNL
Financial Corporation a/k/a CNL Financial Corp., CNL Financial Services, Inc.
and CNL Group, Inc., Case No. CIO 99-3796, in the Circuit Court of the Ninth
Judicial Circuit of Orange County, Florida, alleging that we breached our
fiduciary duties and that APF aided and abetted our breach of fiduciary duties
in connection with the Acquisition. The plaintiff is seeking unspecified
damages. In addition, the plaintiff is seeking equitable relief that would
enjoin the proposed Acquisition.
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<PAGE>
BUSINESS OF THE INCOME FUNDS
The following discussion describes the current business of the Income Funds,
the methods by which the Income Funds' evaluate and acquire the restaurant
properties and the terms upon which the Income Funds' restaurant properties are
leased. As of June 30, 1999, all of the proceeds raised by the Income Funds in
their respective offerings of units have been invested in restaurant properties
or other investments permitted by the terms of their partnership agreements.
General
Between 1985 and 1993, each Income Fund was organized as a Florida limited
partnership to purchase existing fast-food and family-style restaurant
properties, including land and buildings, as well as restaurant properties upon
which such restaurants would be constructed and the land underlying the
restaurant building, with the building owned by the lessee or a third party.
The restaurant properties, located across the United States, typically are
freestanding and are leased on a "triple-net" basis to operators of national
and regional restaurant chains that we selected. Restaurant properties
purchased by the Income Funds are leased under arrangements requiring base
annual rent equal to a specified percentage of the Income Funds' cost of
purchasing a particular restaurant property, generally with contractual rent
increases, as well as additional "percentage rent" based on gross sales of the
restaurant chain leasing the restaurant property.
We have structured the Income Funds' investments to allow them to
participate, to the maximum extent possible, in any sales growth in these
restaurant industry segments, as reflected in the restaurant properties and
provisions of the leases held by the Income Funds. For instance, the Income
Funds generally structure their leases with percentage rent requirements based
on gross sales of the particular restaurant. Gross sales may increase even
absent real growth because increases in the restaurant's costs are passed on to
the consumers through increased prices, and increased prices are reflected in
gross sales. Also, to provide regular cash flow to the Income Funds, the Income
Funds' leases provide that a minimum level of rent is payable regardless of the
amount of gross sales at a particular restaurant property. The Income Funds
have also endeavored to maximize growth and minimize risks associated with
ownership and leasing of real estate that operates in these restaurant industry
segments through several methods:
. careful selection and screening of their lessees in order to reduce risks
of tenant default;
. monitoring statistics relating to restaurant chains and continuing to
develop relationships in the industry; and
. acquisition of restaurant properties for all cash, with no debt or liens
relating to the restaurant properties.
The partnership agreements of the Income Funds impose no restrictions on the
geographic area or areas within the United States in which restaurant
properties acquired by any particular Income Fund may be located. Accordingly,
we have strategically acquired restaurant properties to diversify among
restaurant chains and the geographic location of the restaurant properties, and
the restaurant properties acquired by the Income Funds are located throughout
the United States. While the Income Funds may acquire restaurant properties in
both fee and by leasehold, the Income Funds currently hold all of their
restaurant properties in fee.
We believe that freestanding, triple-net leased restaurant properties of the
type in which the Income Funds have invested are attractive to tenants because
freestanding properties typically offer high visibility to passing traffic,
ease of access from a busy thoroughfare, tenant control over the site to set
hours of operation and maintenance standards and distinctive building designs
conducive to customer name recognition.
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Management Services
Upon APF's acquisition of the Advisor, APF assumed the obligations of the
Advisor to provide management services relating to the Income Funds and their
restaurant properties pursuant to the terms of the management agreement that is
currently in place between each Income Fund and the Advisor. In this section,
we will describe the services historically provided to the Income Funds as
being provided by the Advisor.
The Advisor is responsible for assisting the Income Funds in acquiring
restaurant properties, negotiating leases, collecting rental payments,
inspecting the restaurant properties and the tenants' books and records, and
responding to tenant inquiries and notices. The Advisor also provides
information to each Income Fund about the status of the leases and the
restaurant properties. In exchange for these services, the Advisor is entitled
to receive a management fee from each Income Fund which, generally, is an
annual fee equal to the following:
. for CNL Income Fund, Ltd through CNL Income Fund III, Ltd., .50% of the
value of total assets under management valued at cost, or 1% of the sum
of gross rental revenues derived from the restaurant properties, if that
amount is less, and
. for CNL Income Funds IV, Ltd. through XVI, Ltd., 1% of the sum of gross
rental revenues, excluding noncash lease accounting adjustments, that the
Income Fund derives from the restaurant properties.
The management fee generally is payable monthly. Under agreements with some
of the Income Funds, the Advisor may determine whether or not to take the
management fee, which cannot exceed fees that are competitive for similar
services in the same geographic area, in whole or in part in a given year, in
the sole discretion of the Advisor. In such cases, all or any portion of the
management fee not taken as to any fiscal year is deferred without interest. In
addition, for certain Income Funds the management fee is subordinated to the
Limited Partners receipt of their preferred return. The management agreement
continues until an Income Fund no longer owns an interest in any restaurant
properties unless terminated at an earlier date upon 60 days' prior notice by
either party.
Site Selection and Acquisition of Restaurant Properties
The Income Funds purchase and lease restaurant properties based principally
on an examination and evaluation by the Advisor of the potential value of the
site, the financial condition and business history of the proposed lessee, the
demographics of the area in which the restaurant property is located or to be
located, the proposed purchase price and proposed lease terms, geographic and
market diversification, and potential sales expected to be generated by the
restaurant. In addition, the potential lessee must meet at least the minimum
standards established by a restaurant chain for its operators. The Advisor also
performs an independent break-even analysis of the potential profitability of a
restaurant property using historical data and other data developed by the
Advisor and provided by the restaurant chains.
In each restaurant property acquisition, the Advisor negotiates the land and
building lease agreement with the lessee. In some instances, the Advisor
negotiates an assignment of an existing lease if we, based on the
recommendation of the Advisor, determine that the terms of an acquisition and
lease of a restaurant property, taken as a whole, are favorable to the Income
Fund. In such cases, the terms of the lease may vary substantially from the
Income Funds' standard lease terms. Generally, the leases are structured to be
long-term "triple-net" lease agreements, which provide for monthly rental
payments plus a percentage of gross sales, which will increase the value of the
land and buildings and provide an inflation hedge. In connection with a
restaurant property acquisition, the lessee provides at its own expense all
furniture, fixtures, and equipment, such as deep fryers, grills, refrigerators,
and freezers, necessary to operate the buildings on a restaurant property as a
restaurant.
Some leases have been negotiated to provide the lessee with the opportunity
to purchase the restaurant property, generally either at the greater of fair
market value or 120% of the original purchase price. In addition, tenants are
generally offered a right of first refusal to purchase the restaurant property
in the event an offer is received from a third party to purchase the restaurant
property. Certain leases provide the lessee with the right
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to purchase the restaurant property at a purchase price based on various
measures of value contained in an independent appraisal of the restaurant
property.
The purchase of each restaurant property owned by the Income Funds was
supported by an appraisal of the real estate prepared by an independent
appraiser. The purchase price of each such restaurant property, plus any
acquisition fees paid by the Income Funds to the Advisor in connection with
such purchase, did not exceed the restaurant property's appraised value.
The titles to restaurant properties purchased by the Income Funds are
insured by appropriate title insurance policies and/or abstract opinions
consistent with normal practices in the jurisdictions in which the restaurant
properties are located.
Standards for Investment
Selection of Restaurant Chains. The selection of restaurant chains by the
Advisor and by us is based on an evaluation of several factors:
. the operations of restaurants in the restaurant chain;
. the number of restaurants operated throughout the restaurant chain's
system;
. the relationship of average restaurant gross sales to the average capital
costs of a restaurant; and
. the restaurant chain's relative competitive position among the same type
of restaurants offering similar types of food, name recognition, and
market penetration.
None of the restaurant chains is affiliated with us, the Advisor, or the
Income Funds.
Selection of Restaurant Properties and Lessees. In making investments in
restaurant properties, we and the Advisor consider relevant real property and
financial factors, including:
. the condition, use, and location of the restaurant property;
. the income-producing capacity of the restaurant properties;
. the prospects for long-term appreciation;
. the relative success of the restaurant chain in the geographic area in
which the restaurant property is located; and
. the management capability and financial condition of the lessee.
In selecting lessees, we and the Advisor have historically considered the
prior experience of the lessee in the restaurant industry, the net worth of the
lessee, past operating results of other restaurants currently or previously
operated by the lessee, and the lessee's prior experience in managing
restaurants within a particular restaurant chain.
In selecting specific restaurant properties within a particular restaurant
chain and in selecting lessees for each Income Fund's restaurant properties,
the Advisor applies the following minimum criteria.
. Each restaurant property was located in what we believed to be a prime
business location.
. Base or minimum annual rent provided a specified minimum return on the
Income Fund's cost of purchasing and, if applicable, developing the
restaurant property, and the lease typically also will provide for
automatic increases in base rent at specified times during the lease term
and/or for payment of percentage rent based on gross sales.
. The initial lease term typically was at least 15 to 20 years.
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. In evaluating prospective tenants, the Advisor examined, among other
factors, the lessee's ranking in its market segment, trends in sales in
each restaurant chain, overall changes in consumer preferences, and the
lessee's ability to adapt to changes in market and competitive
conditions, the lessee's historical financial performance, and its
current financial condition.
In general, an Income Fund will not invest in a restaurant property, if, as
a result, more than 25% of its gross proceeds from its offering of units would
be invested in restaurant properties of a single restaurant chain or if more
than 30% of its gross proceeds would be invested in restaurant properties in a
single state.
Description of Restaurant Properties
General. As of June 30, 1999, the Income Funds owned, in the aggregate, 571
restaurant properties. With the exception of 14 restaurant properties that were
vacant as of June 30, 1999, all of the Income Funds' restaurant properties are
currently triple-net leased. The following table provides annualized
information with respect to the Income Funds' restaurant properties owned as of
June 30, 1999. The annualized revenues in the table do not include revenue
relating to closed or vacant restaurant properties.
<TABLE>
<CAPTION>
Number of
States in
Total which Average Annualized Percent
Number of Restaurant Age of Total of Total
Restaurant Properties Buildings Rental Rental
Income Fund Properties(1) are Located (years) Revenue Revenue
- ----------- ------------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd.... 17 11 13.4 $1,087,000 2.2%
CNL Income Fund II,
Ltd.................... 37 17 12.2 2,200,000 4.5
CNL Income Fund III,
Ltd.................... 26 16 11.4 1,625,000 3.5
CNL Income Fund IV,
Ltd.................... 38 15 11.1 2,378,000 5.2
CNL Income Fund V,
Ltd.................... 23 12 11.3 1,512,000 3.2
CNL Income Fund VI,
Ltd.................... 42 17 10.3 3,318,000 7.1
CNL Income Fund VII,
Ltd.................... 38 13 10.1 2,546,000 5.4
CNL Income Fund VIII,
Ltd.................... 36 12 9.9 3,146,000 6.8
CNL Income Fund IX,
Ltd.................... 40 17 9.9 3,048,000 6.2
CNL Income Fund X,
Ltd.................... 49 19 9.3 3,414,000 7.2
CNL Income Fund XI,
Ltd.................... 40 20 8.5 3,777,000 7.9
CNL Income Fund XII,
Ltd.................... 47 15 7.4 3,848,000 8.9
CNL Income Fund XIII,
Ltd.................... 47 17 7.2 3,467,000 7.4
CNL Income Fund XIV,
Ltd.................... 56 16 5.9 4,131,000 8.5
CNL Income Fund XV,
Ltd.................... 50 18 6.5 3,513,000 7.5
CNL Income Fund XVI,
Ltd.................... 44 18 7.5 3,628,000 8.5
</TABLE>
- --------
(1) The total number of properties for each Income Fund includes wholly owned
properties and properties held in joint ventures and as tenants in common
with a third party or another Income Fund. Of the 571 total restaurant
properties owned by the Income Funds as of June 30, 1999, 66 restaurant
properties were owned through joint ventures or as tenants in common with
affiliates of the Income Funds.
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<PAGE>
The following tables present information on the restaurant properties owned
by the Income Funds, as of June 30, 1999, both by restaurant chain and by
tenant.
<TABLE>
<CAPTION>
Average
Total Age of Annualized Percent of
Number of Building Total Rental Total Rental
Restaurant Chain Properties (years) Revenue Revenue
- ---------------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Golden Corral................... 62 8.1 $ 8,404,000 17.8%
Burger King..................... 62 11.8 5,349,000 11.3
Denny's......................... 54 10.5 5,014,000 10.6
Jack in the Box................. 50 7.9 4,715,000 10.0
Hardee's........................ 64 7.3 4,376,000 9.2
Shoney's........................ 26 8.9 2,836,000 6.0
Long John Silver's.............. 40 7.8 2,381,000 5.0
Checkers........................ 47 5.1 2,016,000 4.3
Wendy's......................... 16 11.9 1,453,000 3.1
IHOP............................ 8 4.0 1,108,000 2.3
KFC............................. 17 10.6 1,057,000 2.2
Boston Market................... 13 3.3 1,047,000 2.2
Other........................... 112 11.9 7,561,000 16.0
--- ----------- ------
Total......................... 571 $47,317,000 100.00%
=== =========== ======
<CAPTION>
Average
Total Age of Annualized Percent of
Number of Building Total Rental Total Rental
Tenant Properties (years) Revenue Revenue
- ------ ---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Golden Corral Corporation....... 60 8.1 $ 8,079,000 17.1%
Foodmaker, Inc. ................ 50 7.9 4,715,000 10.0
CKE Restaurants, Inc. .......... 52 7.0 3,623,000 7.7
Phoenix Restaurant Group........ 35 11.0 3,441,000 7.3
Restaurant Management Services,
Inc. .......................... 32 12.0 2,443,000 5.2
Burger King Corporation......... 25 11.7 2,335,000 4.9
Checkers Drive-In Restaurant.... 48 5.2 2,074,000 4.4
Long John Silver's, Inc. ....... 20 6.2 1,671,000 3.5
Shoney's, Inc. ................. 18 9.9 1,498,000 3.2
Advantica Restaurant Group,
Inc. .......................... 13 7.3 1,199,000 2.5
Carrols Corporation............. 14 14.3 1,111,000 2.3
IHOP Corp. ..................... 7 3.9 1,006,000 2.1
Other........................... 197 10.5 14,122,000 29.8
--- ----------- ------
Total......................... 571 $47,317,000 100.00%
=== =========== ======
</TABLE>
The tenants of two restaurant chains have filed voluntary petitions for
bankruptcy. In October 1998, tenants of nine Boston Market restaurant
properties filed voluntary petitions for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code. As of August 31, 1999, three of these restaurant
properties remain closed, two restaurant properties have been re-leased and the
Income Funds continue to receive lease payments on the remaining four
restaurant properties. The tenant of 36 Long John Silver's restaurant
properties has also filed voluntary petitions for bankruptcy under Chapter 11
of the U.S. Bankruptcy Code. As of August 31, 1999, five of these restaurant
properties remain closed, three restaurant properties have been sold, eight
restaurant properties have been re-leased and the Income Funds continue to
receive lease payments on the remaining 20 restaurant properties.
151
<PAGE>
Land. Lot sizes generally range from 9,000 to 467,000 square feet depending
upon building size and local demographic factors. Restaurants located on land
within shopping centers are freestanding and may be located on smaller parcels
if sufficient common parking is available. Restaurant properties purchased by
an Income Fund are in locations zoned for commercial use which were reviewed
for beneficial traffic patterns and volume of traffic. Generally, the cost to
the Income Funds of the underlying land ranged from $8,800 to $1,160,000,
although the cost of the land for particular restaurant properties may be
higher or lower in some cases.
Buildings. Either before or after construction or renovation, the restaurant
properties acquired by the Income Funds are one of a restaurant chain's
approved designs. Building and site preparation costs have varied depending
upon the size of the building and the site and the area in which the restaurant
property is located. Building and site preparation costs to the Income Funds
ranged from $96,000 to $1,160,000 for each restaurant property.
Generally, the restaurant properties acquired by the Income Funds consist of
both land and building, although in a number of cases the Income Fund may have
acquired only the land underlying the restaurant building with the building
owned by a tenant or a third party. In general, the restaurant properties
acquired by the Income Funds are freestanding and surrounded by paved parking
areas. Buildings are suitable for conversion to various uses, although
modifications would be required prior to use for other than restaurant
operations.
A lessee generally is required by the lease agreement to make such capital
expenditures as may be reasonably necessary to refurbish restaurant 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
restaurant chain. These capital expenditures will be paid by the lessee during
the term of the lease, and the Income Funds are under no obligation to
participate in the financing of such capital expenditures. In addition, a
lessee bears responsibility for substantially all of the costs and expenses
associated with the ongoing maintenance and operation of the leased restaurant
properties, including utilities, property taxes and insurance.
The following table shows the distribution of restaurant properties of the
Income Funds by restaurant chain as of June 30, 1999.
<TABLE>
<CAPTION>
Income Fund(1)
-------------------------------------------------------------------------
I II III IV V VI VII VIII IX X XI XII XIII XIV XV XVI
--- --- --- --- --- --- --- ---- --- --- --- --- ---- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arby's.................. -- 1 -- 3 2 1 -- -- -- -- -- 1 1 -- -- 2
Boston Market........... -- 1 -- 1 1 -- 1 -- -- 1 -- -- -- 4 4 5
Burger King............. 1 1 2 -- 2 5 8 13 18 13 12 2 5 1 -- --
Checkers................ -- 2 -- 1 -- -- 1 -- -- -- -- -- 8 15 14 6
Chevy's Fresh Mex....... 1 1 1 -- 1 1 1 -- -- 1 -- -- 1 -- -- --
Denny's................. -- 3 -- 4 3 2 -- 1 4 3 7 9 3 6 2 9
Golden Corral........... 5 5 6 3 2 5 5 5 3 5 3 2 3 4 5 6
Hardee's................ -- -- -- -- 1 2 6 4 6 7 5 11 11 6 7 --
IHOP.................... -- 2 2 1 1 5 -- -- 1 -- -- -- -- -- -- 2
Jack in the Box......... -- 1 -- 1 -- 1 3 2 -- 6 8 10 5 6 4 5
KFC..................... -- 3 4 1 -- 3 2 2 -- -- 1 1 -- -- -- 1
Long John Silver's...... -- -- -- -- -- -- -- -- -- 2 -- 7 8 8 9 6
Pizza Hut............... 2 5 4 5 1 -- -- -- -- 5 -- -- -- -- -- --
Popeyes................. 1 4 1 -- -- 4 5 1 -- -- -- -- -- -- -- --
Shoney's................ -- -- -- 6 -- 1 2 5 5 4 -- 2 -- -- -- 1
Taco Bell............... -- -- 2 1 2 1 1 -- -- -- 1 -- -- 2 1 --
Wendy's................. 5 2 -- 4 1 -- -- 1 -- -- -- -- 1 -- 1 1
Other(2)................ 2 6 4 7 6 11 3 2 3 2 3 2 1 4 3 --
</TABLE>
- --------
(1) The number of restaurant properties for each Income Fund includes wholly
owned restaurant properties and restaurant properties held in joint
ventures and as tenants in common with a third party or another Income
Fund. Of the 571 total restaurant properties owned by the Income Funds as
of June 30, 1999, 66 restaurant properties were owned through joint
ventures or as tenants in common with affiliates of the Income Funds.
(2) This category encompasses all restaurant chains that comprise less than 1%
of the total of all restaurant properties of all of the Income Funds.
152
<PAGE>
Description of Leases
Here, we have summarized the leases of the restaurant properties. The terms
and conditions of any lease, however, entered into by any of the Income Funds
with regard to a restaurant property may vary from those described below.
General. At June 30, 1999, with the exception of 16 vacant restaurant
properties, all of the Income Funds' leases were triple-net leases, which means
that the lessees are required to pay all repairs, maintenance, property taxes,
and insurance. The lessees also are required to pay for utilities and the cost
of any renovations permitted under the leases. An Income Fund is the lessor
under the lease except in circumstances in which it may be a party to a joint
venture or co-tenancy arrangement which, in turn, owns the restaurant property.
In those cases, the joint venture, rather than the Income Fund, is the lessor,
and all references in this section to the Income Fund as lessor therefore
should be read accordingly.
Term of Leases. Generally, each Income Fund's restaurant properties are
leased for an initial term of either 15 or 20 years with two to five renewal
options for five years each. The minimum rental payment under the renewal
option generally is greater than that due for the final lease year of the
initial term of the lease. Upon termination of the lease, the lessee will
surrender possession of the restaurant property to the Income Fund, together
with any improvements made to the restaurant property during the term of the
lease.
As of June 30, 1999, the average remaining initial lease term with respect
to the Income Funds' restaurant properties was approximately 12 years. Leases
accounting for approximately 12.1% of annualized base rent for the six months
ended June 30, 1999, have initial lease terms extending until at least December
31, 2014.
The following table shows the aggregate number of leases in the Income
Funds' restaurant property portfolio which expire each calendar year through
the year 2014, as well as the number of leases which expire after December 31,
2014. The table does not reflect the exercise of any of the renewal options
provided to the tenant under the terms of such leases.
Lease Expiration Table
<TABLE>
<CAPTION>
Base Rent
-------------------
Year Number Amount(1) Percent
- ---- ------ ----------- -------
<S> <C> <C> <C>
2000................................................. 4 $ 149,000 0.3%
2001................................................. 7 493,000 1.1
2002................................................. 13 936,000 2.0
2003................................................. 6 297,000 0.6
2004................................................. 8 993,000 2.1
2005................................................. 22 2,602,000 5.5
2006................................................. 29 2,739,000 5.8
2007................................................. 32 2,707,000 5.7
2008................................................. 34 2,581,000 5.5
2009................................................. 29 3,083,000 6.5
2010................................................. 58 4,594,000 9.7
2011................................................. 68 6,018,000 12.8
2012................................................. 61 5,470,000 11.6
2013................................................. 53 4,192,000 8.9
2014................................................. 73 4,642,000 9.8
Thereafter........................................... 58 5,707,000 12.1
--- ----------- -----
Totals(1)............................................ 555 $47,203,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) The leases for 14 properties with aggregate base rental income of
approximately $1,312,000 have expired or been terminated, including three
Boston Market restaurant properties and six Long John Silver's restaurant
properties. We are actively marketing these properties for re-lease or
sale. This table excludes two leases which expire in 1999 and provide for
annual base rent of approximately $114,000.
153
<PAGE>
Computation of Lease Payments. During the initial term of the lease, the
lessee pays the Income Fund, as lessor, minimum annual rent equal to a
specified percentage of the Income Fund's cost of purchasing the restaurant
property. Generally, the leases provide for the escalation of the minimum
annual rent at predetermined intervals during the term of the lease. In the
case of acquisition of restaurant properties that were to be constructed or
renovated pursuant to a development agreement, the Income Fund's costs of
purchasing the restaurant property included the purchase price of the land,
including all fees, costs, and expenses paid by the Income Fund in connection
with its purchase of the land, and all fees, costs, and expenses disbursed by
the Income Fund for construction of restaurant improvements.
In addition to minimum annual rent, in many cases, the lessee pays the
Income Fund "percentage rent." Percentage rent is computed as a percentage of
gross sales of the restaurant operating at a particular restaurant property.
The leases generally provide that percentage rent will commence in the first
lease year in which gross sales exceed a specified amount. Certain leases,
however, provide that percentage rent is to be paid quarterly beginning at the
end of the first two years of the lease and each succeeding quarter thereafter
to the extent the restaurant gross sales in that quarter exceed the average
quarterly gross sales during the first two lease years. Gross sales include
sales of all products and services of the restaurant, excluding sales taxes,
tips paid to serving people, and sales from vending machines.
Assignment and Sublease. In general, no lease may be assigned or subleased
without the Income Fund's prior written consent, which may not be unreasonably
withheld, except to a tenant's corporate franchiser, corporate affiliate or
subsidiary, a successor by merger or acquisition, or, in some cases, another
franchisee, if such assignee or sublessee agrees to operate the same type of
restaurant on the premises. The leases set forth certain factors, such as the
financial condition of the proposed lessee or subtenant, that are deemed to be
a reasonable basis for the Income Fund's refusal to consent to an assignment or
sublease. The original lessee generally remains fully liable, however, for the
performance of all lessee obligations under the lease following any such
assignment or sublease unless the Income Fund agrees in writing to release the
original lessee from its lease obligations.
Alterations to Premises. A lessee generally has the right, without the prior
consent of the Income Fund and at the lessee's own expense, to make immaterial
structural modifications to the restaurant building and improvements, with a
cost limitation set forth in the lease, or, with the Income Fund's prior
written consent and at the lessee's own expense, to make material structural
modifications that may include demolishing and rebuilding the restaurant. Under
certain leases, the lessee, at its own expense, may make any type of
alterations to the leased premises without the Income Fund's consent but must
provide the Income Fund with plans of any proposed structural modifications at
least 30 days before construction of the alterations commences. Certain leases
may require the lessee to post a payment and performance bond for any
structural alterations with a cost in excess of a certain amount.
Right of Lessee to Purchase. If the Income Fund wishes at any time to sell a
restaurant property pursuant to a bona fide offer from a third party, the
lessee of that restaurant property will generally have the right to purchase
the restaurant property for the same price, and on the same terms and
conditions, as contained in the offer. In certain cases, the lessee also has a
right to purchase the restaurant property seven to 20 years after commencement
of the lease at a purchase price equal to the greater of
(1) the restaurant property's appraised value at the time of the lessee's
purchase, or
(2) a specified amount, generally equal to the Income Fund's purchase price
of the restaurant property, plus a predetermined percentage of such purchase
price. Alternatively, a limited number of leases provide for a purchase option
price which is computed pursuant to a formula that looks to various measures of
value contained in an independent appraisal of the restaurant property. As the
general partners, we negotiated only such formulae that we expected would
result in reasonable approximations of the fair market value of the restaurant
property at the time the option is exercised.
154
<PAGE>
Substitution of Restaurant Properties. Some of the Income Funds' leases
provide the tenant with the right to offer the substitution of another
restaurant property selected by the tenant and improved with the same
restaurant chain subject to landlord approval if the tenant determines in its
reasonable business discretion exercised in good faith that a restaurant
property is inadequate or unprofitable for the purposes for which such
restaurant property is used pursuant to the lease. In that event, the lessee
will have the right to offer the Income Fund the opportunity to exchange the
restaurant property for another restaurant property, with a value of not less
than the current value of the original leased restaurant property as determined
by an independent appraisal of both restaurant properties.
Generally, if the Income Fund approves the substitution, a closing must take
place within 60 days following the Income Fund's approval of the substitution.
The terms of the lease for the substituted restaurant property will generally
be identical to the terms of the lease as the original restaurant property,
except that the lease term will equal the remainder of the term of the original
lease. The tenant must pay all reasonable costs associated with the
substitution.
In some cases if the Income Fund does not approve a proposed substitution,
the tenant has the right to submit alternate restaurant properties to the
Income Fund for the Income Fund's approval. If no restaurant properties are
accepted by the Income Fund, the tenant has the option to purchase the original
restaurant property in accordance with a formula set forth in the lease.
Special Conditions. Certain leases provide that the Income Fund will not be
permitted to own or operate, directly or indirectly, another restaurant
property of the same or similar type as the leased restaurant property that is
or will be located within a specified distance of the leased restaurant
property.
Insurance, Taxes, Maintenance, and Repairs. Substantially all of the leases
require that the lessee pay all taxes and assessments, maintenance, repair,
utility, and insurance costs applicable to the real estate and permanent
improvements. Lessees are required to maintain all restaurant properties in
good order and repair.
Lessees generally are required, under the terms of the leases, to maintain,
for the benefit of the Income Fund and the lessee, casualty insurance in an
amount not less than the full replacement value of the building and other
permanent improvements, or a percent of such value in the case of certain
leases, but in no case less than 90%, as well as liability insurance, generally
for $1,000,000 for each location and event with an umbrella policy of
$5,000,000. All lessees, other than those lessees with a substantial net worth,
generally also are required to obtain "rental value" or "business interruption"
insurance to cover losses due to the occurrence of an insured event for a
specified period, generally six to 12 months. In general, no lease was entered
into unless, in the opinion of the Advisor, the insurance required by the lease
adequately insures the restaurant property.
The lessees generally are required to maintain the restaurant property and
repair any damage to the restaurant property, except damage occurring during
the last 24 months of the lease term, as extended, which in the opinion of the
lessee renders the restaurant property unsuitable for occupancy, in which case
the lessee will have the right instead to pay the insurance proceeds to the
Income Fund and terminate the lease.
Joint Venture/Tenancy in Common Arrangements
The Income Funds have entered into joint ventures or tenancy in common
arrangements to own and operate a restaurant property with unaffiliated persons
or entities, either alone or together with another Income Fund. In these
arrangements, the Income Fund, alone or together with another Income Fund,
acquires a controlling equity interest in the joint venture or tenancy in
common and, except with respect to CNL Income Fund, Ltd., must control the
management and policies of such joint venture or tenancy in common. As of June
30, 1999, the Income Funds held 52 restaurant properties in joint ventures and
14 restaurant properties as tenants in common.
Under the terms of each joint venture agreement, the Income Fund and each
joint venture partner are jointly and severally liable for all debts,
obligations, and other liabilities of the joint venture. In addition, we or our
155
<PAGE>
affiliates are entitled to reimbursement, at cost, for actual expenses incurred
by us or our affiliates on behalf of the Income Fund. Joint ventures entered
into to purchase and hold a restaurant property for investment generally have
an initial term of 15 to 20 years, which is the same term as the initial term
of the lease for the restaurant property in which the joint venture invests,
and, after the expiration of the initial term, will continue in existence from
year to year unless terminated at the option of either joint venturer or unless
terminated by an event of dissolution as specified in the agreement governing
the joint venture. The joint venture agreement restricts each venturer's
ability to sell, transfer, or assign its joint venture interest without first
offering it for sale to its joint venture partner. In addition, in any joint
venture with another Income Fund, in the event that one party desires to sell
the restaurant property and the other party does not desire to sell, either
party has the right to trigger dissolution of the joint venture by sending a
notice to the other party. The notice will establish the price and terms for
the sale or purchase of the other party's interest in the joint venture to the
other party. The joint venture or partnership agreement grants the receiving
party the right to elect either to purchase the other party's interest on the
terms set forth in the notice or to sell its own interest on such terms.
The tenancy in common arrangements are very similar in nature to the joint
venture arrangements. However, unlike joint venture arrangements, tenancy in
common arrangements allow the Income Funds to defer the gain for federal income
tax purposes on the exchange of a restaurant property for a replacement
property. Under a tenancy in common agreement, the co-tenant has an interest in
the property to the extent of its contribution to the acquisition of this
property. In addition, the net profits and losses derived from the tenancy in
common's investment in a real property are allocated among the co-tenants in
accordance with their respective capital contributions. Similar to the joint
venture arrangements, the tenancy in common agreement restricts each co-
tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's property without first offering it for sale to the remaining co-
tenant. In the event that one co-tenant desires to sell the property and the
other co-tenant does not desire to sell such property, then either co-tenant
may deliver a written notice to the other co-tenant. This written notice must
state that the offering co-tenant intends to purchase the entire tenancy in
common interest of the non-offering co-tenant, the purchase price and other
terms of sale. Similar to the joint venture arrangement, the tenancy in common
arrangement provides that the receiving co-tenant has the right to elect
whether to purchase the other co-tenant's interest on the terms set forth in
the notice or sell its own interest on such terms.
Financing
No Income Fund or any general partnership or joint venture in which an
Income Fund is a partner or joint venturer has acquired restaurant properties
by incurring indebtedness. Generally, the partnership agreements governing each
Income Fund do not permit the Income Fund to borrow to make investments.
Subject to certain restrictions, however, the Income Funds may borrow funds but
are not permitted to encumber any of the restaurant properties in connection
with any such borrowing. The Income Funds do not borrow for the purpose of
returning capital to you or under arrangements that would make you liable to
creditors of an Income Fund. In general, we have limited each Income Fund's
outstanding indebtedness to 3.0% of the aggregate adjusted tax basis of its
restaurant properties and we have used, and will continue to use, our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes. In addition,
generally an Income Fund may not incur indebtedness unless it first obtains an
opinion of counsel that such borrowing will not constitute acquisition
indebtedness. Notwithstanding the foregoing, we or our affiliates are entitled
to reimbursement, at cost, for actual expenses incurred by us or our affiliates
on behalf of an Income Fund.
Sale of Restaurant Properties
The Income Funds generally hold their restaurant properties until we
determine either that their sale or other disposition is advantageous in view
of each Income Fund's investment objectives, or that such objectives will not
be met. Generally, we intend to sell each Income Fund's restaurant properties
within 7 to 12 years after their acquisition or as soon thereafter as market
conditions permit. In deciding whether to sell restaurant properties, we will
consider factors such as potential capital appreciation, net cash flow, and
federal income tax
156
<PAGE>
considerations. The terms of certain leases, however, may require an Income
Fund to sell a restaurant property if the lessee exercises its option to
purchase a restaurant property after a specified portion of the lease term has
elapsed. No Income Fund has any obligation to sell all or any portion of a
restaurant property at any particular time, except as may be required under
lessee or joint venture purchase options.
Net sales proceeds not reinvested in restaurant properties or used to
establish reserves deemed necessary or advisable by us are distributed to the
Limited Partners in accordance with each Income Fund's partnership agreement.
If we determine, however, that it is in the interest of an Income Fund to
reinvest net sales proceeds in restaurant properties, net sales proceeds will
be reinvested only if sufficient cash also is distributed to the Limited
Partners to pay any state income tax, at a rate reasonably assumed by us, and
federal income tax, assuming the Limited Partners' income is taxable at the
maximum federal income tax rate then applicable to individuals for capital
gains, created by the disposition. Net cash flow is not invested in restaurant
properties.
In connection with sales of restaurant properties by the Income Funds,
purchase money security interests may be taken by the Income Funds as part
payment of the sales price. The terms of payment are affected by custom in the
area in which the restaurant property is located and by prevailing economic
conditions. When a purchase money security interests is accepted in lieu of
cash upon the sale of an Income Fund's restaurant property, the Income Fund
continues to have a mortgage on the restaurant property and the proceeds of the
sale will be realized over a period of years rather than at closing of the
sale.
Competition
The competitive environment in which the Income Funds operate is
substantially similar to that of the APF, as described above on page 145.
157
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the significant investment, financing and
other policies of APF and of the Income Funds. In the case of APF, APF's Board
of Directors has determined these policies, and generally, the Board may amend
or revise such policies from time to time without a vote of the stockholders.
For the Income Funds, the policies have been set according to the investment
objectives set forth in the partnership agreement governing each Income Fund.
The description included here regarding the Income Funds is general to all the
Income Funds.
Since its inception, APF has primarily engaged in acquiring and triple-net
leasing restaurant properties and secondarily has made mortgage loans to
operators of national and regional restaurant chains. Upon the acquisition of
the CNL Restaurant Businesses, APF has increased its mortgage financing
business substantially, although it will still primarily be engaged in the
acquisition and triple-net leasing of restaurant properties. APF's Articles of
Incorporation, as they are being amended by APF's stockholders, do not place a
limit on the percentage of assets which APF may invest in real estate,
mortgages, or securities of persons primarily engaged in real estate, nor do
they restrict the amount of resources that may be invested in a single
restaurant property.
APF
Investment Policies
Real Estate Investments. Using its line of credit or cash available from
operations or financings, APF seeks to generate income by acquiring and
managing a diversified portfolio of real estate and other assets across the
United States. APF has focused and intends to continue to focus its real estate
investments on properties to be leased to operators of national and regional
restaurant chains, however APF's Articles of Incorporation do not restrict its
real estate investments to restaurant properties. In its real estate
activities, APF seeks to structure triple-net leases and to acquire restaurant
properties subject to leases that generally provide:
(1) that the tenant is responsible for all operating and capital expenses,
except for specified environmental and other contingent liabilities,
(2) for contractual rent increases over the term of the lease, and
(3) for primary lease terms of 15 to 20 years, with two to five renewals
of five years each.
While APF generally intends to hold its restaurant properties for long-term
investment, APF may dispose of a restaurant property if it deems such
disposition to be in its best interests. APF may also sell restaurant
properties to tenants pursuant to purchase options included in certain leases
as described above in "APF's Business --General Evaluation of Investment
Opportunities."
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. APF may in the future invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities. APF may
acquire all or substantially all of the securities or assets of REITs or
similar entities where such investments would be consistent with its investment
policies. APF may also receive an equity interest or rights to purchase equity
interests in tenants or affiliates of tenants in connection with sale-leaseback
transactions. In any event, APF does not intend that its investments in
securities will require it to register as an "Investment Company" under the
Investment Company Act of 1940, as amended, and APF would divest itself of such
securities before any such registration would be required.
Joint Ventures and Wholly-Owned Subsidiaries. APF may in the future enter
into joint ventures or general partnerships and other participations with real
estate developers, owners and others for the purpose of obtaining an equity
interest in a particular property or properties in accordance with APF's
investment policies. Such investments permit APF to own interests in large
properties without unduly restricting diversification and, therefore, add
flexibility in structuring APF's portfolio.
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<PAGE>
Engaging in the Purchase and Sale of Investments and Investing in the
Securities of Others for the Purpose of Exercising Control. As part of its
investment activities, APF may acquire, own and dispose of general and limited
partner interests, stock, warrants, options or other equity interests in
entities and exercise all rights and powers granted to the owner of any such
interests.
Offering Securities in Exchange for Property. APF may offer APF Shares,
Operating Partnership units or other APF securities in exchange for a
restaurant property.
Repurchasing or Reacquiring Its Own Shares. APF may purchase or repurchase
APF Shares from any person for such consideration as the Board of Directors may
determine in its reasonable discretion, whether more or less than the original
issuance price of such APF Share or the then trading price of such APF Share.
Investments in Real Estate Mortgages. APF originates mortgages to operators
of national and regional restaurant chains, or their affiliates, to enable them
to acquire restaurant properties. APF also securitizes the mortgage loans by
contributing them to a trust which subsequently issues trust certificates
representing beneficial ownership interests in the pool of mortgage loans. The
net proceeds of the offering of the trust certificates are then contributed
back to APF. The mortgage loans are not insured by a governmental agency.
Financing Policies
Issuance of Additional Securities. APF's Board of Directors may, in its
discretion, issue additional equity securities. APF expects to issue additional
equity from time to time to increase its available capital. The issuance of
additional equity interests may result in the dilution of the interests of the
APF stockholders at the time of such issuance.
Issuance of Senior Securities. APF may at any time issue securities senior
to the APF Shares, upon such terms and conditions as may be determined by the
Board of Directors.
Borrowing Policy. APF may, at any time, borrow, on a secured or unsecured
basis, funds to finance its business and in connection therewith execute, issue
and deliver promissory notes, commercial paper, notes, debentures, bonds and
other debt obligations which may be convertible into APF Shares or other equity
interests or be issued together with warrants to acquire APF Shares or other
equity interests.
Miscellaneous Policies
Making Annual or Other Reports to Stockholders. APF is subject to the
reporting requirements of the Exchange Act and will file annual and quarterly
reports thereunder. APF currently intends to provide annual and quarterly
reports to its stockholders.
Restrictions on Related Party Transactions. APF's bylaws prohibit APF from
engaging in a transaction with a director, officer, advisor, person owning or
controlling 10% or more of any class of APF's outstanding voting securities or
any affiliate of such persons, to all of whom we refer to here as the
interested parties, except to the extent that such transactions are
specifically authorized by the terms of the bylaws. The bylaws will permit a
transaction, including the acquisition of property, with any of the interested
parties, however, if the terms or conditions of such transaction have been
disclosed to the Board of Directors and approved by a majority of directors not
otherwise interested in the transaction, and such directors, in approving the
transaction, have determined the transaction to be fair, competitive,
commercially reasonable and on terms and conditions no less favorable to APF
than those available from unaffiliated third parties.
Company Control. The Board of Directors has exclusive control over APF's
business and affairs subject only to the restrictions in the APF's Articles of
Incorporation and bylaws. Stockholders have the right to elect members of the
Board of Directors. The Directors are accountable to APF as fiduciaries and are
required to exercise good faith and integrity in conducting APF's affairs as
described in "Fiduciary Responsibility" on page 168.
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Working Capital Reserves
APF will maintain working capital reserves or immediate borrowing capacity
in amounts that the Board of Directors determines to be adequate to meet normal
contingencies in connection with the operation of APF's business and
investments.
The Income Funds
Investment Policies
Real Estate Investments. The Income Funds' primary investment activity is to
acquire and manage a diversified portfolio of real estate assets. In their real
estate activities, the Income Funds seek to structure triple-net leases and to
acquire properties subject to leases that generally have the following terms:
. tenant responsibility for all operating and capital expenses, except for
specified environmental and other contingent liabilities;
. contractual rent increases over the term of the lease; and
. primary lease terms of 15 to 20 years, with two to five renewal options
of five years each.
While the Income Funds generally hold their restaurant properties for long-
term investment, an Income Fund may dispose of a restaurant property if the
general partners deem such disposition to be in its best interests. Generally,
any proceeds from such disposition must be distributed to the partners in the
Income Fund according to the terms of the partnership agreements governing such
Income Fund. The Income Funds are finite term entities which are structured to
dissolve when the assets of the Income Funds are liquidated, or after
approximately 35 years.
Joint Ventures/Tenancy in Common Arrangements. Each of the Income Funds may
enter into joint venture or tenancy in common arrangements and other
participations with others for the purpose of obtaining an equity interest in a
particular property or properties in accordance with the Income Fund's
investment policies. Such investments permit a Fund to own interests in large
properties without unduly restricting diversification and, therefore, add
flexibility in structuring the Income Fund's portfolio.
Financing
The Income Funds are generally prohibited from or restricted in the amount
and nature of borrowings. Additionally, none of the Income Funds are authorized
to raise additional capital for, or reinvest the net sale or refinancing
proceeds in, new investments, absent amendments to their partnership
agreements.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of APF are listed below:
<TABLE>
<CAPTION>
Name Age Position with APF
---- --- --------------------------------------------------
<S> <C> <C>
James M. Seneff, Jr...... 53 Chairman of the Board of Directors
Robert A. Bourne......... 52 Vice Chairman of the Board of Directors
G. Richard Hostetter..... 59 Independent Director
J. Joseph Kruse.......... 66 Independent Director
Richard C. Huseman....... 60 Independent Director
Curtis B. McWilliams..... 44 Chief Executive Officer
John T. Walker........... 40 President and Chief Operating Officer
Howard J. Singer......... 56 Executive Vice President of Development Operations
Barry L. Goff............ 37 Senior Vice President and Chief Investment Officer
Steven D. Shackelford.... 36 Senior Vice President and Chief Financial Officer
Michael I. Wood.......... 38 Senior Vice President of Asset Management
Timothy J. Neville....... 51 Senior Vice President and Chief Credit Officer
Robert W. Chapin Jr...... 37 Senior Vice President of Development Operations
</TABLE>
James M. Seneff, Jr. has served as Chairman of the Board of Directors of APF
since December 1994 and as a director since May 1994. Mr. Seneff also served as
Chief Executive Officer of APF from May 1994 to September 1999. Prior to the
acquisition of the CNL Restaurant Businesses, Mr. Seneff served as Chairman of
the Board, Chief Executive Officer and a director of the Advisor from March
1994 to September 1999. Mr. Seneff is a principal stockholder of CNL Group,
Inc., a diversified real estate company, and has served as its Chairman of the
Board of Directors, a director and Chief Executive Officer since its formation
in 1980. In addition, Mr. Seneff has served as Chairman of the Board, Chief
Executive Officer and a director of CNL Hospitality Properties, Inc. since June
1996 and of CNL Health Care Properties, Inc. since December 1997, two public,
unlisted REITs. Mr. Seneff also has served as Chief Executive Officer, a
director and Chairman of the Board of Directors of Commercial Net Lease Realty,
Inc., a publicly-traded REIT, listed on the NYSE, since 1992 and served as
Chief Executive Officer, a director and Chairman of the Board of Directors of
CNL Realty Advisors, Inc. from its inception in May 1992 through December 1997,
at which time such company merged with Commercial Net Lease Realty, Inc. Mr.
Seneff has served as a member of the board of directors of First Union National
Bank of Florida since May 1998 and has served as a member of the Orlando
Advisory Board of First Union National Bank of Florida since March 1994. Mr.
Seneff received his degree in Business Administration from Florida State
University in 1968.
Robert A. Bourne has served as a Vice Chairman of the Board of Directors of
APF since February 1999 and has served as a director of APF since May 1994. He
also served in various executive positions, including President of APF from May
1994 to February 1999, and Treasurer from February 1994 to September 1999.
Mr. Bourne served as a director of the Advisor from March 1994 through
September 1999, served as Treasurer and Vice Chairman of the Board from
September 1997 through September 1999 and served as President from March 1994
through September 1997. In addition, Mr. Bourne served in several executive
positions, including President and Vice Chairman of the Board of Directors for
CNL Financial Services, Inc. and served in several executive positions,
including President and Vice Chairman of the Board for CNL Financial
Corporation until the acquisition of those entities in September 1999. Mr.
Bourne served as President of Commercial Net Lease Realty, Inc. from July 1992
to February 1996, served as Secretary and Treasurer from February 1996 through
December 1997, has served as a director since July 1992 and as Vice Chairman of
the Board of Directors since February 1996. In addition, Mr. Bourne served as
President of CNL Realty Advisors, Inc. from May 1992 to February 1996, served
as a director from May 1992 through December 1997, and as Treasurer and Vice
Chairman from February 1996 through December 1997, at which time such company
merged with Commercial Net Lease Realty, Inc. Mr. Bourne has served as
President and a director of CNL Hospitality Properties, Inc.
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since June 1996 and CNL Health Care Properties, Inc. since December 1997. In
addition, Mr. Bourne oversaw the acquisition and the management of over 1,500
properties located across 47 states with a total value in excess of $2 billion.
Mr. Bourne received a Bachelor of Science Degree in Accounting, with honors,
from Florida State University in 1970.
G. Richard Hostetter, Esq. has served as an Independent Director of APF
since March 1995. Mr. Hostetter served as a director of CNL Hospitality
Properties, Inc. from July 1997 until February 1999. Mr. Hostetter was
associated with the law firm of Miller and Martin from 1966 through 1989, the
last ten years of such association as a senior partner. As a lawyer, he served
for more than 20 years as counsel for various corporate real estate groups,
fast-food companies and public companies, including The Krystal Company,
resulting in his extensive participation in transactions involving the sale,
lease, and sale/leaseback of approximately 250 restaurant units. Mr. Hostetter
graduated from the University of Georgia and received his Juris Doctor from
Emory Law School in 1966. He is licensed to practice law in Tennessee and
Georgia. From 1989 through 1998, Mr. Hostetter served as President and General
Counsel of Mills, Ragland & Hostetter, Inc., the corporate general partner of
MRH, L.P., a holding company involved in corporate acquisitions, in which he
also was a general and limited partner. Since January 1, 1999, Mr. Hostetter
has served as President and General Counsel of MRH, Inc. which manages two of
the businesses formerly owned by MRH, L.P.
J. Joseph Kruse has served as an Independent Director of APF since March
1995. Mr. Kruse also served as a director of CNL Hospitality Properties, Inc.
from July 1997 to February 1999. From 1993 to the present, Mr. Kruse has been
President and Chief Executive Officer of Kruse & Co., Inc., a merchant banking
company engaged in real estate. Mr. Kruse also serves as a director of Gateway
American Bank of Florida and Chairman of Topsider Building Systems. Formerly,
Mr. Kruse was a Senior Vice President with Textron, Inc. for twenty years, and
then served as Senior Vice President at G. William Miller & Co., a firm founded
by a former Chairman of the Federal Reserve Board and the Secretary of the
Treasury of the United States. Mr. Kruse was responsible for evaluations of
commercial real estate and retail shopping mall projects and continues to serve
as counsel to the firm. Mr. Kruse received a Bachelor of Science degree in
Education from the University of Florida in 1957 and a Master of Science degree
in Administration in 1958 from Florida State University. He also graduated from
the Advanced Management Program of the Harvard Graduate School of Business.
Richard C. Huseman has served as an Independent Director of APF since March
1995. Mr. Huseman also served as a director of CNL Hospitality Properties, Inc.
from July 1997 to February 1999. Mr. Huseman is presently a professor in the
College of Business Administration, and from 1990 through 1995, served as the
Dean of the College of Business Administration of the University of Central
Florida. He has served as a consultant in the area of managerial strategies to
a number of Fortune 500 corporations, including IBM, AT&T, and 3M, as well as
to several branches of the U.S. government, including the U.S. Department of
Health and Human Services, the U.S. Department of Justice, and the Internal
Revenue Service. Mr. Huseman received a Bachelor of Arts degree from Greenville
College in 1961 and an Master of Arts degree and a Ph.D. from the University of
Illinois in 1963 and 1965, respectively.
Curtis B. McWilliams has served as Chief Executive Officer of APF since
September 1999. Prior to the acquisition of the CNL Restaurant Businesses, Mr.
McWilliams served as President of APF from February 1999 until September 1999.
From April 1997 to February 1999, Mr. McWilliams served as Executive Vice
President of APF until the acquisition of the CNL Restaurant Businesses in
September 1999. Mr. McWilliams joined CNL Group, Inc. in April 1997 and served
as an Executive Vice President until September 1999. In addition, Mr.
McWilliams served as President of the Advisor and CNL Financial Services, Inc.
from April 1997 until the acquisition of such entities by APF in September
1999. From September 1983 through March 1997, Mr. McWilliams was employed by
Merrill Lynch & Co. The majority of his career at Merrill Lynch & Co. was in
the Investment Banking division where he served as a Managing Director. Mr.
McWilliams received a B.S.E. in Chemical Engineering from Princeton University
in 1977 and a Master of Business Administration degree with a concentration in
finance from the University of Chicago in 1983.
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John T. Walker has served as President since September 1999, has served as
Chief Operating Officer since March 1995 and has served as Executive Vice
President of APF since January 1996. Mr. Walker joined the Advisor in September
1994, as Senior Vice President, responsible for Research and Development and
served as the Chief Operating Officer of the Advisor from April 1995 until its
acquisition by APF in September 1999 and served as Executive Vice President of
the Advisor from January 1996 until its acquisition by APF. Mr. Walker also
served as Executive Vice President of CNL Hospitality Properties, Inc. and CNL
Hospitality Advisors, Inc. from 1997 to October 1998. From May 1992 to May
1994, he was Executive Vice President for Finance and Administration and Chief
Financial Officer of Z Music, Inc., a cable television network which was
subsequently acquired by Gaylord Entertainment, where he was responsible for
overall financial and administrative management and planning. From January 1990
through April 1992, Mr. Walker was Chief Financial Officer of the First Baptist
Church in Orlando, Florida. From April 1984 through December 1989, he was a
partner in the accounting firm of Chastang, Ferrell & Walker, P.A., where he
was the partner in charge of audit and consulting services, and from 1981 to
1984, Mr. Walker was a Senior Consultant/Audit Senior at Price Waterhouse. Mr.
Walker is a cum laude graduate of Wake Forest University with a Bachelor of
Science degree in Accountancy and is a certified public accountant.
Howard J. Singer has served as Executive Vice President of Development
Operations of APF since September 1999. Mr. Singer joined CNL Restaurant
Development, Inc. in October 1995 and served as chief operating officer for
that company until September 1999, responsible for complete services ranging
from site selection, site development and construction. From October 1986 to
September 1995, Mr. Singer was executive vice president of development for Long
John Silver's. He has also worked for KFC Corporation and Burger King
Corporation where he held positions in development, franchising, national and
international operations. Mr. Singer received a Bachelor of Science degree from
the University of Florida in 1965 and a Juris Doctor from the University of
Miami in 1972.
Barry L. Goff has served as Chief Investment Officer and Senior Vice
President of APF since September 1999. Mr. Goff joined the Advisor in August
1998 as Chief Investment Officer and served in such position until September
1999. Mr. Goff is responsible for marketing APF's restaurant finance,
development and strategic advisory services and products to the restaurant
industry. Prior to joining the Advisor and from 1989 to July 1998, Mr. Goff was
a shareholder of Lowndes, Droskick, Doster, Kantor & Reed, PA., a law firm, in
Orlando, Florida where he specialized in U.S. and international taxation. Prior
to joining Lowndes in 1989, Mr. Goff practiced law with Loeb & Loeb in Los
Angeles. Mr. Goff received his Bachelor of Science degree in Business
Administration from the University of Central Florida in 1983, his Juris Doctor
degree from the University of Florida in 1986 and a Master of Laws in Taxation
from New York University in 1988.
Steven D. Shackelford has served as Senior Vice President and Chief
Financial Officer of APF since January 1997. He has also served as Secretary
and Treasurer of APF since September 1999. He also served as Chief Financial
Officer of the Advisor from September 1996 to September 1999. From March 1995
to July 1996, Mr. Shackelford was a senior manager in the national office of
Price Waterhouse LLP where he was responsible for advising foreign clients
seeking to raise capital and a public listing in the United States. From August
1992 to March 1995, he was a manager in the Paris, France office of Price
Waterhouse, serving several multinational clients. Mr. Shackelford was an audit
staff and senior from 1986 to 1992 in the Orlando, Florida office of Price
Waterhouse. Mr. Shackelford received a Bachelor in Arts degree in Accounting,
with honors, and a Master of Business Administration degree from Florida State
University and is a certified public accountant.
Michael I. Wood has served as Senior Vice President of Asset Management
since September 1999. Mr. Wood joined the Advisor in September 1997 and was
appointed Senior Vice President of Asset Management in December 1997, serving
in such position until September 1999. Mr. Wood is responsible for overseeing
the property management and portfolio management of the various portfolios
advised by APF. Prior to joining the Advisor, Mr. Wood spent more than 10 years
with Xerox Corporation in a variety of positions in its real estate investment
and corporate real estate divisions. His most recent position with Xerox was as
manager of real estate acquisitions and dispositions where he was responsible
for Xerox's major real estate projects. Mr. Wood has achieved the professional
designation of Certified Commercial Investment Member. He received a Bachelor
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of Science degree in Computer Science and a Master of Business Administration
degree from the University of North Carolina at Chapel Hill.
Timothy J. Neville has served as Senior Vice President and Chief Credit
Officer of APF since September 1999. Mr. Neville was Senior Vice President and
Chief Credit Officer of CNL Financial Services, Inc., responsible for
underwriting loans to select operators of top restaurant chains, from mid 1998
to September 1999. He has more than 25 years of lending and risk management
experience at major financial institutions. From 1992 to early 1998, Mr.
Neville served as Executive Vice President and Senior Credit Policy Officer at
Barnett Bank, N.A. In that capacity, he was responsible for loan approval,
asset quality and portfolio management of a loan portfolio totaling $1.4
billion. Prior responsibilities included management of lending departments and
lending teams with various financial institutions. Mr. Neville earned a Master
in Business Administration degree from Xavier University and a Bachelor of
Business Administration degree from the University of Cincinnati.
Robert W. Chapin, Jr. has served as Senior Vice President of Operations of
APF since September 1999. In July 1997, Mr. Chapin joined CNL Restaurant
Development, Inc. and was Senior Vice President of Development Operations for
that Company until September 1999, responsible for complete development
services ranging from site selection, site development and construction
management. From July 1997 to June 1998, Mr. Chapin served as a full-time
consultant with CNL Group, Inc., working on a number of strategic project
initiatives. From November 1994 to June 1997, Mr. Chapin served as President of
Leader Enterprises, a full-service sports marketing firm. From October 1989 to
November 1994, Mr. Chapin was employed by VOA Associates, a Chicago-based
design and development company, most recently as managing principal of the
Florida office. Mr. Chapin received his Bachelor of Science degree from
Appalachian State University.
Board of Directors
General. APF will operate under the direction of its Board of Directors, the
members of which are accountable to APF as fiduciaries.
APF currently has five directors. It may have no fewer than three directors
and no more than 15. Directors will be elected annually, and each director will
hold office until the next annual meeting of stockholders or until his
successor has been duly elected and qualified. There is no limit on the number
of times that a director may be elected to office. Although the number of
directors may be increased or decreased as discussed above, a decrease shall
not have the effect of shortening the term of any incumbent director.
Any director may resign at any time and may be removed with or without cause
only by the stockholders upon the affirmative vote of at least a majority of
all the shares of common stock outstanding and entitled to vote in the election
of the directors. The notice of such meeting shall indicate that the purpose,
or one of the purposes, of such meeting is to determine if a director shall be
removed.
Committees of the Board of Directors. Pursuant to APF's Articles of
Incorporation, the Board of Directors may establish committees as it deems
appropriate. Currently, APF has an Audit Committee which consists of APF's
three independent directors. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of APF's internal
accounting controls.
In addition to the Audit Committee, APF has a Compensation Committee. The
Compensation Committee consists of three independent directors who advise the
Board of Directors on all matters pertaining to compensation programs and
policies and establish guidelines for employee incentive and benefits programs
which the committee reviews on a continuous basis. It makes specific
recommendations relating to salaries of officers and all incentive awards.
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Promptly following the consummation of the Acquisition, the Board of
Directors expects to establish an Executive Committee. The Executive Committee
will consist of a minimum of three directors, including Messrs. Seneff and
Bourne. The Executive Committee will have the authority to acquire, dispose of
and finance investments for APF and execute contracts and agreements, including
those related to the borrowing of money by APF and generally exercise all other
powers of the Board of Directors except for those which require action by all
the directors or the independent directors under the Articles of Incorporation
or the bylaws of APF, or under applicable law.
The Board of Directors may from time to time establish other committees to
facilitate APF's management. The Board of Directors initially will not have a
nominating committee and the entire Board of Directors will perform the
function of such committee.
Compensation of Directors. Each Director is entitled to receive $6,000
annually for serving on the Board of Directors, as well as fees of $750 per
meeting attended ($375 for each telephonic meeting in which the Director
participates), including committee meetings. No executive officer or Director
of APF has received a bonus from APF.
Executive Compensation
The following Summary Compensation Table shows the annual and long-term
compensation to be paid by APF to the Chief Executive Officer and the top four
other most highly compensated executive officers for services to be rendered in
all capacities to APF during the year following the Acquisition, assuming the
completion of the Acquisition as of December 31, 1999.
<TABLE>
<CAPTION>
Annual
Compensation
--------------
Name and Principal Position Salary Bonus
--------------------------- -------- -----
<S> <C> <C>
Curtis B. McWilliams, Chief Executive Officer................ $300,000 n/a
John T. Walker, President and Chief Operating Officer........ 225,000 n/a
Steven D. Shackelford, Senior Vice President and Chief
Financial Officer........................................... 170,000 n/a
Barry L. Goff, Senior Vice President and Chief Investment
Officer..................................................... 170,000 n/a
Timothy J. Neville, Senior Vice President and Chief Credit
Officer..................................................... 150,000 n/a
</TABLE>
To date, APF has not granted to its Chief Executive Officer or to any other
executive officer any options to purchase common stock pursuant to an
established stock incentive plan or otherwise.
Employment Agreements
Effective September 1, 1999 APF entered into employment agreements with
Curtis B. McWilliams, Steven D. Shackleford, John T. Walker, Howard J. Singer,
Barry L. Goff, Michael I. Wood, Timothy J. Neville and Robert W. Chapin, Jr.
Each of the employment agreements terminate on December 31, 2002 and provide
for a discretionary bonus. APF has also entered into noncompetition agreements
with each of Messrs. Seneff and Bourne providing that, subject to exceptions,
they will not engage in specified activities in the restaurant industry.
1999 Performance Incentive Plan
At its 1999 annual meeting on May 27, 1999, APF's stockholders approved the
1999 Performance Incentive Plan. The Board believes that the Incentive Plan is
in the best interest of APF and will enable it to attract and retain highly
qualified executive officers, directors and employees.
The Incentive Plan is qualified under Rule 16b-3 under the Exchange Act. The
Incentive Plan will be administered by the Compensation Committee and provides
for the granting of options, stock appreciation rights or restricted stock.
Under the Incentive Plan, 2,250,000 APF Shares are available for issuance to
executive officers, directors or other key employees of APF, which number may
increase over time based on the number of outstanding APF Shares. Options to
acquire APF Shares are expected to be in the form of non-
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statutory stock options and are exercisable for up to 10 years following the
date of the grant. The exercise price of each option will be set by the
Compensation Committee, but the Incentive Plan requires that the price per APF
Share must be equal to or greater than the fair market value of the APF Shares
on the grant date.
The Incentive Plan also provides for the issuance of stock appreciation
rights and restricted APF Shares to executive officers, directors or other key
employees upon such terms and conditions as shall be determined by the
Compensation Committee in its sole discretion and other performance-based
incentives. The Incentive Plan generally entitles a holder to receive cash or
stock, as determined by the Compensation Committee at the time of exercise,
equal to the difference between the exercise price and the fair market value of
the APF Shares.
Other Incentive Compensation
APF has established an incentive compensation plan for key officers of APF.
This plan provides for payment of cash bonuses to participating officers after
evaluating the officer's performance and the overall performance of APF. The
Chief Executive Officer makes recommendations to the Compensation Committee of
the Board of Directors, which makes the final determination for the award of
bonuses. The Compensation Committee determines such bonuses, if any, for the
Chief Executive Officer.
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PRINCIPAL STOCKHOLDERS OF APF
We have provided in the table below information regarding the beneficial
ownership of the APF Shares as of September 15, 1999, as adjusted to give
effect to the issuance of APF Shares in the Acquisition assuming that APF
acquires all of the Income Funds, by (i) each person or entity known by APF to
beneficially own 5% or more of the outstanding APF Shares, (ii) the Chief
Executive Officer, Curtis B McWilliams, and the four other most highly
compensated executive officers of APF, (iii) the directors of APF, and (iv) all
executive officers and directors, as a group.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the Acquisition After the Acquisition
----------------------------- ---------------------
Name of Beneficial Owner (2) Number Percent (1) Number Percent (1)
- ---------------------------- -------------- -------------- --------- -----------
<S> <C> <C> <C> <C>
James M. Seneff, Jr........ 3,721,672 8.6% 3,791,432 5.4
Robert A. Bourne........... 988,108 2.3% 1,057,868 1.5
G. Richard Hostetter (3)... 2,740 * 2,740 *
J. Joseph Kruse............ -- -- -- --
Richard C. Huseman......... -- -- -- --
Curtis B. McWilliams....... 290,322 * 290,322 *
John T. Walker............. 172,114 * 172,114 *
Steven D. Shackelford...... 26,600 * 26,600 *
Barry L. Goff.............. -- -- -- --
Timothy J. Neville......... -- -- -- --
All executive officers and
directors as a group
(13 persons).............. 5,239,556 12.0% 5,379,076 7.6
</TABLE>
- --------
* Less than 1%.
(1) The percentage ownership prior to the Acquisition is based on 43,498,464
shares of APF Shares outstanding as of September 15, 1999 after giving
effect to a one-for-two reverse stock split approved by the APF
stockholders at their annual meeting and effective as of June 3, 1999. The
percentage ownership after the Acquisition is based on 70,533,607 APF
Shares outstanding upon completion of the Acquisition assuming the
Acquisition of 100% of the Income Funds and adjusted for the payment by the
Income Funds of expenses of the Acquisition to be paid by the Income Funds
in the form of a reduction in the number of APF Shares paid to each Income
Fund. Beneficial ownership is determined in accordance with the rules of
the SEC. For each beneficial owner, APF Shares subject to options or
conversion rights exercisable within 60 days of September , 1999 are
deemed outstanding.
(2) The address of each of the named beneficial owners is c/o APF, CNL Center
at City Commons 450 South Orange Avenue, Orlando, Florida 32801.
(3) Represents shares held by Sun Trust Bank of Chattanooga in an IRA.
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FIDUCIARY RESPONSIBILITY
Directors and Officers of the Company
The directors are accountable to APF and its stockholders as fiduciaries and
must perform their duties in good faith, in a manner believed to be in APF's
best interests and that of its stockholders and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would
use under similar circumstances. APF's Articles of Incorporation provide that
the directors will not be personally liable to APF or to any stockholder for
the breach of a fiduciary responsibility, to the full extent that such
limitation or elimination of liability is permitted under Maryland law. The
bylaws provide that APF will indemnify its directors and officers to the full
extent permitted under Maryland law. Pursuant to the bylaws and the MGCL, APF
will indemnify each director and officer against any liability and related
expenses, including attorneys' fees, incurred in connection with any proceeding
in which he may be involved by reason of his or her service in such position so
long as the director or officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to APF's best interest, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
A director and officer is also entitled to indemnification against expenses
incurred in any action or suit by or on behalf of APF to procure a judgment in
its favor by reason of his or her service in such position if the director or
officer acted in good faith and in a manner reasonably believed to be in or not
opposed to APF's best interests, except that no such indemnification will be
made if the director or officer is judged to be liable to APF, unless the
applicable court of law determines that despite the adjudication of liability
the director or officer is reasonably entitled to indemnification for such
expenses. The bylaws authorize APF to advance funds to a director or officer
for costs and expenses, including attorneys' fees, incurred in a suit or
proceeding upon receipt of an undertaking by such director or officer to repay
such amounts if it is ultimately determined that he is not entitled to be
indemnified. APF has entered into agreements with its directors and executive
officers, indemnifying them to the fullest extent permitted by Maryland law. If
the Acquisition is consummated, you and other stockholders of APF, may have
more limited recourse against the directors and officers than you would have
absent these agreements and the provisions in APF's Articles of Incorporation
and bylaws.
To the extent that these indemnification provisions apply to actions arising
under the Securities Act, APF has been informed that, in the opinion of the
SEC, such indemnification provisions are contrary to public policy as expressed
in the Securities Act and therefore are not enforceable. APF has obtained
insurance policies indemnifying the directors and officers against specified
civil liabilities, including liabilities under the federal securities laws,
which might be incurred by them in such capacity.
General Partners of the Income Funds
Under Florida partnership law, we are accountable to the Income Funds as
fiduciaries and owe each Income Fund and the partners a duty of loyalty and
duty of care and are required to exercise good faith and fair dealing in
conducting the Income Fund's affairs. Each Income Fund's partnership agreement
generally provides that neither we, as general partners, nor any of our
affiliates performing services on behalf of the Income Fund will be liable to
the Income Fund or any of the Limited Partners for any act or omission by us
performed in good faith pursuant to authority granted to us by the partnership
agreement, or in accordance with its provisions, and any manner we reasonably
believed to be within the scope of our authority and in the best interests of
the Income Fund, provided that such act or omission did not constitute
negligent misconduct or a breach of our fiduciary duty. As a result, you and
the other Limited Partners may have a more limited right of action than you
would have in the absence of such a provision in the partnership agreements.
Each Income Fund's partnership agreements also generally provide that we and
our affiliates including the Advisor are indemnified from losses relating to
acts performed or failures to act in connection with the business of the Income
Fund, except to the extent indemnification is prohibited by law, provided that
we or our affiliate determined in good faith that the course of conduct was in
the best interests of the Income Fund and
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provided further that the course of conduct did not constitute negligence,
misconduct, or breach of our fiduciary duty. Notwithstanding the foregoing,
neither we nor any of our affiliates will be indemnified by any Income Fund
from any liability, loss, damage, cost or expense incurred by us or any
affiliate in connection with any claim involving allegations that we or our
affiliate violated federal or state securities laws unless:
. a court has held in our or our affiliate's favor on the merits of the
claims of each count involving alleged securities law violations as to
the person seeking indemnification and the court approves indemnification
of the litigation costs,
. a court of competent jurisdiction has dismissed such claims with
prejudice on the merits, and the court approves indemnification of the
litigation costs, or
. a court of competent jurisdiction has approved a settlement of the claims
against the person seeking indemnification and finds that indemnification
of the settlement and related costs should be made.
In each of the situations described above, the court of law considering the
request for indemnification must be advised as to the position of the SEC, the
Florida Department of Banking and Finance and any other applicable regulatory
authority regarding indemnification for violations of securities laws. Any
indemnification may not be enforceable as to certain liabilities arising from
claims under the Securities Act and state securities laws, and, in the opinion
of the SEC, such indemnification is contrary to public policy and is therefore
unenforceable. For purposes of the foregoing, our affiliates will be
indemnified only when operating within the scope of our authority. Any claim
for indemnification under a partnership agreement will be satisfied only out of
the assets of the Income Fund, and no Limited Partner has any personal
liability to satisfy an indemnification claim made against the Income Fund.
Each Income Fund may also advance funds to a third person indemnified under
the partnership agreement for legal expenses incurred as a result of legal
action brought against such person if:
. the legal action relates to the performance of duties or services by such
person on behalf of the Income Fund,
. the legal action is initiated by a party other than a Limited Partner,
and
. such person undertakes to repay the advanced funds to the Income Fund if
it is subsequently determined that such person is not entitled to
indemnification pursuant to the terms of the partnership agreement.
The partnership agreement of each Income Fund provides that the Income Fund
may pay the attorneys fees of a person indemnified under the partnership
agreement as they are incurred. No Income Fund pays for any insurance covering
liability of the general partners or any other indemnified person for acts or
omissions for which indemnification is not permitted by its partnership
agreement, although we may be named as additional insured parties on policies
obtained for the benefit of the Income Fund if there is no additional cost to
such Income Fund. As part of its assumption of liabilities in the Acquisition,
APF will indemnify us and our affiliates for periods prior to and following the
Acquisition to the extent of our and our affiliates' indemnity under the terms
of the partnership agreements and applicable law.
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DESCRIPTION OF CAPITAL STOCK
APF is currently soliciting the approval of its stockholders for a number of
amendments to APF's Articles of Incorporation, including an increase in the
number of APF's authorized shares of capital stock. Upon the receipt of
stockholder approval, APF's Articles of Incorporation will authorize a total of
178,000,000 shares of capital stock, consisting of 137,500,000 shares of common
stock, $.01 par value per share, 3,000,000 shares of preferred stock, and
78,000,000 additional shares of excess stock, $.01 par value per share. As of
September 15, 1999, giving effect to a one-for-two reverse stock split
effective as of June 3, 1999, APF had 43,498,464 shares of common stock
outstanding and no preferred stock or excess stock outstanding. Currently,
there is no established public trading market for the APF Shares. Upon
consummation of the Acquisition, the APF Shares will be listed on the NYSE
under the symbol " ".
Holders of APF Shares are entitled to one vote per share on all matters to
be voted on by stockholders and are entitled to receive ratably such
distributions as may be declared on the APF Shares by the Board of Directors in
its discretion from funds legally available therefor. In the event of the
liquidation, dissolution or winding up of APF, holders of APF Shares are
entitled to share ratably in all assets remaining after payment of all debts
and other liabilities and any liquidation preference of any holders of
preferred stock. Holders of APF Shares have no subscription, redemption,
conversion or preemptive rights. Matters submitted for stockholder approval
generally require a majority vote of the shares present and voting thereon.
All of the APF Shares offered in the Acquisition will be fully paid and
nonassessable when issued.
Preferred Stock
Under APF's Articles of Incorporation, the Board of Directors may from time
to time establish and issue one or more series of preferred stock without
stockholder approval. The Board of Directors may classify or reclassify any
unissued preferred stock by setting or changing the number, designation,
preference, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms or conditions of
redemption of such series. Because the Board of Directors has the power to
establish the preferences and rights of each series of preferred stock, it may
afford the holders of any series of preferred stock preferences, powers and
rights, voting or otherwise, senior to the rights of holders of APF Shares.
The characteristics of the excess stock, which differ from APF Shares and
preferred stock in a number of respects, including voting and economic rights
are described below.
Ownership Limits and Restrictions on Transfer
For APF to continue to qualify as a REIT under Section 856(a) of the
Internal Revenue Code of 1986, as amended, it must adhere to the following
ownership limits:
(a) not more than 50% in value of outstanding equity securities of all
classes may be owned, directly or indirectly, by five or fewer individuals
or entities, as defined in the Code, during the last half of a taxable
year;
(b) the equity securities must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year; and
(c) APF must satisfy complex requirements imposed by the Code with
respect to the nature of its income and assets.
A description of these complex requirements is included in the "Federal
Income Tax Considerations" section starting on page 180 of this consent
solicitation.
To ensure that five or fewer individuals or entities do not own more than
50% in value of the outstanding equity securities, APF's Articles of
Incorporation provide generally that no holder may own, or be deemed to
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own by virtue of the attribution provisions of the Code, more than 9.8% of the
issued and outstanding equity securities, which we refer to as the Ownership
Limit. The Board of Directors, upon receipt of a ruling from the Internal
Revenue Service, an opinion of counsel, or other evidence satisfactory to the
Board of Directors, in its sole discretion, may waive or change, in whole or in
part, the application of the Ownership Limit with respect to any person that is
not an individual, as defined in Section 542(a)(2) of the Code. In connection
with any such waiver or change, the Board of Directors may require such
representations and undertakings from such person or affiliates and may impose
such other conditions, as the Board deems necessary, advisable or prudent, in
its sole discretion, to determine the effect, if any, of the proposed
transaction or ownership of equity securities on APF's status as a REIT for
federal income tax purposes.
In addition, the Board of Directors, from time to time, may increase the
Ownership Limit, except that the Ownership Limit may not be increased and no
additional limitations may be created if, after giving effect thereto, APF
would be "closely held" within the meaning of Section 856(h) of the Code. Prior
to any modification of the Ownership Limit, the Board of Directors will have
the right to require such opinions of counsel, affidavits, undertakings or
agreements as it may deem necessary, advisable or prudent, in its sole
discretion, in order to determine or ensure APF's status as a REIT.
Under the Articles of Incorporation, the Ownership Limit will not be
automatically removed even if the REIT provisions of the Code are changed so
that they no longer contain any ownership concentration limitation or if the
ownership concentration limit is increased. In addition to preserving APF's
status as a REIT for federal income tax purposes, the Ownership Limit may
prevent any person or small group of persons from acquiring control of APF.
The Articles of Incorporation of APF also provide that if an issuance,
transfer or acquisition of equity shares (a) would result in a holder exceeding
the Ownership Limit, (b) would cause APF to be beneficially owned by less than
100 persons, (c) would result in APF being "closely held" within the meaning of
Section 856(h) of the Code or (d) would otherwise result in APF failing to
qualify as a REIT for federal income tax purposes, such issuance, transfer or
acquisition shall be null and void to the intended transferee or holder, and
the intended transferee or holder will acquire no rights to the shares.
Pursuant to the Articles of Incorporation, equity securities owned, transferred
or proposed to be transferred in excess of the Ownership Limit or which would
otherwise jeopardize APF's status as a REIT under the Code will automatically
be converted to excess stock.
A holder of excess stock is generally not entitled to distributions, voting
rights and other benefits with respect to such shares, except the right to
payment of the purchase price for the shares and the right to receive
distributions upon liquidation. Any dividend or distribution paid to a proposed
transferee on excess stock pursuant to APF's Articles of Incorporation will be
required to be repaid to APF upon demand. Excess stock will be subject to
repurchase by APF at its election. The purchase price of any excess stock will
be equal to the lesser of (1) the price in such proposed transaction or (2)
either:
. if the APF shares are then listed on the NYSE, the fair market value of
such shares reflected in the average closing sales prices for the shares
on the 10 trading days immediately preceding the date on which APF or its
designee determines to exercise its repurchase right;
. if the shares are not then so listed, such price for the shares on the
principal exchange, including the Nasdaq National Market, on which such
shares are listed;
. if the shares are not then listed on a national securities exchange, the
latest quoted price for the shares;
. if not quoted, the average of the high bid and low asked prices if the
shares are then traded over-the-counter, as reported by the Nasdaq Stock
Market;
. if such system is no longer in use, the principal automated quotation
system then in use;
. if the shares are not quoted on such system, the average of the closing
bid and asked prices as furnished by a professional market maker making a
market in the shares; or
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. if there is no such market maker or such closing prices otherwise are
unavailable, the fair market value, as determined by the Board of
Directors in good faith, on the last trading day immediately preceding
the day on which notice of such proposed purchase is sent by APF.
The Articles of Incorporation also established restrictions relating to
transfers of any excess stock that may be issued. If such transfer restrictions
are determined to be void or invalid by virtue of any legal decision, statute,
rule or regulation, then APF will have the option to deem the intended
transferee of any excess stock to have acted as an agent on behalf of APF in
acquiring such excess stock and to hold such excess stock on behalf of APF.
Under the Articles of Incorporation, APF has the authority at any time to
waive the requirement that excess stock be issued or be deemed outstanding in
accordance with the provisions of the Amended and Restated Articles of
Incorporation if, in the opinion of nationally recognized tax counsel, the
issuance of such excess stock or that such excess stock are deemed to be
outstanding jeopardizes the status of APF as a REIT for federal income tax
purposes.
All certificates issued by APF representing equity securities will bear a
legend referring to the restrictions described above.
The Articles of Incorporation of APF also provides that all persons who own,
directly or by virtue of the attribution provisions of the Code, more than 5%
of the outstanding equity securities or such lower percentage as may be set by
the Board of Directors, must file an affidavit with APF containing information
specified in the Articles of Incorporation no later than January 31st of each
year. In addition, each stockholder, upon demand, shall be required to disclose
to APF in writing such information with respect to the direct, indirect and
constructive ownership of shares as the directors deem necessary to comply with
the provisions of the Code, as applicable to a REIT, or to comply with the
requirements of an authority or governmental agency.
The ownership limitations described above may have the effect of precluding
acquisitions of control of APF by a third party.
Registrar and Transfer Agent
The Registrar and Transfer Agent for the APF Shares is .
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DESCRIPTION OF THE NOTES
The notes will be issued under the indenture between APF and , as
trustee. A copy of the form of indenture is filed as an exhibit to the
Registration Statement of which this consent solicitation is a part. The terms
of the notes include those provisions contained in the indenture and those made
part of the indenture by reference to the Trust Indenture Act of 1939, as
amended. The notes are subject to all such terms, and, if you are to be a
holder of notes, we refer you to the indenture and the Trust Indenture Act for
a statement thereof. As used in this section, the term APF means APF and all of
its subsidiaries, unless otherwise expressly stated or the context otherwise
requires.
General Terms of the Notes
The following summary of the material provisions of the indenture does not
purport to be complete and is subject to and qualified in its entirety by
reference to the indenture:
. A separate series of notes will be issued to Limited Partners of each
Income Fund who elect to receive notes in exchange for their units in
connection with the Acquisition. The terms of each series of notes will
be substantially identical.
. The notes will be direct, unsecured and unsubordinated obligations of APF
and will rank equally with each other and with all other unsecured and
unsubordinated indebtedness of APF from time to time outstanding. The
notes also will be subordinated to all existing secured and future third
party secured indebtedness and other liabilities of APF. As of June 30,
1999, on a pro forma basis assuming APF had acquired all of the Income
Funds and the CNL Restaurant Businesses, APF would have had aggregate
secured consolidated debt of approximately $268 million, to which the
notes would be subordinated.
. APF will have the sole responsibility of paying interest on the notes and
repaying the principal amount due at their maturity. No other person,
including the stockholders of APF, will have any liability with respect
to the notes.
. The notes will mature on , 2005 which is approximately five years
following the currently expected date that the Acquisition will be
completed.
. The notes are not subject to any sinking fund provisions. This means that
APF is not required to make periodic payments to a custodial account for
the purpose of accumulating the cash necessary to repay the notes at
their maturity date.
. Except as described below, the indenture does not contain any other
provisions that would limit the ability of APF to incur indebtedness or
that would afford holders of the notes protection in the event of a
highly leveraged buyout or similar transaction involving APF or its
management; a change of control of APF; or a reorganization, merger or
similar transaction of APF that may adversely affect the holders of the
notes.
APF may in the future enter into transactions, such as the sale of all or
substantially all of its assets or the merger or consolidation of APF, that
would increase the amount of APF's indebtedness or substantially reduce or
eliminate APF's assets, which may have an adverse effect on APF's ability to
service its indebtedness, including the notes. APF and its management have no
present intention of engaging in a highly leveraged or similar transaction
involving APF.
. The notes will be issued in fully registered form. This means that for
each Limited Partner who elects to receive notes, such Limited Partner
will be issued a note in his, her or its name. In the event that a
Limited Partner wishes to transfer the note, the Limited Partner will be
required to produce the note prior to transfer and endorse the note over
to the transferee in the manner required by the transferee.
. The notes will not be convertible into or exchangeable for any capital
stock of APF.
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Principal Amount of the Notes and the Repayment thereof
The principal amount of the notes with respect to each Income Fund will be
equal to 97% of the APF Share consideration that your Income Fund would have
otherwise received, based on the exchange value, up to a maximum of 15% of the
aggregate APF Share consideration paid to the Income Fund.
The principal of each note payable on the maturity date will be paid against
presentation and surrender of such note at an office or agency of a paying
agent that will be maintained by APF in New York City in United States dollars.
Initially, the indenture trustee will act as paying agent.
Interest Rate
The following discussion sets forth the interest rate payable with respect
to the notes and the dates upon which interest will be paid:
. The notes will bear interest at a fixed rate of interest equal to 7.0%
per annum.
. Limited Partners who hold notes will begin earning interest on the notes
on the date the Acquisition is consummated.
. APF will pay interest on the notes semi-annually in arrears on each June
15 and December 15, commencing June 15, 2000 of which we refer to as each
an interest payment date, and on the maturity date.
. Interest will be paid to the persons in whose names the notes are
registered in the security register for the notes at the close of
business on June 1, for interest to be paid on June 15, and December 1,
for interest to be paid on December 15, regardless of whether such day is
a business day, as defined in the indenture.
. If any interest payment date falls on a day that is not a business day,
payment will be made on the next business day and no additional interest
will be paid.
. Interest payments will be in the amount of interest accrued to, but
excluding, each June 15 and December 15.
.Interest on the notes will be computed on the basis of a 360-day year of
twelve 30-day months.
Redemption
The notes of any series may be redeemed at any time at the option of APF, in
whole or in part, at a redemption price equal to the sum of the principal
amount of the notes being redeemed plus accrued interest thereon to the
redemption date, or the redemption price.
If the paying agent, other than APF or an affiliate thereof, holds, on the
redemption date of any notes, money sufficient to pay such notes, then on and
after that date such notes will cease to be outstanding and interest on them
will cease to accrue.
Notice of any optional or mandatory redemption of any notes will be given to
holders at their addresses, as shown in the security register for the notes,
not more than 60 nor less than 30 days prior to the date fixed for redemption.
The notice of redemption will specify, among other items, the redemption price
and the principal amount of the notes held by such holder to be redeemed.
If less than all the notes of any series are to be redeemed, the indenture
trustee shall select the notes to be redeemed in whole or in part.
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Proceeds from Sale of Restaurant Properties Formerly Owned by the Income Funds
In the event that, following the closing of the Acquisition, APF sells or
otherwise disposes of any restaurant property owned by an Income Fund
immediately prior to the Acquisition and realizes net cash proceeds, in excess
of:
. the amount required to repay mortgage indebtedness outstanding
immediately prior to the Acquisition secured by such restaurant property
or otherwise required to be applied to the reduction of indebtedness of
APF; and
. the costs incurred by APF in connection with such sale or other
disposition,
APF will be required within 90 days of the receipt of the total net cash
proceeds to redeem at the redemption price an aggregate amount of principal of
the particular series of the notes which were issued to the holders who were
Limited Partners of such Income Fund prior to the Acquisition equal to 80% of
such net cash proceeds.
Proceeds from Refinancings of Restaurant Properties Formerly Owned by the
Income Funds
In the event that, following the closing of the Acquisition, APF refinances,
whether at maturity or otherwise, any indebtedness secured by any restaurant
property owned by an Income Fund immediately prior to the Acquisition and
realizes net cash proceeds in excess of:
. the amount of indebtedness secured by such restaurant property at the
time of the Acquisition, calculated prior to any repayment or other
reduction in the amount of such indebtedness in the Acquisition; and
. the costs incurred by APF in connection with such refinancing,
APF will be required within 90 days of the receipt of the total net cash
proceeds to redeem at the redemption price an aggregate amount of principal of
the particular series of the notes which were issued to the holders who were
Limited Partners of such Income Fund prior to the Acquisition equal to 80%
ofsuch net cash proceeds.
Limitation on Incurrence of Indebtedness
Pursuant to the terms of the indenture, APF will not, and will not permit
any of its subsidiaries to, incur any indebtedness, including indebtedness that
is acquired as the result of acquisitions, other than intercompany indebtedness
that is subordinate in right of payment to the notes, if immediately after
giving effect to the incurrence of such indebtedness, the aggregate principal
amount of all outstanding indebtedness of APF and its subsidiaries on a
consolidated basis, determined in accordance with GAAP, is greater than 70% of
APF's total assets, as defined below.
As used in the description of the indenture included here:
"subsidiary" means (1) a corporation, partnership, limited liability
company, trust, REIT or other entity a majority of the voting power of the
voting equity securities of which are owned, directly or indirectly, by APF or
by one or more subsidiaries of APF, (2) a partnership, limited liability
company, trust, REIT or other entity not treated as a corporation for federal
income tax purposes, a majority of the equity interests of which are owned,
directly or indirectly, by APF or a subsidiary of APF or (3) one or more
corporations which, either individually or in the aggregate, would be
"significant subsidiaries," as defined by Regulation S-X under the Securities
Act, and would have investment, asset and equity thresholds of 5%, the majority
of which are owned, directly or indirectly, by APF or by one or more
subsidiaries.
"total assets" means the sum of (1) undepreciated real estate assets and (2)
all other assets, excluding intangibles, of APF and its subsidiaries determined
on a consolidated basis. The accounts of subsidiaries shall be consolidated
with those of APF only to the extent of APF's proportionate interest therein.
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"undepreciated real estate assets" means, as of any date, the cost, being
the original cost to APF or any of its subsidiaries plus capital improvements,
of real estate assets of APF and its subsidiaries on such date, before
depreciation and amortization of such real estate assets, determined on a
consolidated basis. The accounts of subsidiaries shall be consolidated with
those of APF only to the extent of APF's proportionate interest therein.
Merger, Consolidation or Sale
APF will not merge or consolidate with, or sell, lease, transfer or
otherwise dispose of all or substantially all of its property and assets in one
transaction or a series of related transactions to any person, or permit any
person to merge with or into APF, unless:
. either APF shall be the continuing person or the person, if other than
APF, formed by such consolidation or into which APF is merged or that
acquired such property and assets of APF shall be an entity organized and
validly existing under the laws of the United States of America or any
state or jurisdiction thereof and shall expressly assume, by a
supplemental indenture, executed and delivered to the indenture trustee,
all of the obligations of APF, on the notes and under the indenture;
. immediately after giving effect, on a pro forma basis, to such
transaction, no default or event of default, as described below, shall
have occurred and be continuing; and
. APF will have delivered to the indenture trustee an officers' certificate
and an opinion of counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture complies with such
conditions.
A person is defined by the indenture as an individual, corporation, limited
liability company, partnership, joint venture, association, joint stock
company, trust, REIT, unincorporated organization or government or any agency
or political subdivision.
Events of Default, Notice and Waiver
The following events are "events of default" with respect to the notes of
any series:
. default for 30 days in the payment of any installment of interest on any
note of such series;
. default in the payment of the principal of any note when due and payable
at maturity, redemption, by acceleration or otherwise;
. default in the payment of any mandatory redemption of principal on or
before the date 90 days after the receipt of the total net cash proceeds
from the applicable sale or other disposition or refinancing of a
restaurant property giving rise to the obligation to make such
redemption;
. default in the performance of any other covenant or agreement of APF
contained in the indenture, such default having continued for 60 days
after written notice as provided in the indenture; and
. certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator, assignee or trustee of APF or any
significant subsidiary or any of their respective property. The term
"significant subsidiary" means any subsidiary which is a "significant
subsidiary" of APF as defined by Regulation S-X promulgated under the
Securities Act.
If an event of default under the indenture occurs and is continuing, then in
every such case other than a bankruptcy-related event of default as described
above, in which case the principal amount of the notes shall become immediately
due and payable, the indenture trustee or the holders of not less than 25% in
principal amount of the outstanding notes of any series may declare the
principal amount of all of the notes of any series to be due and payable
immediately by written notice thereof to APF and to the indenture trustee if
given by the holders. However, at any time after such a declaration of
acceleration with respect to any series of notes has been made, but before a
judgment or decree for payment of the money due has been obtained by the
indenture trustee, the holders of not less than a majority of the principal
amount of outstanding notes of any series may cancel such declaration and its
consequences if:
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. APF shall have paid or deposited with the indenture trustee all required
payments of the principal of and interest on the notes of any series,
plus fees, expenses, disbursements and advances of the indenture trustee;
and
. all events of default, other than the nonpayment of accelerated principal
of, or specified portion thereof, and interest on the notes have been
cured or waived.
The indenture provides that the holders of not less than a majority of the
principal amount of the outstanding notes of a series may waive any past
default with respect to such series and its consequences, except a default:
. in the payment of the principal of or interest on any note; or
. in respect of a covenant or provision contained in the indenture that
cannot be modified or amended without the consent of the holder of each
outstanding note affected thereby.
The indenture trustee will be required to give notice to the holders of
notes within 90 days of a default under the indenture unless such default has
been cured or waived. The indenture trustee may withhold notice to the holders
of any default, except a default in the payment of the principal of or interest
on any note or in the payment of any mandatory redemption installment in
respect of any note, if it determines in good faith such withholding to be in
the interest of such holders.
The indenture provides that no holders of notes may institute any
proceeding, judicial or otherwise, with respect to the indenture or for the
appointment of a receiver or trustee, or for any other remedy thereunder,
except in the case of failure of the Indenture Trustee, for 60 days, to act
after it has received a written request to institute proceedings in respect of
an event of default from the holders of not less than 25% in principal amount
of the outstanding notes, as well as an offer of indemnity reasonably
satisfactory to it. This provision will not prevent, however, any holder of
notes from instituting suit for the enforcement of payment of the principal of
and interest on such notes at the respective due dates thereof.
Subject to provisions in the indenture relating to its duties in case of
default, the indenture trustee shall be under no obligation to exercise any of
its rights or powers under the indenture at the request, order or direction of
any holders of any outstanding notes under the indenture, unless such holders
offer the indenture trustee reasonable indemnity. The holders of a majority in
principal amount of the outstanding notes shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the indenture trustee, or of exercising any trust or power conferred upon the
indenture trustee.
Within 120 days after the close of each fiscal year, APF must deliver to the
indenture trustee a certificate, signed by one of several specified officers of
APF, stating whether or not such officer has knowledge of any default under the
indenture and, if so, specifying each such default and the nature and status
thereof.
Modification of the Indenture
Modifications and amendments of the indenture will be permitted to be made
by APF and the indenture trustee without the consent of any holder of notes for
any of the following purposes:
. to cure any ambiguity, defect or inconsistency in the indenture;
. to evidence the succession of another person to APF as obligor under the
indenture;
. to permit or facilitate the issuance of the notes in uncertificated form;
. to make any change that does not adversely affect the rights of any
holder of notes;
. to provide for the issuance of and establish the form and terms and
conditions of the notes of any series as permitted by the indenture;
. to add to the covenants of APF or to add events of default for the
benefit of holders or to surrender any right or power conferred upon APF
in the indenture;
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. to evidence and provide for the acceptance of appointment by a successor
indenture trustee or facilitate the administration of the trusts under
the indenture by more than one indenture trustee;
. to provide for guarantors or collateral for the notes of any series; or
. to comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act.
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COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by the Income Funds to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure which will be in effect after the Acquisition had been
in effect during the years presented below.
Under the partnership agreements, we and our affiliates are entitled to
receive fees in connection with managing the affairs of each Income Fund. The
partnership agreements also provide that we are to be reimbursed for our
expenses for services performed for each Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. As part of the Acquisition, all
participating Income Funds will share in the overall cost of managing the
consolidated portfolio of restaurant properties owned by APF. As stockholders
of APF, you and the other former Limited Partners of the Income Funds will
receive distributions in proportion with your ownership of APF Shares. This
cost participation and dividend payment are in lieu of the payments to us
discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by the
Income Funds to us are shown below under "Historical" and the estimated amounts
of compensation that would have been paid had the Acquisition been in effect
for the periods presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Six
Months
Year Ended December 31, Ended
-------------------------------- June 30,
1996 1997 1998 1999
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions...... $ -- $ -- $ -- $ --
Accounting and Administrative
Services.......................... 1,444,245 1,347,490 1,508,413 720,382
Broker/Dealer Commissions.......... -- -- -- --
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. 226,329 226,547 226,177 112,161
Real Estate Disposition Fees (1)... 75,750 15,150 230,013 --
---------- ---------- ---------- --------
Total historical................. $1,746,324 $1,589,187 $1,964,603 $832,543
========== ========== ========== ========
Pro Forma:
Cash Distributions on APF Shares
(2)............................... $ 197,015 $ 207,823 $ 212,761 $106,380
Salary Compensation................ -- -- -- --
---------- ---------- ---------- --------
Total pro forma.................. $ 197,015 $ 207,823 $ 212,761 $106,380
========== ========== ========== ========
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
If you would like more detailed information regarding our compensation and
distributions on a pro forma and historical basis for each Income Fund, please
read the supplement for your Income Fund under the heading "Compensation,
Reimbursements and Distributions to the General Partners."
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax issues associated
with the Acquisition was prepared by Shaw Pittman, counsel to APF, and is based
upon the laws, regulations, and reported judicial and administrative rulings
and decisions in effect as of the date of this consent solicitation, all of
which are subject to change, retroactively or prospectively, and to possibly
differing interpretations. This discussion does not purport to deal with all of
the federal income or other tax consequences applicable to you in light of your
particular investment or other circumstances.
APF has not requested a ruling from the Internal Revenue Service or any
other tax authority on the federal, state or local tax considerations relevant
to the operation of APF, the Acquisition, or the ownership or disposition of
APF Shares or notes. Shaw Pittman has rendered certain opinions discussed
herein and believes that if the IRS were to challenge their conclusions, the
conclusions should prevail in court. Opinions of counsel are not binding on the
IRS or on the courts, however, and we cannot predict whether the conclusions
reached by Shaw Pittman would be sustained in court.
You should consult your own tax advisor in determining the federal, state,
local, foreign and other tax consequences to you of the receipt, ownership, and
disposition of APF Shares or notes, the tax treatment of a REIT, and potential
changes in applicable tax laws.
Material Tax Differences between the Ownership of Units and APF Shares
If your Income Fund is acquired by APF and you have voted in favor of the
Acquisition, you will receive APF Shares. If you have voted against the
Acquisition but your Income Fund is acquired by APF, you may elect to receive
notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Because each Income Fund is a partnership for
federal income tax purposes, it is not subject to taxation. Currently, as a
Limited Partner, you must take into account your distributive share of all
income, loss and separately stated partnership items, regardless of the amount
of any distributions of cash to you. Your Income Fund supplies that information
to you annually on a Schedule K-1. The character of the income that you
recognize depends upon the assets and activities of your Income Fund and may,
in some circumstances, be treated as income which may be offset by any losses
you may have from passive activities.
In contrast to your treatment as a Limited Partner, as a stockholder of APF
you will be taxed based on the amount of distributions you receive from APF.
Each year APF will send you a Form 1099-DIV reporting the amount of taxable and
nontaxable distributions paid to you during the preceding year. The taxable
portion of these distributions depends on the amount of APF's earnings and
profits. Because the Acquisition is a taxable transaction, APF's tax basis in
the acquired restaurant properties will be higher than the Income Funds' tax
basis had been in the same properties. At the same time, however, APF may be
required to utilize a slower method of depreciation with respect to certain
restaurant properties than that used by the Income Funds. As a result, APF's
tax depreciation from the acquired restaurant properties will differ from the
Income Funds' tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a
different portion of the distributions could constitute taxable income to you.
In addition, the character of this income to you as a stockholder of APF does
not depend on its character to APF. The income will generally be ordinary
dividend income to you and will be classified as portfolio income under the
passive loss rules, except with respect to capital gains dividends, discussed
below. Furthermore, if APF incurs a taxable loss, the loss will not be passed
through to you.
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Tax Consequences of the Acquisition
Tax Consequences of Your Income Fund's Transfer of Assets to APF. If your
Income Fund is acquired by APF, your Income Fund will be merged with and into
the Operating Partnership. For federal income tax purposes, the merger of your
Income Fund and the Operating Partnership will be treated as though your Income
Fund transferred all of its assets and liabilities to APF in exchange for APF
Shares and notes, if you or any other Limited Partners in your Income Fund
elect to receive notes. Your Income Fund will then be treated as though it
liquidated and distributed the notes to the Limited Partners electing to
receive notes and the APF Shares to the remaining Limited Partners.
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80% of the
total combined voting power of all classes of stock entitled to vote and at
least 80% of the total number of shares of all other classes of stock of the
corporation. APF has represented to Shaw Pittman that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80% of the total combined voting power of all classes of
APF stock entitled to vote and at least 80% of the total number of shares of
all other classes of APF stock. Based upon this representation, Shaw Pittman
has opined that the Acquisition will not result in the acquisition of control
of APF by the Limited Partners for purposes of section 351(a). Accordingly, the
transfer of assets will result in recognition of gain or loss by each Income
Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or any other Limited Partners
in your Income Fund elect the notes, your Income Fund will receive APF Shares
and notes in exchange for your Income Fund's assets. Because the principal
portion of the notes will not be due until , 2005, the acquisition of your
Income Fund's assets, in part, in exchange for notes will be reported under the
installment sales method and a portion of your Income Fund's gain may be
deferred under the "installment sale" rules. Pursuant to this method, and
assuming that none of the principal amount of the notes is collected in the
year of the Acquisition, the amount of gain recognized by your Income Fund in
the year of the Acquisition will be equal to the value of the APF Shares
received by your Income Fund multiplied by the ratio that the gross profit
realized by your Income Fund in the Acquisition bears to the total contract
price for your Income Fund's assets. To the extent your Income Fund realizes
depreciation recapture income under section 1245 or section 1250 of the Code,
the recapture income will also be recognized by your Income Fund in the year of
the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares and notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231
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gains and losses that you recognize in that year. If the result is a net loss,
such loss is characterized as an ordinary loss. If the result is a net gain, it
is characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report its allocable
share of such gain, if any, pursuant to these terms, regardless of the Limited
Partner's decision to receive notes rather than APF Shares. Even though a
Limited Partner's election of the notes may decrease the amount of gain your
Income Fund recognizes, the electing Limited Partner still will be required to
take into account his, her or its share of the Income Fund's gain as determined
under the partnership agreement. Therefore, Limited Partners who elect the
notes may recognize gain in the year of the Acquisition despite the fact that
they will not receive cash with which to pay the tax on the gain. Such Limited
Partners will adjust the basis of the notes as described below, and the
resulting increase in basis will decrease the amount of the gain recognized
over the term of the notes by the Limited Partners electing to receive notes.
The estimated taxable gain or loss, as of June 30, 1999, based on the
exchange value, for an average $10,000 original Limited Partner investment in
an Income Fund, is set forth in the table below for those Limited Partners
subject to federal income taxation. The information in the table asumes that
none of the Limited Partners in the Income Fund elected to receive notes.
<TABLE>
<CAPTION>
Estimated Gain (Loss)
per Average $10,000
Original Limited
Income Fund Partner Investment
- ----------- ---------------------
<S> <C>
CNL Income Fund, Ltd. .................................... $1,924
CNL Income Fund II, Ltd. ................................. 1,415
CNL Income Fund III, Ltd. ................................ 783
CNL Income Fund IV, Ltd. ................................. 861
CNL Income Fund V, Ltd. .................................. 256
CNL Income Fund VI, Ltd. ................................. 1,616
CNL Income Fund VII, Ltd. ................................ 2,300
CNL Income Fund VIII, Ltd. ............................... 2,796
CNL Income Fund IX, Ltd. ................................. 1,911
CNL Income Fund X, Ltd. .................................. 1,773
CNL Income Fund XI, Ltd. ................................. 1,940
CNL Income Fund XII, Ltd. ................................ 1,710
CNL Income Fund XIII, Ltd. ............................... 710
CNL Income Fund XIV, Ltd.................................. 303
CNL Income Fund XV, Ltd. ................................. (70)
CNL Income Fund XVI, Ltd. ................................ 127
</TABLE>
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed the APF Shares or the notes, as the case may be, to
you. The taxable year of your Income Fund will end at such time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss,
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deduction and credit for your Income Fund through the date of the Acquisition
including your gain or loss resulting from the Acquisition. If your taxable
year is not the calendar year, you could be required to recognize as income in
a single taxable year your share of your Income Fund's income attributable to
more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of the Income Funds,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employees'
beneficiary association, supplemental unemployment benefit trust or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Treatment of Noteholders
Stated Interest. If you receive notes in the Acquisition you must include
stated interest in income in accordance with your method of tax accounting.
Accordingly, if you use the accrual method of tax accounting, you must include
stated interest in income as it accrues, and if you use the cash method of tax
accounting, you must include stated interest in income as it is actually or
constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from passive
activities if you are subject to the passive activity loss rules. Income
attributable to interest payments may be offset by investment expense
deductions, however, subject to the limitation that, if you are an individual
investor, you may only deduct miscellaneous itemized deductions, including
investment expenses, to the extent such deductions exceed two percent of your
adjusted gross income.
Receipt of Principal. Noteholders will recognize gain or loss when APF makes
payments of principal under the notes. The amount of gain or loss recognized at
the time the principal payments are made will be equal to the difference
between the amount of the principal payments and the noteholder's basis in the
notes. If, however, the notes are redeemed in part prior to the maturity date,
the amount of gain or loss recognized at the time the principal payments are
made will be equal to the difference between the amount of the principal
payments made and a proportionate amount of the noteholder's basis in the
notes. To the extent a noteholder's adjusted tax basis in his or her notes is
greater than the face amount of the notes, the excess should be treated as a
capital loss upon the retirement or maturity of the notes.
Disposition of Notes. In general, if you are a holder of notes, you will
recognize gain or loss upon the sale, exchange, redemption or other taxable
disposition of a note measured by the difference between:
. the amount of cash and the fair market value of property received,
except, for cash method taxpayers, to the extent attributable to the
payment of accrued interest, and
. your tax basis in the note.
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Any such gain or loss will generally be long-term capital gain or loss,
provided the note was a capital asset in your hands and was held for more than
one year.
If the face amount of the notes that you hold at the end of the taxable
year, together with any other installment obligations that you receive during
the year, exceeds $5,000,000, you may be required to pay to the IRS interest at
the federal underpayment rate based on a portion of the tax liability that you
have deferred.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date of the Acquisition. The
basis of the restaurant properties received by APF from the Income Funds will
equal the fair market value of the APF Shares, plus the issue price of the
notes issued in the Acquisition, plus the amount of any liabilities of the
Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property will
differ from the Income Fund's basis therein, and the restaurant properties will
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change in the
depreciation deductions attributable to the restaurant properties acquired from
the Income Funds.
Tax Issues Relating to Foreign Limited Partners. The rules governing U.S.
federal income taxation of nonresident alien individuals and foreign entities
are complex, and we will not try here to provide more than a brief summary of
certain rules relating to the Acquisition. If you are a foreign Limited
Partner, you should consult your tax advisors to determine the impact of the
Acquisition under the tax laws applicable to you, including any reporting
requirements.
The Foreign Investment in Real Property Tax Act of 1980 introduced special
rules applicable to foreign investors in United States real property and
partnerships owning United States real property. FIRPTA generally subjects
foreign investors to United States taxation at regular United States rates on
the gain from the sale by such foreign investors of United States real property
interests, which include (1) United States real estate and (2) interests in
partnerships and some other entities, holding United States real estate. FIRPTA
also imposes withholding on such sales.
Under section 702(b) of the Code, the character of an item included in a
partner's distributive share of gain is determined as if the partner, rather
than the partnership, realized the item from the source. Therefore, if a
partnership sells a United States real property interest, FIRPTA should apply
as if the foreign partner had sold the United States real property interest
directly. APF, based on the advice of Shaw Pittman, believes that substantially
all of the assets in the Income Funds consist of United States real property
interests. Accordingly, you should take into account your distributive share of
any gain or loss recognized by your Income Fund on its disposition of the
United States real property interests in the Acquisition. Consequently, you
will be subject to tax upon your distributive share of any such gain.
Section 1446 requires partnerships to withhold at a 39.6% rate with respect
to noncorporate foreign partners and a 35% rate with respect to corporate
foreign partners on "effectively connected taxable income" allocable to foreign
partners. A foreign partner's distributive share of the income from a
disposition of a United States real property interest is subject to withholding
under section 1446 because FIRPTA characterizes such gain as effectively
connected taxable income. Any amounts withheld with respect to the distributive
share of a foreign partner are treated as a credit against the tax liability of
such partner for the taxable year to which the withholding relates. Withheld
amounts are treated as a distribution on the last day of the partnership
taxable year for which the withheld amount was paid, or, if earlier, on the
last day on which the partner owned an interest in the partnership.
To satisfy the above withholding obligation with respect to the Acquisition,
your Income Fund may retain and place the APF Shares or notes to be received by
any foreign Limited Partner in an escrow account pending
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either (1) a sale of a portion of the APF Shares or notes sufficient to satisfy
the withholding requirement or (2) the receipt of an amount of cash from such
foreign Limited Partner sufficient to satisfy the withholding requirement.
Taxation of APF
General. APF has elected to be taxed as a REIT for federal income tax
purposes, as defined in sections 856 through 860 of the Code, commencing with
its taxable year ending December 31, 1995. APF believes that it is organized
and will operate so as to continue to qualify as a REIT. We cannot predict,
however, whether APF will continue to succeed in qualifying as a REIT. The
provisions of the Code pertaining to REITs are highly technical and complex.
Accordingly, we urge you to review with your tax advisor this summary, the
applicable Code sections, rules and regulations issued thereunder, and
administrative and judicial interpretations thereof.
If APF qualifies to be treated as a REIT for federal income tax purposes, it
generally will not be subject to federal corporate income tax on net income
that is currently distributed to APF stockholders. This treatment substantially
eliminates the "double taxation" that is imposed at the corporate level when
earned and once again at the stockholder level when distributed and that
generally results from investments in a corporation.
Certain Corporate Level Taxation. Regardless of whether APF qualifies as a
REIT, APF will be subject to federal income tax in the following circumstances:
. APF will be taxed at regular corporate rates on any undistributed real
estate investment trust taxable income, including undistributed net
capital gains.
. Under certain circumstances, APF may be subject to the alternative
minimum tax on its items of tax preference.
. If APF has net income from foreclosure property, which is property
acquired as a result of default on a lease of or on a loan secured by the
property, APF will be subject to tax on this income at the highest
corporate rate.
. If APF has net income derived from a prohibited transaction, which is a
sale or other disposition of property other than foreclosure property
that is held primarily for sale to customers in the ordinary course of
business, this income will be subject to a 100% tax.
. If APF should fail to satisfy the 75% gross income test or the 95% gross
income test, but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a
100% tax on the net income attributable to the greater of the amount by
which it fails the 75% or 95% test.
. If, during any calendar year, APF fails to distribute at least the sum of
(1) 85% of its real estate investment trust ordinary income for such
year,
(2) 95% of its real estate investment trust capital gain net income for
such year, and
(3) any undistributed taxable income from prior periods
APF will be subject to a four percent excise tax on the excess of the
required distribution over the amounts actually distributed.
. If APF acquires an asset from a C-corporation in a transaction, and
recognizes gain on the disposition of the asset during the 10-year period
beginning on the date on which APF acquired the asset, then, assuming APF
makes an election pursuant to IRS Notice 88-19, to the extent of the
excess of the fair market value of the property at the time of
acquisition by APF over the adjusted basis in the property at such time,
this gain will be subject to tax at the highest regular corporate rate.
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If APF fails to qualify as a REIT for any taxable year and relief provisions
included in the Code do not apply, APF will be subject to federal income tax on
its taxable income at regular corporate rates. To the extent that APF would be
subject to tax liability for any taxable year, the amount of cash available for
satisfaction of its liabilities and for distribution to its stockholders would
be reduced. In addition, if APF fails to qualify as a REIT, distributions made
to you, as a stockholder of APF, generally would be taxable as ordinary income
to the extent of current and accumulated earnings and profits. If you are a
corporation, you possibly would be eligible for the corporate dividends
received deduction. However, we cannot guarantee that any such distributions
would be made. APF would not be eligible to elect REIT status for the four
taxable years after the taxable year it failed to qualify as a REIT, unless its
failure to qualify was due to reasonable cause and not willful neglect and
certain other requirements were satisfied.
Requirements for Qualification. As discussed more fully below, the Code
defines a REIT as a corporation, trust or association that:
. is managed by one or more trustees or directors;
. uses transferable shares or transferable certificates to evidence
beneficial ownership;
. would be taxable as a domestic corporation, but for the REIT provisions
of the Code;
. is neither a financial institution nor an insurance company;
. has at least 100 persons as beneficial owners;
. is not closely held as defined in section 856(h) of the Code; and
. satisfies other tests that are described below regarding the nature of
its assets and income and the amount of its distributions.
In the case of a REIT that is a partner in a partnership, the Treasury
Regulations deem that the REIT owns its proportionate share of the assets of
the partnership and is entitled to the income of the partnership attributable
to its proportionate share. In addition, the assets and gross income of the
partnership attributed to the REIT retain the same character as in the hands of
the partnership for purposes of satisfying the gross income tests and the asset
tests described below. Thus, APF's proportionate share of the assets,
liabilities and items of income of the Operating Partnership will be treated as
assets, liabilities and items of income of APF for purposes of applying the
asset and gross income tests described below.
Income Tests. In order for APF to qualify as a REIT, there are currently two
requirements relating to APF's gross income that must be satisfied annually.
First, at least 75% of APF's gross income for each taxable year must consist of
temporary investment income or of certain defined categories of income derived
directly or indirectly from investments relating to real property or the
mortgages on real property. Subject to various limitations, these categories
include:
. rents from real property,
. interest on mortgages on real property,
. gain from the sale or other disposition of real property, interests in
real property and in mortgages on real property which are not primarily
held for sale to customers in the ordinary course of business,
. income from foreclosure property, and
. amounts received as consideration for entering into either loans secured
by real property or purchases or leases of real property.
Second, at least 95% of APF's gross income for each taxable year must be
derived either from income qualifying under the 75% test or from dividends,
other types of interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Gross income from
prohibited transactions is excluded for purposes of determining gross income
for the 75% and 95% tests.
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For each taxable year before 1998, APF was required to satisfy an additional
gross income test. This test required that gain from the sale or other
disposition of stock or securities held for less than one year, gain from
prohibited transactions and gain on the sale or other disposition of real
property held for less than four years, excluding involuntary conversions and
sales of foreclosure property, represent less than 30% of APF's gross income
for such taxable year. Gross income from prohibited transactions was included
for purposes of determining gross income for the 30% test.
APF believes that it satisfied all three of these income tests for 1995,
1996 and 1997. APF also believes that it satisfied the two current tests for
1998 and expects to satisfy both tests for 1999 and subsequent taxable years.
Much of APF's income will be derived from rent from the restaurant
properties. All of the rent from the restaurant properties will qualify as
"rents from real property" in satisfying the two gross income tests only if the
following conditions are met:
. First, the rent must not be based on the income or profits of any person.
However, an amount generally will be treated as "rents from real
property" if it is based on a fixed percentage or percentages of receipts
or sales.
. Second, APF, or a direct or indirect owner of 10% or more of APF, may not
own, directly or constructively, 10% or more of a tenant.
. Third, if rent attributable to personal property leased in connection
with a lease of real property may not exceed 15% of the total rent
received under the lease.
. Finally, APF generally must not operate or manage the property or furnish
or render services to the tenants of such property.
APF has represented to Shaw Pittman that it will not violate any of the four
conditions specified above. Specifically, APF expects that a substantial
majority of its income will be derived from triple-net leases and it does not
expect such leases to generate income that would not qualify as rents from real
property for purposes of the 75% and 95% income tests.
In addition, APF will be paid interest on mortgage loans. All interest
income qualifies under the 95% gross income test. All the interest on each
mortgage loan will also qualify under the 75% gross income test if the loan is
secured by real property and if the amount of the loan did not exceed the fair
market value of the real property at the time of the loan commitment. APF
anticipates that its mortgage loans will continue to generate qualified income
under the 75% and 95% income tests.
APF will also receive payments under the terms of secured equipment leases.
Although the secured equipment leases are structured as leases, Shaw Pittman is
of the opinion that, subject to certain assumptions, the secured equipment
leases will be treated as loans secured by personal property. If the secured
equipment leases are treated as loans secured by personal property for federal
income tax purposes, then the portion of the payments under the terms of the
secured equipment leases that represents interest will not satisfy the 75%
gross income test. APF believes, however, that the aggregate amount of such
nonqualifying income from the secured equipment leases will not cause APF to
exceed the limits on nonqualifying income under the 75% gross income test.
If, contrary to Shaw Pittman's opinion, the IRS treats the secured equipment
leases as true leases rather than as loans secured by personal property, the
payments under the terms of the secured equipment leases will be treated as
rents from personal property. Rents from personal property will satisfy both
the 75% and 95% gross income tests only if they are received in connection with
a lease of real property and the rent attributable to the personal property
does not exceed 15% of the total rent received from the tenant in connection
with the lease. If rents attributable to personal property exceed 15% of the
total rent received from a particular tenant, however, then the portion of the
total rent attributable to personal property will not satisfy either the 75% or
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95% gross income tests. APF believes, however, that if the income under the
secured equipment leases was treated as rents from personal property, the
aggregate of any amounts that exceed 15% of the total rent received from a
particular tenant will not cause APF to exceed the limits on nonqualifying
income under either the 75% or the 95% gross income test.
Prior to the Acquisition, APF increased its restaurant management,
development and financing capabilities by acquiring the CNL Restaurant
Businesses. As a result, APF may assist third parties with making acquisitions
and performing due diligence. APF may also provide to third parties such
services as asset management, accounting services, construction and development
services, and acquisition and financing advisory services. The income derived
by APF from providing these services to third parties is not qualifying income
under the 75% and 95% gross income tests. APF does not anticipate, however,
that the income derived from such services, together with any other
nonqualifying income for purposes of the 95% gross income test, will equal or
exceed five percent of APF's annual gross income, and does not anticipate that
the income derived from such services, together with any other nonqualifying
income for purposes of the 75% gross income test, will equal or exceed 25% of
APF's annual gross income.
If APF fails to satisfy one or both of the 75% or 95% tests for any taxable
year, it may still qualify as a REIT if:
. APF's failure is due to reasonable cause and not willful neglect;
. APF reports the nature and amount of each item of its income on a
schedule attached to its tax return for such year; and
. the reporting of any incorrect information is not due to fraud with
intent to evade tax.
Even if these three requirements are met and APF is not disqualified as a
REIT, however, a penalty tax would be imposed on the amount by which APF failed
the 75% or 95% income test.
Asset Tests. At the end of each quarter of APF's taxable year, at least 75%
of the value of its total assets must consist of "real estate assets," cash and
cash items including receivables, and government securities. The balance of
APF's assets generally may be invested without restriction, except that
securities holdings not within the 75% class of assets generally must not, with
respect to any one issuer, exceed 5 percent of the value of APF's assets or 10%
of the issuer's outstanding voting securities. The term "real estate assets"
includes:
. real property,
. interests in real property,
. leaseholds of land or improvements thereon, and mortgages on any such
property or leasehold, and
. any property attributable to the temporary investment of new capital in
stock or a debt instrument for the one-year period beginning on the date
that APF receives the capital.
When a mortgage is secured by both real property and other property, it is
considered to constitute a mortgage on real property to the extent of the fair
market value of the real property at the time when APF is committed to make the
loan. In the case of a construction loan secured by both real property and
other property, the loan is treated as a mortgage on real property to the
extent of the reasonably estimated cost of construction. The bulk of the APF's
assets will be real property, but APF will also hold the secured equipment
leases. Shaw Pittman is of the opinion that the secured equipment leases will
be treated as loans secured by personal property for federal income tax
purposes. Therefore, the secured equipment leases will not qualify as "real
estate assets." However, APF has represented that, at the end of each quarter,
the value of the secured equipment leases, together with any personal property
owned by APF, has been and will be less than 25% of APF's total assets and that
the value of the secured equipment leases entered into with any particular
tenant or borrower has been and will be less than five percent of APF's total
assets. APF does not have any independent
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appraisals to support this representation, and Shaw Pittman, in rendering its
opinion as to the qualification of APF as a REIT, is relying on the
conclusions of APF and its senior management as to the relative values of
APF's assets. The IRS may contend, however, that either:
. the value of the secured equipment leases entered into with any
particular tenant or borrower represents more than five percent of APF's
total assets, or
. the value of the secured equipment leases, together with any personal
property owned by APF, exceeds 25% of APF's total assets.
Ownership Tests. The Code provides the following ownership requirements for
qualification as a REIT:
. during the last half of each taxable year, not more than 50% in value of
the REIT's outstanding shares may be owned, directly or indirectly, by
five or fewer individuals or certain entities; and
. there must be at least 100 stockholders on at least 335 days of a 12-
month taxable year.
These two requirements do not apply to the first taxable year for which
REIT election is made. In keeping with these requirements, APF's Articles of
Incorporation generally prohibit any person or entity from actually,
constructively or beneficially acquiring or owning more than 9.8% of the
issued and outstanding equity securities. APF's Articles of Incorporation also
empower APF's Board of Directors to redeem, at its option, a sufficient number
of APF Shares to comply with these ownership tests or to assure continued
conformity with them.
Under APF's Articles of Incorporation, the Board of Directors may require
each holder of APF Shares to disclose to APF's Board of Directors information
regarding actual, constructive or beneficial ownership of APF Shares. Treasury
Regulations govern the method by which APF is required to demonstrate
compliance with these stock ownership requirements and the failure to satisfy
such regulations could cause APF to fail to qualify as a REIT. We believe that
APF will meet these stock ownership requirements for each taxable year and
will be able to demonstrate its compliance with these requirements.
Distribution Requirements. APF must distribute to its stockholders for each
taxable year ordinary income dividends in an amount equal to at least the
difference between:
. 95 percent of the sum of (1) its "real estate investment trust taxable
income" and (2) the excess of net income from foreclosure property over
the tax on such income, and
. certain excess noncash income.
"Real estate investment trust taxable income" generally is the taxable income
of a REIT computed as if it were an ordinary corporation, with certain
adjustments. Distributions must be made in the taxable year to which they
relate, or, if declared before the timely filing of APF's tax return for such
year and paid not later than the first regular dividend payment after such
declaration, in the following taxable year.
APF intends to make distributions to stockholders that will meet the 95%
distribution requirement. Under some circumstances, however, APF may not have
sufficient funds from its operations to make cash distributions to satisfy the
95% distribution requirement. For example, in the event of the default or
financial failure of one or more tenants or lessees, APF might be required
under federal income tax principles to continue to accrue rent for some period
of time even though APF would not currently be receiving the corresponding
amounts of cash. Similarly, APF might not be entitled, under federal income
tax principles, to deduct certain expenses at the time those expenses are
incurred. In either case, APF's cash available for making distributions might
not be sufficient to satisfy the 95% distribution requirement. If the cash
available to APF is insufficient to make the necessary distributions, APF
might raise cash by borrowing funds, issuing new securities or selling assets.
If APF ultimately were unable to satisfy the 95% distribution requirement, it
would fail to qualify as a REIT and, as a result, would be subject to federal
income tax as an ordinary corporation.
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If APF fails to satisfy the 95% distribution requirement as a result of an
adjustment to its tax returns by the IRS it may be able to rectify its failure
by paying a "deficiency dividend" plus a penalty and interest within 90 days
after such adjustment. This deficiency dividend would be included in APF's
deductions for dividends paid for the taxable year affected by such adjustment.
The deduction for a deficiency dividend will be denied, however, if any part of
the adjustment resulting in the deficiency is attributable to fraud with intent
to evade tax or to willful failure to file an income tax return on time.
Opinion of Shaw Pittman. Based upon representations made by officers of APF
with respect to relevant factual matters, upon the existing Code provisions,
Treasury Regulations, and reported administrative and judicial interpretations
of the Code and Treasury Regulations, upon Shaw Pittman's independent review of
relevant documents, and upon the assumption that APF will operate in the manner
described in this consent solicitation, Shaw Pittman has opined the following:
. APF qualified as a REIT under the Code for its taxable years ending
through December 31, 1998;
. APF is organized in conformity with the requirements for qualification as
a REIT; and
. APF's proposed method of operation will enable it to meet the
requirements for qualification as a REIT.
You should bear in mind, however, that APF's ability to qualify and remain
qualified as a REIT depends upon actual operating results and future actions by
and events involving APF and others, including changes in tax laws. Shaw
Pittman's opinion does not ensure that the actual results of APF's operations
and future actions and events will enable APF to satisfy in any given year the
requirements for qualification and taxation as a REIT.
Upon receipt of a written request from you or from your representative
designated in writing, we will provide you with a free copy of Shaw Pittman's
opinion.
Proposed REIT Legislation. On August 5, 1999, the Senate and House of
Representatives approved the Taxpayer Refund and Relief Act of 1999, which was
vetoed by President Clinton on September 23, 1999. If enacted, the proposed
legislation would have implemented a number of changes to the Internal Revenue
Code's treatment of REITs.
One of the provisions of this legislation would have prohibited APF from
holding securities possessing greater than 10% of the voting power or the value
of any issuer. Because the term "securities" includes loans that are not
secured by real property, under such a regulatory scheme, APF would not be
permitted to make loans with principal amounts exceeding 10% of the value of a
borrower, unless the loans were secured by real property. This restriction
would have impacted APF's ability to enter into securitization transactions
involving non-mortgage loans. It would also have required APF to dispose of any
non-mortgage loans in the principal amounts of which exceeded 10% of the value
of their issuers, including, for this purpose, any equipment leases treated as
loans for federal income tax purposes.
It is not clear whether legislation similar to this legislation will be
enacted and, if it is, which provisions will be included and what their
effective dates will be. Additional proposals may be made by the Clinton
Administration or by members of Congress. It is impossible to predict the
nature of those proposals, whether they would be enacted, and their effect on
APF. There can be no assurance, however, that changes in legislation would not
have a material adverse effect on APF.
Characterization of Leases. APF has purchased and intends to purchase
restaurant properties with both new and existing buildings and lease them to
franchisees or corporate franchisors. APF's ability to claim certain tax
benefits associated with ownership of the restaurant properties, such as
depreciation, depends on a determination that the lease transactions engaged in
by APF are true leases, under which APF is the owner of the leased restaurant
property for federal income tax purposes, rather than a conditional sale of the
restaurant property or a financing transaction. If it is determined that APF is
not the owner of the restaurant properties for federal income tax purposes,
then APF could suffer adverse consequences, such as the denial of APF's
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depreciation deductions. A denial of APF's depreciation deductions could result
in a determination that APF's distributions to stockholders were insufficient
to satisfy the 95% distribution requirement for qualification as a REIT. As
discussed above, however, if APF has sufficient cash, it may be able to remedy
any past failure to satisfy the distribution requirements by paying a
"deficiency dividend" plus a penalty and interest. Furthermore, in the event
that APF was not the owner of a particular restaurant property, in the opinion
of Shaw Pittman the income that APF would receive pursuant to the
recharacterized lease would constitute interest qualifying under the 95% and
75% gross income tests by reason of being interest on an obligation secured by
a mortgage on an interest in real property, because the legal ownership
structure of such restaurant property would have the effect of making the
building serve as collateral for a debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous instances. The courts have not
identified any one determinative factor of whether the lessor or the lessee of
property is to be treated as the owner. Judicial decisions and IRS
pronouncements with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have clearly stated that
the characterization of leases for tax purposes is a question that must be
decided on the basis of a weighing of many factors, and courts have reached
different conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases, such as the fact that such
leases are "triple-net" leases, suggest that APF might not be the owner of the
restaurant properties, many other characteristics indicate the bona fide nature
of such leases and that APF is the owner of the restaurant properties. For
example, under the leases, APF bears the risk of substantial loss in the value
of the restaurant properties because it uses an equity investment, rather than
nonrecourse indebtedness to acquire its interest in the restaurant properties.
Further, APF, rather than the tenant, benefits from any appreciation in the
restaurant properties, since APF has the right at any time to sell or transfer
the restaurant properties, subject to the tenant's right to purchase the
property at a price not less than the restaurant property's fair market value.
Other factors that are consistent with the ownership of the restaurant
properties by APF are:
. the tenants are liable for repairs and are required to return the
restaurant properties in reasonably good condition;
. insurance proceeds generally are to be used to restore the restaurant
properties and, to the extent not so used, belong to APF;
. the tenants agree to subordinate their interests in the restaurant
properties to the lien of any first mortgage upon delivery of a
nondisturbance agreement and agree to pay rent to the purchaser upon any
foreclosure sale; and
. based on APF's representation that the restaurant properties can
reasonably be expected to have at the end of their lease terms a fair
market value of at least 20% of APF's cost and a remaining useful life of
at least 20% of their useful lives at the beginning of the leases, APF
has retained a significant residual interest in the restaurant
properties. Moreover, APF will not be primarily dependent upon tax
benefits in order to realize a reasonable return on its investments.
For the restaurant properties for which APF owns the buildings and the
underlying land, assuming (1) APF leases the restaurant properties on
substantially the same terms and conditions described above, (2) as is
represented by APF, the residual value of the restaurant properties remaining
after the end of their lease terms and all renewal periods may reasonably be
expected to be at least 20% of APF's cost of such restaurant properties, and
(3) as is represented by APF, the remaining useful lives of the restaurant
properties after the end of their lease terms and all renewal periods, may
reasonably be expected to be at least 20% of the restaurant properties' useful
lives at the beginning of their lease terms, it is Shaw Pittman's opinion that
APF will be treated as the owner of the restaurant properties for federal
income tax purposes and will be entitled to claim depreciation and other tax
benefits associated with such ownership. In the case of the restaurant
properties for which APF does not own the underlying land, Shaw Pittman cannot
opine that the transactions will be characterized as leases, but will opine
that the transactions will be characterized as financing transactions and the
income from the transactions will constitute interest on mortgages secured by
real property.
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Securitizations. From time to time, APF intends to enter into one or more
securitization transactions. In a securitization, APF will consolidate some of
the outstanding real estate loans it holds into a single portfolio, and then
sell interests in the portfolio to outside investors. Depending on how they are
structured, securitizations can be classified for federal income tax purposes
either as a sale of assets or as a borrowing against assets. APF intends to
structure its securitizations so as to avoid characterization of the
transactions as sales of the underlying mortgages and, in appropriate cases,
will seek the advice or opinion of tax counsel. If APF enters into a
securitization that is nevertheless treated as a sale for federal income tax
purposes, the securitization will be treated as a prohibited transaction, which
is a sale of property held primarily for sale to customers in the ordinary
course of business. Income from a prohibited transaction is subject to a
special tax equal to 100% of the income derived from the prohibited
transaction. In no event, however, would this treatment jeopardize APF's status
as a REIT.
Taxation of Stockholders
Taxable Domestic Stockholders. For any taxable year in which APF qualifies
as a REIT for federal income tax purposes, if you, as a stockholder, are a
United States person, which is generally any person other than a nonresident
alien individual, a foreign trust or estate or a foreign partnership or
corporation, you generally will be taxed in the following manner:
. Distributions made by APF to you generally will be taxed as ordinary
income.
. Amounts that you receive that are properly designated as capital gain
dividends by APF generally will be taxed as long-term capital gain, to
the extent that they do not exceed APF's actual net capital gain for the
taxable year.
. If you are a corporate stockholder, you may be required to treat up to
20% of certain capital gain dividends as ordinary income. Such ordinary
income and capital gain are not eligible for the dividends received
deduction allowed to corporations.
. APF may elect to retain and pay income tax on its net long-term capital
gain. If APF so elects, you will take into income your share of the
retained capital gain as long-term capital gain and will receive a credit
or refund for your share of the tax paid by APF, and you will increase
the basis of your APF Shares by an amount equal to the excess of the
retained capital gain included in your income over the tax deemed paid by
you.
. Distributions in excess of APF's current or accumulated earnings and
profits will not be taxable to you to the extent that they do not exceed
the adjusted basis of your APF Shares, but rather will reduce the
adjusted basis of your APF Shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the
adjusted basis of your APF Shares, such distributions will be included in
your income as long-term or short-term capital gain depending on how long
you have held the APF Shares, assuming the shares are a capital asset in
your hands.
. Any distribution that is (1) declared by APF in October, November or
December of any calendar year and payable to stockholders of record on a
specified date in such months and (2) actually paid by APF in January of
the following year, shall be deemed to have been received by each
stockholder on December 31st of the calendar year in which the dividend
is declared and, as a result, will be includable in your gross income for
that taxable year.
. You may not deduct on your income tax returns any net operating or net
capital losses of APF.
. Upon the sale or other disposition of your APF Shares, you generally will
recognize capital gain or loss equal to the difference between the amount
realized on the sale or other disposition and the adjusted basis of your
APF Shares involved in the transaction. The gain or loss will be long-
term capital gain or loss if, at the time of sale or other disposition,
the APF Shares involved have been held for more than one year.
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. If you receive a capital gain dividend with respect to APF Shares that
you have held for six months or less at the time of sale or other
disposition, any loss recognized by you will be treated as long-term
capital loss to the extent of the amount of the capital gain dividend
that was treated as long-term capital gain.
. Generally, the redemption of APF Shares by APF will result in recognition
of ordinary income by you unless you "completely terminate" or
substantially reduce your interest in APF, as described in the Code.
APF will notify you of which portions of each distribution, in its judgment,
constitute ordinary income, capital gain or return of capital for federal
income tax purposes. In addition, APF will report to you and to the IRS the
amount of dividends paid or treated as paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, you may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless you:
. are a corporation or fit within certain other exempt categories and, when
required, demonstrate this fact, or
. provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding, and otherwise comply with applicable
requirements of the backup withholding rules.
If you do not provide APF with a correct taxpayer identification number, you
may also be subject to penalties imposed by the IRS. You may credit any amount
paid to the IRS as backup withholding against your income tax liability. In
addition, APF may be required to withhold a portion of capital gain dividends
to you if you fail to certify your non-foreign status to APF.
The state and local income tax treatment of you and APF may not conform to
the federal income tax treatment described above. As a result, you should
consult your tax advisors for an explanation of how state and local tax laws
would affect your ownership of APF Shares.
The tax treatment discussed above is a summary of the general rules and may
not deal with all of the tax consequences applicable to you in light of your
particular investment or other circumstances. Therefore, you should consult
your own tax advisors for an explanation of the tax consequences to you of the
receipt, ownership, and disposition of APF Shares.
Tax-Exempt Stockholders. If you are an APF stockholder and a tax-exempt
entity, you generally will be taxed in the following manner:
. Dividends paid by APF to you generally will not constitute "unrelated
business taxable income" as defined in section 512(a) of the Code,
provided that you have not financed the acquisition of APF Shares with
"acquisition indebtedness" within the meaning of section 524(c) of the
Code and your APF Shares are not otherwise used in an unrelated trade or
business.
. If you are a qualified trust that holds more than 10% by value of the
shares of APF, and if (i) treating qualified trusts holding APF Shares as
individuals would result in a determination that APF is "closely held"
within the meaning of section 856(h)(1) of the Code, and (ii) APF is
"predominantly held" by qualified trusts, you may be required to treat a
certain percentage of APF's distributions as unrelated business taxable
income. The restrictions on ownership of APF Shares in APF's Articles of
Incorporation will prevent application of the provisions treating a
portion of REIT distributions as unrelated business taxable income to
tax-exempt entities purchasing APF Shares, absent a waiver of the
restrictions by APF's Board of Directors.
The tax treatment of distributions by qualified retirement plans, IRAs,
Keogh plans and other tax-exempt entities is beyond the scope of this
discussion. If you are one of these entities, you should consult your own tax
advisors regarding such questions.
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Foreign Stockholders. The rules governing U.S. federal income taxation of
non-U.S. stockholders are complex, and we will not try here to provide more
than a summary of such rules. If you are a nonresident alien individual,
foreign corporation, foreign participant or other prospective foreign
stockholder, you should consult with your tax advisors to determine the impact
of federal, state and local laws with regard to an investment in APF Shares
including any reporting requirements.
Assuming that the income from investment in APF Shares will not be
effectively connected with your conduct of a United States trade or business,
if you are a non-U.S. stockholder you generally will be taxed in the following
manner:
. Distributions that are not attributable to gain from sales or exchanges
by APF of United States real property interests and not designated by APF
as capital gain dividends will be treated as dividends of ordinary income
to the extent that they are made out of current and accumulated earnings
and profits of APF. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend, unless
an applicable tax treaty reduces or eliminates that tax.
. Distributions in excess of APF's current and accumulated earnings and
profits will not be taxable to you to the extent that such distributions
do not exceed the adjusted basis of your APF Shares, but rather will
reduce the adjusted basis of your APF Shares.
. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of your APF Shares, the
distributions will give rise to tax liability if you would otherwise be
subject to tax on any gain from the sale or disposition of your APF
Shares.
. If it cannot be determined at the time APF pays a distribution whether or
not the distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at
the rate of 30%. You may seek a refund of the withheld amount from the
IRS, however, if it is subsequently determined that the distribution was,
in fact, in excess of APF's current and accumulated earnings and profits.
. APF is permitted, but not required, to make reasonable estimates of the
extent to which distributions exceed current or accumulated earnings and
profits. To the extent that the distributions are determined by APF to
exceed current or accumulated earnings and profits, they will generally
be subject to a 10 percent withholding tax, which may be refunded to the
extent it exceeds your actual U.S. tax liability, provided the required
information is furnished to the IRS.
. Distributions that are attributable to gain from sales or exchanges by
APF of United States real property interests will be taxed to you under
the provisions of the FIRPTA. Under FIRPTA, distributions attributable to
gain from sales of United States real property interests are taxed to you
as if such gain were effectively connected with a United States business.
You would thus be taxed at the normal capital gain rates applicable to
U.S. stockholders, and subject to applicable alternative minimum tax and
a special alternative minimum tax in the case of nonresident alien
individuals. Also, distributions subject to FIRPTA may be subject to a
30% branch profits tax in the hands of a foreign corporate stockholder
not entitled to treaty exemption or rate reduction. APF is required by
applicable Treasury Regulations to withhold 35% of any distribution that
could be designated by APF as a capital gain dividend. You may credit
this amount against your FIRPTA tax liability.
. Gain that you recognize upon a sale of APF Shares generally will not be
taxed under FIRPTA if APF is a "domestically controlled REIT." APF
currently believes that it is, and expects to continue to be, a
"domestically controlled REIT."
Gain not subject to FIRPTA nonetheless will be taxable to you if (1)
investment in the APF Shares is treated as "effectively connected" with your
U.S. trade or business, or (2) you are a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
certain other conditions are met. If you are a foreign corporate stockholder,
"effectively connected" gain realized by you
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may be subject to an additional 30% branch profits tax, subject to possible
exemption or rate reduction under an applicable tax treaty. If the gain on the
sale of your APF Shares were to be subject to taxation under FIRPTA, you would
be subject to the same treatment as U.S. stockholders with respect to such gain
and subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals, and the purchaser of
your APF Shares would be required to withhold and remit to the IRS 10% of the
purchase price.
195
<PAGE>
EXPERTS
The consolidated balance sheets of CNL American Properties Fund, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the consolidated statements
of earnings, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998, included in this consent solicitation
and the balance sheets of CNL Income Fund, Ltd. and CNL Income Fund II, Ltd.
through CNL Income Fund XVI, Ltd. as of December 31, 1998 and 1997 and the
related statements of income, partners' capital, and cash flows for each of the
three years in the period ended December 31, 1998 included in this consent
solicitation have been included herein and therein in reliance on the reports
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing. The consolidated financial
statements of CNL Financial Corporation and the financial statements of CNL
Financial Services, Inc. included in this consent solicitation have been
audited by Arthur Andersen LLP, independent certified public accountants, as
indicated in their reports with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said reports. The
audited financial statements of CNL Fund Advisors, Inc. and subsidiary included
in this consent solicitation have been audited by McDirmit, Davis, Lauteria,
Puckett, Vogel & Company, P.A., independent certified public accountants, as
indicated in their report with respect thereto, and are included therein in
reliance upon the authority of said firm as experts in giving said reports.
The appraisals included as exhibits to this Registration Statement on Form
S-4 have been prepared by Valuation Associates Real Estate Group, Inc. and are
included therein in reliance upon the authority of said firm as experts in
giving such reports.
LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed upon
for APF by Shaw Pittman, Washington, D.C., a law partnership including
professional corporations. Certain members of Shaw Pittman invested in the
Income Funds in an aggregate amount of $174,000, and, assuming all of the
Income Funds are acquired by APF, such members will receive an aggregate of
8,083 APF Shares.
Certain legal matters will be passed upon for the Income Funds by Baker &
Hostetler LLP.
WHERE YOU CAN FIND MORE INFORMATION
APF and each Income Fund are subject to the reporting requirements of the
Exchange Act, and are required to file reports and other information with the
SEC, 450 Fifth Street N.W., Washington, D.C. 20549. In addition, APF has filed
a Registration Statement on Form S-4 under the Securities Act with respect to
the securities offered pursuant to this consent solicitation. This consent
solicitation, which is part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits and
financial schedules thereto. For further information concerning the
Acquisition, you should refer to APF's Registration Statement and such exhibits
and schedules, which is available at the SEC's web site at http://www.sec.gov.
Also, you may examine copies of such documents without charge at, or obtain
upon payment of prescribed fees from, the Public Reference Section of the SEC
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
regional offices of the SEC located at Room 1400, 75 Park Place, New York, New
York 10007 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. The SEC's web site also contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
A separate supplement to this consent solicitation has been prepared for
your Income Fund and will be delivered to you and the other Limited Partners of
your Income Fund. Upon receipt of a written request by you or your
representative so designated in writing, we will send a copy of any supplement
without charge. All requests should be directed to D.F. King & Co., 77 Water
Street, New York, New York 10005, (800) 290-6428.
196
<PAGE>
Statements contained in this consent solicitation or any supplements hereto
as to the contents of any contract or other document which is filed as an
exhibit to the Registration Statement are not necessarily complete, and each
such statement is qualified in its entirety by reference to the full text of
such contract or document.
In addition to applicable legal or NYSE requirements, if any, APF will send
to holders of APF Shares annual reports containing audited financial statements
with a report thereon by APF's independent public accountants and quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
197
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets--As of June 30, 1999 and December
31, 1998................................................................. F-2
Condensed Consolidated Statements of Earnings--For the Quarters and for
the Six Months ended June 30, 1999 and 1998 ............................. F-3
Condensed Consolidated Statements of Stockholders Equity--For the Six
Months ended June 30, 1999 and the Year Ended December 31, 1998.......... F-4
Condensed Consolidated Statements of Cash Flows--For the Six Months ended
June 30, 1999 and 1998................................................... F-5
Notes to Condensed Consolidated Financial Statements--For the Quarters and
Six Months ended June 30, 1999 and 1998.................................. F-6
Statement of Estimated Taxable Operating Results Before Dividends Paid
Deduction--Properties Acquired from January 1, 1998 through July 31,
1999..................................................................... F-14
Report of Independent Certified Public Accountants........................ F-15
Consolidated Balance Sheets--As of December 31, 1998 and 1997............. F-16
Consolidated Statements of Earnings--For the Years ended December 31,
1998, 1997 and 1996...................................................... F-17
Consolidated Statements of Stockholders' Equity--For the Years ended
December 31, 1998, 1997 and 1996......................................... F-18
Consolidated Statements of Cash Flows--For the Years ended December 31,
1998, 1997 and 1996...................................................... F-19
Notes to Consolidated Financial Statements--For the Years ended December
31, 1998, 1997 and 1996.................................................. F-20
</TABLE>
F-1
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings................................ $569,567,003 $393,339,334
Net investment in direct financing leases.......... 132,179,949 91,675,650
Investment in joint venture........................ 1,081,046 988,078
Mortgage notes receivable.......................... 22,142,819 19,631,693
Equipment and other notes receivable............... 41,208,688 19,377,380
Other investments.................................. 16,197,812 16,201,014
Cash and cash equivalents.......................... 18,764,033 123,199,837
Certificates of deposit............................ 2,006,690 2,007,540
Receivables, less allowance for doubtful accounts
of $1,194,454 and $1,069,024, respectively........ 649,972 526,650
Accrued rental income.............................. 5,875,698 3,959,913
Intangibles and other assets....................... 12,551,632 9,444,924
------------ ------------
$822,225,342 $680,352,013
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $149,000,000 $ 10,143,044
Accrued construction costs payable................. 9,745,014 4,170,410
Accounts payable and accrued expenses.............. 1,288,825 1,035,436
Due to related parties............................. 1,444,444 1,308,464
Rents paid in advance.............................. 1,617,367 954,271
Deferred rental income............................. 2,466,355 1,189,883
Other payables..................................... 816,900 458,402
------------ ------------
Total liabilities.............................. 166,378,905 19,259,910
------------ ------------
Minority interest.................................. 644,611 281,817
------------ ------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000 shares........ -- --
Excess shares, $0.01 par value per share.
Authorized and unissued 78,000,000 shares....... -- --
Common stock, $.01 par value per share.
Authorized 62,500,000 shares, issued 37,383,221
and 37,372,684 shares, respectively, outstanding
37,348,464 and 37,337,927 shares, respectively.. 373,484 373,378
Capital in excess of par value................... 669,997,715 669,983,439
Accumulated distributions in excess of net
earnings........................................ (15,169,373) (9,546,531)
------------ ------------
Total stockholders' equity..................... 655,201,826 660,810,286
------------ ------------
$822,225,342 $680,352,013
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended June
June 30, 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases........ $12,433,749 $ 5,696,205 $22,188,551 $11,012,231
Earned income from direct
financing leases........ 3,283,137 1,432,718 5,712,343 2,795,390
Interest income from
mortgage, equipment and
other notes receivable.. 1,186,184 748,136 2,040,720 1,506,140
Investment and interest
income.................. 793,313 1,412,830 2,150,660 2,293,590
Other income............. 55,201 11,385 58,081 21,727
----------- ----------- ----------- -----------
17,751,584 9,301,274 32,150,355 17,629,078
----------- ----------- ----------- -----------
Expenses:
General operating and
administrative.......... 1,195,808 484,508 2,244,408 1,036,835
Asset management fees to
related party........... 984,506 367,201 1,681,870 729,860
State and other taxes.... 183,089 77,180 464,966 182,703
Depreciation and
amortization............ 2,155,493 869,329 3,711,674 1,648,827
Transaction costs........ 357,079 -- 483,005 --
----------- ----------- ----------- -----------
4,875,975 1,798,218 8,585,923 3,598,225
----------- ----------- ----------- -----------
Earnings Before Minority
Interest in Income of
Consolidated Joint
Ventures, Equity in
Earnings of Unconsolidated
Joint Venture, Loss on
Sales of Properties and
Provision for Losses on
Buildings................. 12,875,609 7,503,056 23,564,432 14,030,853
Minority Interest in Income
of Consolidated
Joint Ventures............ (9,847) (7,612) (17,610) (15,380)
Equity in Earnings of
Unconsolidated Joint
Ventures.................. 23,817 -- 48,851 --
Loss on Sales of
Properties................ (201,843) -- (201,843) --
Provision for Losses on
Buildings................. (324,725) -- (540,522) --
----------- ----------- ----------- -----------
Net Earnings............... $12,363,011 $ 7,495,444 $22,853,308 $14,015,473
=========== =========== =========== ===========
Earnings Per Share of
Common Stock
(Basic and Diluted)....... $ .33 $ 0.32 $ 0.61 $ 0.65
=========== =========== =========== ===========
Weighted Average Number of
Shares of Common Stock
Outstanding............... 37,348,464 23,524,385 37,347,883 21,583,217
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1999 and the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Common Stock distributions
-------------------- Capital in in excess
Number Par excess of of net
of Shares Value par value earnings Total
---------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 18,096,486 $180,964 $323,706,927 $ (2,249,790) $321,638,101
Subscriptions received
for common stock
through public
offerings and
distribution
reinvestment plan..... 19,276,198 192,762 385,331,204 -- 385,523,966
Retirement of common
stock................. (34,757) (348) (639,180) -- (639,528)
Stock issuance costs... -- -- (38,415,512) -- (38,415,512)
Net earnings........... -- -- -- 32,152,408 32,152,408
Distributions declared
and paid
($1.52 per share)..... -- -- -- (39,449,149) (39,449,149)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1998................... 37,337,927 373,378 669,983,439 (9,546,531) 660,810,286
Subscriptions received
for common stock
through public
offerings............. 10,537 106 210,630 -- 210,736
Stock issuance costs... -- -- (196,354) -- (196,354)
Net earnings........... -- -- -- 22,853,308 22,853,308
Distributions declared
and paid
($0.76 per share)..... -- -- -- (28,476,150) (28,476,150)
---------- -------- ------------ ------------ ------------
Balance at June 30,
1999................... 37,348,464 $373,484 $669,997,715 $(15,169,373) $655,201,826
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities....... $ 28,256,292 $ 16,600,953
------------- -------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases........................................ (170,153,724) (36,742,586)
Investment in direct financing leases.......... (44,186,644) (71,360,700)
Proceeds from sale of land, buildings and
equipment under direct financing leases....... 3,673,907 1,233,679
Investment in mortgage notes receivable........ (2,596,244) --
Collection on mortgage notes receivable........ 224,373 147,051
Investment in equipment and other notes
receivable.................................... (22,358,869) (2,903,600)
Collection on equipment and other notes
receivable.................................... 626,959 666,633
Investment in joint venture.................... (117,663) (112,847)
Increase in intangibles and other assets....... (3,198,326) (1,845,005)
------------- -------------
Net cash used in investing activities......... (238,086,231) (110,917,375)
------------- -------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and stock issuance
costs paid by related parties on behalf of the
Company........................................ (1,258,062) (2,570,126)
Proceeds from borrowing on line of credit....... 151,437,245 2,979,403
Payment on line of credit....................... (12,580,289) --
Payment of loan costs........................... (3,548,744) (30,842)
Subscriptions received from stockholders........ 210,736 152,570,391
Distributions to minority interests............. (21,105) (16,956)
Contributions from minority interests........... 366,289 --
Distributions to stockholders................... (28,476,150) (15,992,806)
Payment of stock issuance costs................. (735,785) (13,840,339)
------------- -------------
Net cash provided by financing activities..... 105,394,135 123,098,725
------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... (104,435,804) 28,782,303
Cash and Cash Equivalents at Beginning of
Period.......................................... 123,199,837 47,586,777
------------- -------------
Cash and Cash Equivalents at End of Period....... $ 18,764,033 $ 76,369,080
============= =============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition and
stock issuance costs on behalf of the Company:
Acquisition costs.............................. $ 392,301 $ 536,646
Stock issuance costs........................... 124,031 2,190,143
------------- -------------
$ 516,332 $ 2,726,789
============= =============
Land and buildings under operating leases
exchanged for land and buildings under
operating leases.............................. $ -- $ 2,754,419
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
1. Organization and Nature of Business:
CNL American Properties Fund, Inc. was organized in Maryland on May 2, 1994.
CNL APF GP Corp. and CNL APF LP Corp., organized in Delaware in May 1998, and
CFA Acquisition Corp., CFC Acquisition Corp. and CFS Acquisition Corp.,
organized in Maryland in February 1999, are wholly owned subsidiaries of CNL
American Properties Fund, Inc. CNL APF Partners, LP is a Delaware limited
partnership formed in May 1998. CNL APF GP Corp. and CNL APF LP Corp. are the
general and limited partner, respectively, of CNL APF Partners, LP. The term
"Company" includes, unless the text otherwise requires, CNL American Properties
Fund, Inc., CNL APF GP Corp., CNL APF LP Corp., CFA Acquisition Corp., CFC
Acquisition Corp., CFS Acquisition Corp., CNL APF Partners, LP, CNL/Corral
South Joint Venture and CNL/Chevys Annapolis Joint Venture. The Company was
formed primarily for the purpose of acquiring, directly or indirectly through
joint venture or co-tenancy arrangements, restaurant properties (the
"Properties") to be leased on a long-term, triple-net basis to operators of
selected national and regional fast-food, family-style and casual dining
restaurant chains. The Company also provides financing (the "Mortgage Loans")
for the purchase of buildings, generally by tenants that lease the underlying
land from the Company. In addition, the Company offers furniture, fixtures and
equipment financing through leases or loans (the "Secured Equipment Leases") to
operators of restaurant chains.
2. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1998.
The Company determines the appropriate classification of other investments
at the time of purchase and reevaluates such designation at each balance sheet
date. Other investments have been classified as held to maturity and are
carried at amortized cost (which approximates market value).
The Company determines the appropriate classification of other investments
at the time of purchase and reevaluates such designation at each balance sheet
date. Other investments have been classified as held to maturity and are
carried at their amortized cost (which approximates market value).
The Company accounts for its 85.47% interest in CNL/Corral South Joint
Venture and its 73.79% interest in CNL/Chevys Annapolis Joint Venture using the
consolidation method. Minority interest represents the minority joint venture
partners' proportionate share of the equity in the Company's consolidated joint
ventures. All significant intercompany balances and transactions have been
eliminated. The Company accounts for its 59.22% interest in CNL/Lee Vista Joint
Venture using the equity method because it shares control with the other joint
venture partner.
Certain items in the prior year's financial statements have been
reclassified to conform with the 1999 presentation. These reclassifications had
no effect on stockholders' equity or net earnings.
3. Leases:
The Company leases its land, buildings and equipment to operators of
national and regional fast-food, family-style and casual dining restaurants.
The leases are accounted for under the provisions of Statement of
F-6
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Accounting Standards No. 13, "Accounting for Leases." For Property
leases classified as direct financing leases, the building portions of these
leases are accounted for as direct financing leases while the land portions of
the majority of these leases are accounted for as operating leases. The
Company's equipment financing offered pursuant to leases are recorded as direct
financing leases.
4. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Land............................................ $287,491,252 $210,451,742
Buildings....................................... 269,068,855 169,708,652
------------ ------------
556,560,107 380,160,394
Less accumulated depreciation................... (9,884,469) (6,242,782)
------------ ------------
546,675,638 373,917,612
Construction in progress........................ 23,911,844 20,033,256
------------ ------------
570,587,482 393,950,868
Less allowance for loss on land and buildings... (1,020,479) (611,534)
------------ ------------
$569,567,003 $393,339,334
============ ============
</TABLE>
Some leases provide for scheduled rent increases throughout the lease term
and/or rental payments during the construction of a Property prior to the date
it is placed in service. Such amounts are recognized on a straight-line basis
over the terms of the leases commencing on the date the Property is placed in
service. For the six months ended June 30, 1999 and 1998, the Company
recognized $2,466,357 and $1,303,987, respectively, (net of $140,014 and
$273,013 in write-offs and reserves during the six months ended June 30, 1999)
of such rental income, $1,235,512 and $547,789 of which was earned during the
quarters ended June 30, 1999 and 1998, respectively.
At December 31, 1998, the Company had recorded provisions for losses on land
and buildings totalling $611,534 for financial reporting purposes relating to
two Shoney's Properties and two Boston Market Properties. In addition, during
the six months ended June 30, 1999, the Company recorded provisions for losses
on buildings totaling $408,945 for financial reporting purposes relating to one
Shoney's Property and three Boston Market Properties. The tenants of these
Properties experienced financial difficulties and ceased payment of rents under
the terms of their lease agreements. The allowances represented the difference
between the carrying value of the Properties at December 31, 1998 and June 30,
1999, respectively, and the estimated net realizable value for these
Properties.
During the six months ended June 30, 1999, the Company sold its Boston
Market Property in Ellisville, Missouri and its Golden Corral Property in
Brooklyn, Ohio. The Company received total net proceeds of $2,186,720,
resulting in a total loss of $201,843 for financial reporting purposes.
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases at June 30, 1999:
<TABLE>
<S> <C>
1999............................................................ $ 23,201,658
2000............................................................ 46,886,894
2001............................................................ 47,136,906
2002............................................................ 47,964,652
2003............................................................ 49,231,776
Thereafter...................................................... 649,679,441
------------
$864,101,327
============
</TABLE>
F-7
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since leases are renewable at the option of the tenant, the above table only
presents future minimum lease payments due during the initial lease terms. In
addition, this table does not include any amounts for future
contingent rents which may be received on the leases based on the percentage of
the tenant's gross sales. These amounts do not include minimum lease payments
that will become due when Properties under development are completed (See Note
13).
5. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Minimum lease payments receivable............ $ 264,142,411 $ 186,515,403
Estimated residual values.................... 31,006,537 17,680,858
Interest receivable from Secured Equipment
Leases...................................... 82,706 81,690
Less unearned income......................... (162,920,128) (112,602,301)
Less allowance for loss on direct financing
leases...................................... (131,577) --
------------- -------------
Net investment in direct financing leases.... $ 132,179,949 $ 91,675,650
============= =============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at June 30, 1999:
<TABLE>
<S> <C>
1999............................................................ $ 8,006,612
2000............................................................ 16,265,762
2001............................................................ 16,038,242
2002............................................................ 15,947,516
2003............................................................ 15,796,519
Thereafter...................................................... 192,087,760
------------
$264,142,411
============
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or contingent rental payments that may become due in future periods
(see Note 4).
During the six months ended June 30, 1999, the Company received proceeds
from various borrowers for the payoff of nine Secured Equipment Leases. The
Company collected $1,487,187 which were approximately equal to the net
investment in the direct financing leases at the time of the payoff. As a
result, no gain or loss was recognized for financial reporting purposes.
6. Equipment and Other Notes Receivable:
On June 30, 1999, the Company advanced approximately $20,100,000 to a
borrower for the purpose of purchasing and taking by assignment three existing
Notes from third parties with an outstanding principal balance of approximately
$14,600,000, as well as, advancing additional funds of approximately
$5,500,000, both of which were then consolidated with an existing $2,200,000
equipment loan for a total of $22,300,000 ("Consolidated Note"). The
Consolidated Note is collateralized by leasehold mortgages, equipment and a
security interest in other miscellaneous collateral associated with restaurant
properties, and matures August 31, 1999. A portion of the Consolidated Note,
$5,200,000, bears interest at a rate of 10.5%, and the remaining portion,
$17,100,000, bears interest at a rate of 11.53%.
7. Other Investments:
During the six months ended June 30, 1999, the Company reassessed the
classification of the franchise loan certificates purchased in a mortgage loan
securitization (the "Certificates") and transferred the Certificates from the
available for sale category to the held to maturity category for financial
reporting purposes. The
F-8
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated fair value of the Certificates of $16,199,792 represented the
carrying value at the time of transfer resulting in no unrealized gains or
losses at the time of transfer. At June 30, 1999 and December 31, 1998, the
estimated fair values of the Certificates approximated their carrying values.
8. Line of Credit:
At December 31, 1998, the Company had a revolving $35,000,000 unsecured line
of credit with a bank which enabled the Company to receive advances to provide
equipment financing, to purchase and develop Properties and to fund Mortgage
Loans. In March 1999, the Company obtained a new unsecured revolving credit
facility in an amount up to $200,000,000 (the "Credit Facility"). In
conjunction with obtaining the Credit Facility, the Company terminated and
repaid the balance of approximately $12,600,000 under the previous line of
credit. In June 1999, the Company amended the Credit Facility to increase the
borrowing amount up to $300,000,000. Interest on advances under the Credit
Facility is determined according to i) a tiered rate structure up to a maximum
rate of 200 basis points above LIBOR (based upon the Company's overall leverage
ratio) or ii) the lender's prime rate plus 0.25%, whichever the Company selects
at the time of each advance. The Company obtained advances of $151,437,245
under the Credit Facility during the six months ended June 30, 1999 and had an
outstanding balance of $149,000,000 at June 30, 1999. As of June 30, 1999,
$20,000,000 of the balance under the Credit Facility incurred interest at a
rate of eight percent per annum and the remaining balance of $129,000,000
incurred interest at a rate of 6.71% per annum. In connection with obtaining
the new Credit Facility and the June amendment, the Company incurred commitment
fees, legal fees and closing costs of $3,548,744. Interest incurred on prime
rate advances on the Credit Facility is payable monthly. LIBOR rate advances
have maturity periods of one, two, three or six months, with interest payable
at the end of the selected period (except for six month loans, on which
interest is payable at the end of three and six months). The principal balance,
together with all unpaid interest, is due in full upon termination of the
facility on June 9, 2002. The terms of the agreement for the amended Credit
Facility include financial covenants which provide for the maintenance of
certain financial ratios. The Company was in compliance with all such covenants
as of June 30, 1999.
As of June 30, 1999 and December 31, 1998, $149,000,000 and $10,143,044,
respectively, of principal was outstanding relating to the respective lines of
credit. The Company believes, based on current terms, that the carrying values
of its lines of credit at June 30, 1999 and December 31, 1998 approximated fair
value.
For the six months ended June 30, 1999 and 1998, the Company incurred
interest costs (including amortization of loan costs) of $1,262,160 and
$124,702, respectively, all of which were capitalized as part of the cost of
buildings under construction. For the six months ended June 30, 1999 and 1998,
the Company paid interest of $994,253 and $106,305, respectively.
In June, 1999, in connection with the amended Credit Facility, the Company
entered into a new swap agreement. The purpose of the interest rate swap
agreement is to reduce the impact of changes in interest rates on its floating
rate Credit Facility. The agreement effectively changes the Company's interest
rate exposure on a notional amount of approximately $75,000,000 of the
outstanding floating rate Credit Facility to a fixed rate of 6.17% per annum,
as of June 30, 1999. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreement; however,
the Company does not anticipate nonperformance by the counterparty as they
maintain long-term credit ratings of "A" or better, as rated by Moody's or
Standard & Poors.
The effective interest rate for the outstanding balance of $149,000,000 as
of June 30, 1999 as a result of the impact of the interest rate swap in the
amount of $75,000,000 was 7.49% per annum.
9. Reverse Stock Split:
On May 27, 1999, the shareholders approved a one-for-two reverse split of
common stock that was effective on June 3, 1999 with the filing of the amended
Articles of Incorporation with the Maryland Department of Assessments and
Taxation. A total of $180,965 was transferred from common stock to
F-9
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
additional paid-in capital in connection with the stock split. All share and
per share amounts have been restated herein to reflect the one-for-two reverse
stock split.
10. Distributions:
For the six months ended June 30, 1999 and 1998, approximately 85 and 86
percent, respectively, of the distributions paid to stockholders were
considered ordinary income and approximately 15 and 14 percent, respectively,
were considered a return of capital to stockholders for federal income tax
purposes. No amounts distributed to the stockholders for the six months ended
June 30, 1999 and 1998 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. The characterization for tax purposes of distributions
declared for the six months ended June 30, 1999 may not be indicative of the
results that may be expected for the year ending December 31, 1999.
11. Related Party Transactions:
During the six months ended June 30, 1999 and June 30, 1998, the Company
incurred $15,805 and $11,442,779, respectively, in selling commissions due to
CNL Securities Corp. for services in connection with the offering of shares. A
substantial portion of these amounts ($14,571 and $10,689,329) were paid by CNL
Securities Corp. as commissions to other broker-dealers during the six months
ended June 30, 1999 and 1998, respectively.
In addition, CNL Securities Corp. received 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 was re-allowed to other broker-
dealers. During the six months ended June 30, 1999 and June 30, 1998, the
Company incurred $1,054 and $762,852, respectively, of such fees, the majority
of which was re-allowed to other broker-dealers and from which all bona fide
due diligence expenses were paid.
The advisor of the Company, CNL Fund Advisors, Inc. (the "Advisor") is
entitled to receive acquisition fees for services in identifying the Properties
and structuring the terms of the acquisition and leases of these Properties and
structuring the terms of Mortgage Loans and other investments equal to 4.5% of
the total amount raised from the sale of shares. To the extent the Company uses
proceeds from its Credit Facility to acquire Properties or make mortgage loans,
the Company also pays the Advisor an acquisition fee equal to 4.5% of the
purchase price paid by the Company. During the six months ended June 30, 1999
and 1998, the Company incurred $4,492,940 and $6,865,668, respectively, of such
fees. Such fees are included in land and buildings on operating leases, net
investment in direct financing leases, mortgage notes receivable, investment in
joint venture and other assets.
In connection with the acquisition of Properties subject to approval by the
Company's Board of Directors, the Company may incur development or construction
management fees payable to affiliates of the Company. Such fees are included in
the purchase price of the Properties and are therefore included in the basis on
which the Company charges rent on the Properties. During the six months ended
June 30, 1999 and 1998, the Company incurred $38,853 and $68,759, respectively,
of such fees relating to four and three Properties, respectively.
In connection with the acquisition of Properties, subject to approval by the
Company's Board of Directors, the Company may incur advisory fees payable to
affiliates of the Company. Such fees are included in the purchase price of the
Properties and are therefore included in the basis on which the Company charges
rent on the Properties. During the six months ended June 30, 1999, the Company
incurred $539,976 of such fees relating to 25 Properties. No such fees were
incurred for the six months ended June 30, 1998.
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor is entitled to receive a one-time Secured
Equipment Lease servicing fee of two percent of the purchase
F-10
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
price of the equipment that is the subject of each Secured Equipment Lease.
During the six months ended June 30, 1999 and 1998, the Company incurred
$67,967 and $14,899, respectively, in Secured Equipment Lease servicing fees.
The Company and the Advisor have entered into an advisory agreement pursuant
to which the Advisor will receive a monthly asset management fee of one-twelfth
of 0.60% of the Company's real estate asset value and the outstanding principal
balance of the Mortgage Loans as of the end of the preceding month. The
management fee, which will not exceed fees which are competitive for similar
services in the same geographic area, may or may not be taken, in whole or in
part as to any year, in the sole discretion of the Advisor. All or any portion
of the management fee not taken as to any fiscal year shall be deferred without
interest and may be taken in such other fiscal year as the Advisor shall
determine. During the six months ended June 30, 1999 and 1998, the Company
incurred $1,788,771 and $756,791, respectively, of such fees, of which $106,901
and $26,931, respectively, was capitalized as part of the cost of the buildings
for Properties under construction.
Prior to such time, if any, as shares of the Company's common stock are
listed on a national securities exchange or over-the-counter market, the
Advisor is entitled to receive deferred, subordinated real estate disposition
fee, payable upon the sale of one or more Properties, based on the lesser of
one-half of a competitive real estate commission or three percent of the sales
price if the Advisor provides a substantial amount of services in connection
with the sale. However, if the sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
real estate disposition fee is payable only after the stockholders receive
distributions equal to the sum of an annual, aggregate, cumulative,
noncompounded eight percent return on their invested capital (the
"Stockholders' 8% Return") plus their aggregate invested capital. As of June
30, 1999, no deferred, subordinated real estate disposition fees had been
incurred.
A subordinated share of net sales proceeds will be paid to the Advisor upon
the sale of Company assets in an amount equal to ten percent of net sales
proceeds. However, if net sales proceeds are reinvested in replacement assets,
no such share of net sales proceeds will be paid to the Advisor until such
replacement assets are sold. This amount will be payable only after the
stockholders receive distributions equal to the sum of the stockholders'
aggregate invested capital and the Stockholders' 8% Return. As of June 30,
1999, no such fees had been incurred.
The Advisor and its affiliates provide administrative services (including
services for accounting; financial, tax and regulatory compliance and
reporting; lease and loan compliance; stockholder distributions and reporting;
due diligence and marketing; and investor relations) to the Company on a day-
to-day basis as well as services in connection with the offering of shares and
services in connection with the proposed mergers referred to in Note 13. The
expenses incurred for these services were classified as follows for the six
months ended June 30:
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Stock issuance costs.................................... $ 55,463 $1,378,104
Transaction costs....................................... 286,544 --
General operating and administrative expenses........... 600,992 488,710
-------- ----------
$942,999 $1,866,814
======== ==========
</TABLE>
During the six months ended June 30, 1999 and 1998, the Company acquired 40
Properties and one Property, respectively, for approximately $38,500,000 and
$2,200,000, respectively, from affiliates of the Company. Each Property was
acquired at a cost no greater than the lesser of the cost of the Property to
the affiliate, including carrying costs, or the Property's appraised value. Of
the 40 Properties acquired from affiliates in 1999, 38 were acquired for a
total purchase price of approximately $36,800,000 from Commercial Net Lease
Realty, Inc. ("NNN") a publicly traded real estate investment trust. James M.
Seneff, Jr., the
F-11
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Chairman of the Board and Chief Executive Officer of the Company, is also the
Chairman of the Board and Chief Executive Officer of NNN and Robert A. Bourne,
a Director and Treasurer of the Company, is also a board member of NNN. This
transaction was approved by the Company's independent directors.
The due to related parties consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Due to the Advisor:
Expenditures incurred on behalf of the Company
and accounting and administrative services...... $ 683,189 $1,238,148
Acquisition fees................................. 761,255 39,788
---------- ----------
1,444,444 1,277,936
---------- ----------
Due to CNL Securities Corp:
Commissions...................................... -- 30,528
Marketing support and due diligence expense
reimbursement fees.............................. -- --
---------- ----------
-- 30,528
---------- ----------
$1,444,444 $1,308,464
========== ==========
</TABLE>
12. Concentration of Credit Risk:
The following schedule presents rental, earned and interest income from
individual lessees or borrowers, or affiliated groups of lessees or borrowers,
each representing more than ten percent of the Company's total rental, earned,
investment and interest income from its Properties, Mortgage Loans, Secured
Equipment Leases and Certificates for each of the six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
S & A Properties Corporation.......................... $3,529,789 $ N/A
Foodmaker, Inc........................................ N/A 1,811,447
Phoenix Restaurant Group, Inc......................... N/A 1,771,121
Houlihan's Restaurants, Inc. ......................... N/A 1,650,339
</TABLE>
The information denoted by N/A indicates that for the applicable period
presented, the tenant or group of affiliated tenants did not represent more
than ten percent of the Company's total rental, earned, investment and interest
income.
Although the Company's Properties are geographically diverse throughout the
United States and the Company's lessees and borrowers operate a variety of
restaurant concepts, failure of any one of these lessees or borrowers that
contributes more than ten percent of the Company's rental, earned, investment
and interest income could significantly impact the results of operations of the
Company if the Company is not able to re-lease the Properties in a timely
manner.
13. Commitments and Contingencies:
On March 11, 1999, the Company entered into agreements to acquire (i) the
Advisor, (ii) CNL Financial Corp. and CNL Financial Services, Inc., affiliates
of the Advisor that provide mortgage loans and perform securitization
transactions and (iii) 18 CNL Income Funds, limited partnerships that are
affiliated with the Advisor and whose properties are substantially the same
type as the Company's (the "CNL Income Funds"). In connection therewith, the
Company has agreed to issue 3.8 million, 2.35 million and up to 30.5 million
shares of common stock, respectively after restatement for the one for two
reverse stock split.
F-12
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to entering into the merger agreements, the general partners of
the CNL Income Funds received a number of comments from broker-dealers who sold
units of CNL Income Fund XVII, Ltd. and CNL Income Fund XVIII, Ltd. ("CNL
Income Fund XVII and XVIII") concerning the loss of passive income treatment in
the event that those Income Funds merged with APF. On June 3, 1999, the general
partners, on behalf of CNL Income Funds XVII and XVIII, and the Company agreed
that it would be in the best interests of CNL Income Funds XVII and XVIII and
the Company that the Company not attempt to acquire CNL Income Funds XVII and
XVIII in the acquisition. Representatives of the Company stated that they
would, depending on market conditions, seek to acquire CNL Income Funds XVII
and XVIII after the Company was listed on the New York Stock Exchange. The
representatives further noted that they would be willing to structure any
future acquisition in a manner so that the limited partners could retain
passive income treatment most likely by offering the limited partners an
exchange offer whereby limited partners would exchange their units of limited
partnership interest for the Company's common stock. Therefore, in June 1999,
the Company entered into termination agreements with CNL Income Funds XVII and
XVIII. The Company's Board of Directors accordingly reduced its offer to
acquire the 16 CNL Income Funds to an aggregate of 27.3 million shares of
common stock.
The acquisition of each of the 16 CNL Income Funds is contingent upon
certain conditions, including approval by the Company's stockholders to
increase the number of authorized shares of common stock and approval by a
majority of the limited partners of such Income Fund.
On May 11, 1999, four limited partners in several CNL Income Funds served a
lawsuit against the general partners of the CNL Income Funds and the Company in
connection with the proposed merger of the CNL Income Funds. Additionally, on
June 22, 1999, a limited partner in certain of the CNL Income Funds filed a
lawsuit against the Company, CNL Fund Advisors, Inc., and certain of its
affiliates and the CNL Income Funds in connection with the proposed merger. The
Company, the general partners of the CNL Income Funds and CNL Fund Advisors,
Inc. believe that the lawsuits are without merit and intend to defend
vigorously against the claims.
The Company has entered into various development agreements with tenants
which provide terms and specifications for the construction or renovation of
buildings the tenants have agreed to lease or equipment financing the Company
has agreed to provide. The agreements provide a maximum amount of development
costs (including the purchase price of the land and closing costs) to be paid
by the Company. The aggregate maximum development costs the Company has agreed
to pay are approximately $75,817,000, of which approximately $51,699,000 in
land and other costs had been incurred as of June 30, 1999. The buildings
currently under construction or renovation are expected to be operational by
December 1999. In connection with the purchase of each Property, the Company,
as lessor, entered into a long-term lease agreement.
14. Subsequent Events:
On each of July 1, 1999 and August 1, 1999, the Company declared
distributions of $4,746,243, or $0.12708 per share of common stock, payable in
September 1999 to stockholders of record on July 1, 1999 and August 1, 1999,
respectively.
During the period July 1, 1999 through August 11, 1999, the Company obtained
additional advances under its Credit Facility and acquired 16 Properties (12 of
which are under construction) for cash at a total cost of approximately
$14,900,000. In connection with the purchase of each of the 16 Properties, the
Company, as lessor, entered into a long-term lease agreement. The buildings
under construction are expected to be operational by February 2000. In
connection with the 12 Properties which are under construction, the Company has
committed to pay an additional $10,500,000 in construction and development
costs.
In August 1999, the Company sold its Property in Edgewater, Colorado, for
$638,000 and received net sales proceeds of $626,083, resulting in a loss of
$283,533 for financial reporting purposes which the Company recorded at June
30, 1999.
F-13
<PAGE>
STATEMENT OF ESTIMATED TAXABLE OPERATING RESULTS
BEFORE DIVIDENDS PAID DEDUCTION
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
PROPERTIES ACQUIRED FROM JANUARY 1, 1998 THROUGH JULY 31, 1999
The following schedule presents unaudited estimated taxable operating
results before dividends paid deduction of each property acquired by CNL
American Properties Fund, Inc. (the "Company") from January 1, 1998 through
July 31, 1999. The statement presents unaudited estimated taxable operating
results for each property that was operational as if the property had been
acquired and operational on January 1, 1998 through December 31, 1998. The
schedule should be read in light of the accompanying footnotes.
These estimates do not purport to present actual or expected operations of
the Company for any period in the future. These estimates were prepared on the
basis described in the accompanying notes which should be read in conjunction
herewith.
<TABLE>
<CAPTION>
Property Acquisitions Probable Property
from 1/1/98-7/31/99 Acquisitions at 7/31/99(5)
--------------------- --------------------------
<S> <C> <C>
Estimated Taxable
Operating Results Before
Dividends Paid
Deduction:
Base Rent(1)........... $26,227,548 $1,789,407
Asset Management
Fees(2)............... (1,581,359) (113,254)
General and
Administrative
Expenses(3)........... (1,626,108) (110,943)
----------- ----------
Estimated Cash
Available from
Operations.......... 23,020,081 1,565,210
Depreciation
Expense(4)(6)........... (4,529,667) (414,328)
----------- ----------
Estimated Taxable
Operating Results
Before Dividends
Paid Deduction...... $18,490,414 1,150,882
=========== ==========
</TABLE>
- --------
(1) Base rent does not include percentage rents which become due if specified
levels of gross receipts are achieved. Base rent represents the amount to
be collected during the first year under the terms of the lease agreement.
(2) The properties will be managed pursuant to an advisory agreement between
the Company and the Advisor, pursuant to which the Advisor will receive
monthly asset management fees in an amount equal to one-twelfth of .60% of
APF's Real Estate Asset Value as of the end of the preceding month as
defined in such agreement. The Real Estate Asset Value, defined as the
amount actually paid for the purchase of a property was $263,559,758 and
$18,875,605, for property acquisitions and probable acquisitions,
respectively.
(3) Estimated at 6.2% of gross rental income based on the previous experience
of affiliates of the Advisor with 18 public limited partnerships which own
properties similar to those owned by the Company.
(4) The estimated federal tax basis of the depreciable portion (the building
portion) of each property has been depreciated on the straight-line method
over 39 years. The estimated federal tax basis was $176,657,025 and
$16,158,774 for property acquisitions and probable acquisitions,
respectively.
(5) Information relating to the pending investments that are existing is based
on estimated purchase prices for each property. The properties that will be
under construction once they are acquired are not included.
(6) For pending investments which consist of land and building, for purposes of
calculating depreciation, the allocation of the estimated cost of the
property between land and building is based upon the average allocation of
the actual cost of properties (consisting of both land and building)
acquired by the Company as of July 1999.
F-14
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL American Properties Fund, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of CNL
American Properties Fund, Inc. (a Maryland Corporation) and Subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 29, 1999, except for Note 17
for which the date is March 11, 1999 and
Note 18 for which the date is June 3, 1999
F-15
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings................................ $393,339,334 $205,338,186
Net investment in direct financing leases.......... 91,675,650 47,613,595
Investment in joint venture........................ 988,078 --
Mortgage notes receivable.......................... 19,631,693 17,622,010
Equipment notes receivable......................... 19,377,380 13,548,044
Other investments.................................. 16,201,014 --
Cash and cash equivalents.......................... 123,199,837 47,586,777
Certificates of deposit............................ 2,007,540 2,008,224
Receivables, less allowance for doubtful accounts
of $1,069,024 and $99,964, respectively........... 526,650 635,796
Accrued rental income.............................. 3,959,913 1,772,261
Intangibles and other assets....................... 9,444,924 2,952,869
------------ ------------
$680,352,013 $339,077,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $ 10,143,044 $ 2,459,043
Accrued construction costs payable................. 4,170,410 10,978,211
Accounts payable and accrued expenses.............. 1,035,436 1,060,497
Due to related parties............................. 1,308,464 1,524,294
Rents paid in advance.............................. 954,271 517,428
Deferred rental income............................. 1,189,883 557,576
Other payables..................................... 458,402 56,878
------------ ------------
Total liabilities.............................. 19,259,910 17,153,927
------------ ------------
Minority interest.................................. 281,817 285,734
------------ ------------
Commitments (Note 16)
Stockholders' equity:
Preferred stock, without par value. Authorized
and unissued 3,000,000 shares................... -- --
Excess shares, $0.01 par value per share.
Authorized and unissued 78,000,000 shares....... -- --
Common stock, $0.01 par value per share.
Authorized 62,500,000 and 37,500,000 shares,
respectively, issued 37,372,684 and 18,096,486,
respectively, outstanding 37,337,927 and
18,096,486, respectively........................ 373,378 180,965
Capital in excess of par value..................... 669,983,439 323,706,927
Accumulated distributions in excess of net
earnings.......................................... (9,546,531) (2,249,790)
------------ ------------
Total stockholders' equity..................... 660,810,286 321,638,101
------------ ------------
$680,352,013 $339,077,762
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases.... $26,688,864 $12,457,200 $3,731,806
Earned income from direct financing
leases................................ 6,440,797 3,033,415 625,492
Interest income from mortgage and
equipment notes receivable............ 3,085,518 2,010,500 1,069,349
Investment and interest income......... 5,899,028 1,931,331 773,404
Other income........................... 72,830 25,487 6,633
----------- ----------- ----------
42,187,037 19,457,933 6,206,684
----------- ----------- ----------
Expenses:
General operating and administrative... 2,955,535 1,010,725 601,540
Asset management fees to related
party................................. 1,851,004 804,879 251,200
State and other taxes.................. 548,320 251,358 56,184
Depreciation and amortization.......... 4,054,098 1,795,062 521,871
----------- ----------- ----------
9,408,957 3,862,024 1,430,795
----------- ----------- ----------
Earnings Before Minority Interest in
Income of Consolidated Joint Venture,
Equity in Earnings of Unconsolidated
Joint Venture and Provision for Loss on
Land and Buildings...................... 32,778,080 15,595,909 4,775,889
Minority Interest in Income of
Consolidated Joint Venture.............. (30,156) (31,453) (29,927)
Equity in Earnings of Unconsolidated
Joint Venture........................... 16,018 -- --
Provision for Loss on Land and
Buildings............................... (611,534) -- --
----------- ----------- ----------
Net Earnings............................. $32,152,408 $15,564,456 $4,745,962
=========== =========== ==========
Earnings Per Share of Common Stock (Basic
and Diluted)............................ $ 1.21 $ 1.33 $ 1.18
=========== =========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding................ 26,648,219 11,711,934 4,035,835
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Accumulated
-------------------- Capital in distributions
Number Par excess of in excess of
of shares value par value net earnings Total
---------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 3,865,416 $ 38,654 $ 32,211,833 $ (269,839) $ 31,980,648
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan.... 10,079,299 100,793 100,692,198 -- 100,792,991
Stock issuance costs.. -- -- (9,216,102) -- (9,216,102)
Net earnings.......... -- -- -- 4,745,962 4,745,962
Distributions declared
and paid ($1.41 per
share)............... -- -- -- (5,436,072) (5,436,072)
One-for-two reverse
stock split (Note
18).................. (6,972,358) (69,724) 69,724 -- --
---------- -------- ------------ ------------ ------------
Balance at December 31,
1996................... 6,972,357 69,723 123,757,653 (959,949) 122,867,427
Subscriptions received
for common stock
through public
offerings and
distribution
reinvestment plan.... 11,124,128 111,241 222,371,319 -- 222,482,560
Stock issuance costs.. -- -- (22,422,045) -- (22,422,045)
Net earnings.......... -- -- -- 15,564,456 15,564,456
Distributions declared
and paid ($1.49 per
share)............... -- -- -- (16,854,297) (16,854,297)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1997................... 18,096,485 180,964 323,706,927 (2,249,790) 321,638,101
Subscriptions received
for common stock
through public
offerings and
distribution
reinvestment plan.... 19,276,199 192,162 385,331,204 -- 385,523,966
Retirement of common
stock................ (34,757) (348) (639,180) -- (639,528)
Stock issuance costs.. -- -- (38,415,512) -- (38,415,512)
Net earnings.......... -- -- -- 32,152,408 32,152,408
Distributions declared
and paid ($1.52 per
share)............... -- -- -- (39,449,149) (39,449,149)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1998................... 37,337,927 $373,378 $669,983,439 $ (9,546,531) $660,810,286
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 34,275,767 $ 15,440,803 $ 4,543,506
Distributions from unconsolidated
joint venture....................... 578 -- --
Cash paid for expenses............... (4,326,169) (1,903,876) (928,001)
Interest received.................... 9,166,099 3,539,287 1,867,035
------------ ------------ -----------
Net cash provided by operating
activities.......................... 39,116,275 17,076,214 5,482,540
------------ ------------ -----------
Cash Flows from Investing Activities:
Additions to land and buildings on
operating leases.................... (200,101,667) (143,542,667) (36,104,148)
Investment in direct financing
leases.............................. (47,115,435) (39,155,974) (13,372,621)
Proceeds from sale of buildings and
equipment under direct financing
leases.............................. 2,385,941 7,251,510 --
Investment in joint venture.......... (974,696) -- --
Purchase of other investments........ (16,083,055) -- --
Investment in certificates of
deposit............................. -- (2,000,000) --
Investment in mortgage notes
receivable.......................... (2,886,648) (4,401,982) (13,547,264)
Collection on mortgage notes
receivable.......................... 291,990 250,732 133,850
Investment in equipment notes
receivable.......................... (7,837,750) (12,521,401) --
Collection on equipment notes
receivable.......................... 1,263,633 -- --
Increase in intangibles and other
assets.............................. (6,281,069) -- (1,103,896)
------------ ------------ -----------
Net cash used in investing
activities.......................... (277,338,756) (194,119,782) (63,994,079)
------------ ------------ -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition and
stock issuance costs paid by related
parties on behalf of the Company.... (4,574,925) (2,857,352) (939,798)
Proceeds from borrowing on line of
credit.............................. 7,692,040 19,721,804 3,666,896
Payment on line of credit............ (8,039) (20,784,577) (145,080)
Contribution from minority interest
of consolidated joint venture....... -- -- 97,419
Subscriptions received from
stockholders........................ 385,523,966 222,482,560 100,792,991
Retirement of shares of common
stock............................... (639,528) -- --
Distributions to minority interest... (34,073) (34,020) (39,121)
Distributions to stockholders........ (39,449,149) (16,854,297) (5,439,404)
Payment of stock issuance costs...... (34,579,650) (19,542,862) (8,486,188)
Other................................ (95,101) 49,001 (54,533)
------------ ------------ -----------
Net cash provided by financing
activities.......................... 313,835,541 182,180,257 89,453,182
------------ ------------ -----------
Net Increase in Cash and Cash
Equivalents.......................... 75,613,060 5,136,689 30,941,643
Cash and Cash Equivalents at Beginning
of Year.............................. 47,586,777 42,450,088 11,508,445
------------ ------------ -----------
Cash and Cash Equivalents at End of
Year................................. $123,199,837 $ 47,586,777 $42,450,088
============ ============ ===========
Reconciliation of Net Earnings to Net
Cash Provided by Operating
Activities:
Net earnings.......................... $ 32,152,408 $ 15,564,456 $ 4,745,962
============ ============ ===========
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Provision for uncollectible mortgage
notes............................... 636,614 -- --
Depreciation......................... 4,042,290 1,784,268 511,078
Amortization......................... 11,808 10,794 69,886
Provision for loss on land and
buildings........................... 611,534 -- --
Equity in earnings of joint venture,
net of distributions................ (15,440) -- --
Decrease (increase) in receivables... 262,958 (905,339) (160,984)
Decrease in net investment in direct
financing leases.................... 1,971,634 1,130,095 259,740
Increase in accrued rental income.... (2,187,652) (1,350,185) (382,934)
Increase in intangibles and other
assets.............................. (29,477) (6,869) (4,293)
Increase (decrease) in accounts
payable and accrued expenses........ 404,161 153,223 (2,896)
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition, deferred offering and
stock issuance costs paid on behalf
of the Company...................... 31,255 15,466 (30,929)
Increase in rents paid in advance.... 436,843 398,528 93,549
Increase in deferred rental income... 693,372 221,727 335,849
Increase in other payables........... 63,811 28,597 18,585
Increase in minority interest........ 30,156 31,453 29,927
------------ ------------ -----------
Total adjustments.................... 6,963,867 1,511,758 736,578
------------ ------------ -----------
Net Cash Provided by Operating
Activities........................... $ 39,116,275 $ 17,076,214 $ 5,482,540
============ ============ ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, deferred offering and
stock issuance costs on behalf of the
Company as follows:
Acquisition costs.................... $ 1,113,580 $ 514,908 $ 206,103
Deferred offering costs.............. -- -- 466,405
Stock issuance costs................. 4,228,480 2,351,244 338,212
------------ ------------ -----------
$ 5,342,060 $ 2,866,152 $ 1,010,720
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL American Properties Fund, Inc. was
organized in Maryland on May 2, 1994. CNL APF GP Corp. and CNL APF LP Corp.,
organized in Delaware in May 1998, are wholly owned subsidiaries of CNL
American Properties Fund, Inc. CNL APF Partners, LP is a Delaware limited
partnership formed in May 1998. CNL APF GP Corp. and CNL APF LP Corp. are the
general and limited partners, respectively, of CNL APF Partners, LP. The term
"Company" includes, unless the text otherwise requires, CNL American Properties
Fund, Inc., CNL APF GP Corp., CNL APF LP Corp. and CNL APF Partners, LP. The
Company was formed primarily for the purpose of acquiring, directly or
indirectly through joint venture or co-tenancy arrangements, restaurant
properties (the "Properties") to be leased on a long-term, triple-net basis to
operators of selected national and regional fast-food, family-style and casual
dining restaurant chains. The Company also provides financing (the "Mortgage
Loans") for the purchase of buildings, generally by tenants that lease the
underlying land from the Company. In addition, the Company offers furniture,
fixtures and equipment financing through leases or loans (the "Secured
Equipment Leases") to operators of restaurant chains.
Principles of Consolidation--The Company accounts for its 85.47% interest in
CNL/Corral South Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Company's consolidated joint venture. The Company accounts
for its 55.38% interest in CNL/Lee Vista Joint Venture using the equity method
because it shares control with the other joint venture partner. All significant
intercompany balances and transactions have been eliminated.
Real Estate and Lease Accounting--The Company records the acquisition of
land, buildings and equipment at cost, including acquisition and closing costs.
In addition, interest costs incurred during construction are capitalized. Land
and buildings are generally leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating expenses
relating to the Property, including property taxes, insurance, maintenance and
repairs. In addition, the Company offers equipment financing through leases or
loans. The Property leases are accounted for using either the direct financing
or the operating method. The Secured Equipment Leases are accounted for using
the direct financing method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
5). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the Company's
net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals (including rental payments, if any,
required during the construction of a Property) vary during the lease term,
income is recognized on a straight-line basis so as to produce a constant
periodic rent over the lease term commencing on the date the Property is
placed in service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. In contrast, deferred rental income represents the aggregate
amount of scheduled rental payments to date (including rental payments due
during construction and prior to the Property being placed in service) in
excess of income recognized on a straight-line basis over the lease term
commencing on the date the Property is placed in service.
When the Properties or equipment are sold, the related cost and
accumulated depreciation for operating leases and the net investment for
direct financing leases, plus any accrued rental income or
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
deferred rental income, will be removed from the accounts and any gains or
losses from sales will be reflected in income. Management reviews its
Properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
through operations. Management determines whether an impairment in value
has occurred by comparing the estimated future undiscounted cash flows,
including the residual value of the Property, with the carrying cost of the
individual Property. If an impairment is indicated, the assets are adjusted
to their fair value.
Mortgage Loans--The Company accounts for loan origination fees and costs
incurred in connection with Mortgage Loans in accordance with Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases." This statement requires the deferral of loan origination
fees and the capitalization of direct loan costs. The costs capitalized,
net of the fees deferred, are amortized to interest income as an adjustment
of yield over the life of the loans. The unpaid principal and accrued
interest on the Mortgage Loans, plus the unamortized balance of such fees
and costs are included in mortgage notes receivable (see Note 7).
Provisions for uncollectible mortgage notes are established whenever it
appears that future collection of principal on specific mortgage notes
appears doubtful. The provision for uncollectible mortgage notes represents
the difference between the carrying value at December 31 and the net
realizable value management expects to receive relating to the mortgage
note.
Other Investments--The Company determines the appropriate classification
of other investments at the time of purchase and reevaluates such
designation at each balance sheet date. Other investments have been
classified as available for sale and are carried at fair value, with
unrealized holding gains and losses, if any, reported as a separate
component of stockholders' equity and in the statement of comprehensive
earnings, as applicable.
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, money market funds (some of which are backed by
government securities) and certificates of deposit (with maturities of
three months or less when purchased). 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, money market funds and certificates of deposit 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 and are included in intangibles and other
assets. As of December 31, 1998 and 1997, accumulated amortization totalled
$14,318 and $10,318, respectively.
Loan Costs--Loan costs incurred in connection with the Company's
$35,000,000 line of credit have been capitalized and are being amortized
over the term of the loan commitment using the effective interest method.
Income or expense associated with interest rate swap agreements related to
the line of credit is recognized on the accrual basis as earned or incurred
through an adjustment to interest expense. Loan costs are included in
intangibles and other assets. As of December 31, 1998 and 1997, the Company
had aggregate gross loan costs of $100,634. As of December 31, 1998 and
1997, accumulated amortization totalled $88,000 and $61,783, respectively.
Income Taxes--The Company has made 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, and related regulations. The
Company generally will not be subject to federal corporate income taxes on
amounts
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
distributed to stockholders, providing 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 accompanying consolidated financial statements.
Notwithstanding the Company's qualification for taxation as a REIT, the
Company is subject to certain state taxes on its income and property.
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.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform with the 1998 presentation. These
reclassifications had no effect on stockholders' equity or net earnings.
New Accounting Standards--Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This Statement 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 net earnings.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. Management of the Company anticipates that, due to
its limited use of interest rate swaps, the adoption of FAS 133 will not have a
significant effect on the Company's results of operations or its financial
position.
2. Public Offerings:
The Company's public offering of $345,000,000 of common stock (the "1998
Offering") became fully subscribed in December 1998 and the last subscription
was received in January 1999. Prior to the 1998 Offering, the Company received
proceeds from its initial offering (the "Initial Offering"), of $150,591,765,
including $591,765 issued pursuant to the Company's reinvestment plan, and
received proceeds from its first follow-on offering (the "1997 Offering") of
$251,872,648 including $1,872,648 issued pursuant to the Company's reinvestment
plan. (See Note 18)
3. Leases:
The Company leases its land, buildings and equipment to operators of
national and regional fast-food, family-style and casual dining restaurants.
The leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." For Property leases
classified as direct financing leases, the building portions of the majority of
the leases are accounted for as direct financing leases while the land portions
of these leases are generally accounted for as operating leases. Substantially,
all
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Property leases have initial terms of 15 to 20 years (expiring between 2006
and 2018) and provide for minimum rentals. In addition, the majority of the
Property leases provide for contingent rentals and/or scheduled rent increases
over the terms of the leases. Each tenant also pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options for the Property leases generally allow
tenants to renew the leases for two to four successive five-year periods
subject to the same terms and conditions
as the initial lease. Most leases also allow the tenant to purchase the
Property at the greater of the Company's purchase price plus a specified
percentage of such purchase price or fair market value after a specified
portion of the lease has elapsed.
The Secured Equipment Leases recorded as direct financing leases as of
December 31, 1998 provide for minimum rentals payable monthly and generally
have lease terms ranging from four to seven years. The Secured Equipment
Leases generally include an option for the lessee to acquire the equipment at
the end of the lease term for a nominal fee.
4. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land............................................ $210,451,742 $106,616,360
Buildings....................................... 169,708,652 95,518,149
------------ ------------
380,160,394 202,134,509
Less accumulated depreciation................... (6,242,782) (2,395,665)
------------ ------------
373,917,612 199,738,844
Construction in progress........................ 20,033,256 5,599,342
------------ ------------
393,950,868 205,338,186
Less allowance for loss on land and buildings... (611,534) --
------------ ------------
$393,339,334 $205,338,186
============ ============
</TABLE>
Some leases provide for scheduled rent increases throughout the lease term
and/or rental payments during the construction of a Property prior to the date
it is placed in service. Such amounts are recognized on a straight-line basis
over the terms of the leases commencing on the date the Property is placed in
service. For the years ended December 31, 1998, 1997 and 1996, the Company
recognized $2,734,767 (net of $351,177 in reserves and $666,596 in write-
offs), $1,941,054 and $517,067, respectively, of such rental income.
During 1998, the Company sold three Properties to tenants. During 1997, the
Company sold five of its Properties and the equipment relating to two Secured
Equipment Leases to tenants. The Company received net proceeds of
approximately $7,252,000 and $2,386,000 during 1997 and 1998, respectively,
which approximated the carrying value of the Properties and the net investment
in the direct financing leases for the equipment at the time of the sales. As
a result, no gain or loss was recognized for financial reporting purposes. The
Company used the net sales proceeds relating to the sale of the equipment to
repay amounts previously advanced under its line of credit (see Note 10). The
Company reinvested the proceeds from the sale of Properties in additional
Properties.
During 1998, a tenant exercised its option under the terms of three lease
agreements to exchange three existing Properties for three replacement
Properties which were approved by the Company. In connection therewith, the
Company exchanged three Properties with three replacement Properties. Under
the exchange agreements for each Property, each replacement Property will
continue under the terms of the leases of the
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
original Properties. All closing costs were paid by the tenant. The Company
accounted for these transactions as nonmonetary exchanges of similar productive
assets and recorded the acquisitions of the replacement Properties at the net
book value of the original Properties. No gain or loss was recognized due to
these transactions being accounted for as nonmonetary exchanges of similar
assets.
At December 31, 1998, the Company recorded provisions for losses on land and
buildings totalling $611,534 for financial reporting purposes relating to two
Shoney's Properties and two Boston Market Properties. The tenants of these
Properties experienced financial difficulties and ceased payment of rents under
the terms of their lease agreements. The allowances represent the difference
between the carrying value of the Properties at December 31, 1998 and the
estimated net realizable value for these Properties.
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 31,434,445
2000............................................................ 31,470,924
2001............................................................ 31,671,570
2002............................................................ 32,416,670
2003............................................................ 33,586,967
Thereafter...................................................... 461,430,511
------------
$622,011,087
============
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales. These amounts also do not include minimum lease
payments that will become due when Properties under development are completed
(see Note 16).
5. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Minimum lease payments receivable............. $ 186,515,403 $ 98,121,853
Estimated residual values..................... 17,680,858 6,889,570
Interest receivable from Secured Equipment
Leases....................................... 81,690 67,614
Less unearned income.......................... (112,602,301) (57,465,442)
------------- ------------
Net investment in direct financing leases..... $ 91,675,650 $ 47,613,595
============= ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 11,883,992
2000............................................................ 12,078,426
2001............................................................ 11,850,358
2002............................................................ 11,753,228
2003............................................................ 11,536,216
Thereafter...................................................... 127,413,183
------------
$186,515,403
============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
6. Investment in Joint Venture:
In June 1998, the Company entered into a joint venture arrangement, CNL/Lee
Vista Joint Venture, with a third party to construct and hold one restaurant
property. As of December 31, 1998, the Company had contributed $868,953 to pay
for construction relating to the Property owned by the joint venture. The
Company has agreed to contribute approximately $646,000 to complete its funding
to the joint venture. When funding is completed, the Company expects to have an
approximate 68 percent interest in the profits and losses of the joint venture.
The Company accounts for its investment in this joint venture under the equity
method because it shares control with the other joint venture partner. As of
December 31, 1998, the Company had a 55.38% interest in this joint venture.
The following presents the condensed financial information for the joint
venture at:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
---------- ----
<S> <C> <C>
Land and building on operating lease, less accumulated
depreciation............................................. $2,207,874 $--
Other assets.............................................. 31,757 --
Liabilities............................................... 647,066 --
Partners' capital......................................... 1,592,565 --
Revenues.................................................. 36,767 --
Net income................................................ 28,682 --
</TABLE>
At December 31, 1998, the difference between the Company's carrying amount
of its investment in joint venture and the underlying equity in the net assets
of the joint venture was $104,698, less accumulated amortization of $1,013.
This amount is being amortized on a straight-line basis over 30 years, the term
of the joint venture agreement.
7. Mortgage Notes Receivable:
During 1997, in connection with the acquisition of land for nine Properties,
the Company entered into a Mortgage Loan in the principal sum of $4,200,000,
collateralized by a mortgage on the buildings on the nine Properties and two
additional buildings. The Mortgage Loan bears interest at a rate of 10.5% per
annum and is being collected in 240 equal monthly installments.
During 1998, the Company accepted four Mortgage Loans in the aggregate
principal sum of $2,901,742, collateralized by mortgages on the buildings of
four Properties. These Mortgage Loans bear interest at rates ranging from 9.5%
to 11 percent per annum and are being collected in monthly installments with
maturity dates ranging from 2000 to 2014.
Mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Outstanding principal.............................. $19,272,171 $16,662,418
Accrued interest income............................ 79,034 118,887
Deferred financing income.......................... (95,575) (85,448)
Unamortized loan costs............................. 1,012,677 926,153
Provision for uncollectible mortgage notes......... (636,614) --
----------- -----------
$19,631,693 $17,622,010
=========== ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Management believes that the estimated fair value of mortgage notes
receivable at December 31, 1998 and 1997 approximated the outstanding principal
amount, net of the provision for uncollectible mortgage notes, based on
estimated current rates at which similar loans would be made to borrowers with
similar credit and for similar maturities.
8. Equipment Notes Receivable:
In October 1997, the Company entered into two promissory notes with a
borrower for equipment financing totalling $13,225,000, which are
collateralized by restaurant equipment. Payments of principal and interest were
collected during 1998. In December 1998, additional equipment financing was
provided to this borrower, resulting in two new promissory notes consolidating
the new amounts with the previous amounts loaned in 1997. The two new
(consolidated) promissory notes total the original $13,225,000, bear interest
at a rate of ten percent per annum and will be collected in 84 equal monthly
installments of principal and interest beginning on February 1, 1999.
In 1998, the Company also entered into several promissory notes with several
borrowers for equipment financing for a total of $5,887,512, which are
collateralized by restaurant equipment. The promissory notes bear interest at
rates ranging from ten percent to 11 percent per annum and are being collected
in monthly installments with maturity dates ranging from 1999 to 2006.
Equipment notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Outstanding principal.............................. $19,100,118 $13,225,000
Accrued interest income............................ 119,113 323,044
Deferred financing income.......................... (4,344) --
Unamortized loan costs............................. 162,493 --
----------- -----------
$19,377,380 $13,548,044
=========== ===========
</TABLE>
Management believes that the estimated fair value of equipment notes
receivable at December 31, 1998 and 1997 approximated the outstanding principal
amount based on estimated current rates at which similar loans would be made to
borrowers with similar credit and for similar maturities.
9. Other Investments:
In August 1998, the Company acquired an investment in the Class F, Class G
and Class H Franchise Loan Certificates, Series 1998-1 (collectively, the
"Certificates") from CNL Funding 98-1, LP, a mortgage loan securitization
entity sponsored by CNL Financial Corp. ("CFC"), an affiliate of CNL Fund
Advisors, Inc., the advisor to the Company (the "Advisor"). CFC originated and
serviced mortgage loans on restaurant properties comparable to the triple-net
leased properties currently owned by the Company. After originating the
mortgage loans, CFC contributed the loans to CNL Funding 98-1, LP, the
securitization entity which subsequently issued the Certificates representing
beneficial ownership interests in the pool of mortgage loans.
The Company paid an aggregate purchase price of approximately $16,100,000
for the Certificates. The Company classified the investments in these
Certificates as available for sale for accounting purposes. At December 31,
1998, the estimated fair value of the Certificates approximated their carrying
value; therefore, the Company did not record any unrealized gains or losses
relating to its investment in Certificates. The investment in Certificates
balance at December 31, 1998 includes $117,959 of accrued interest.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Company acquired Class F-1, Class G-1 and Class H-1 Certificates with
fixed pass through rates of 8.4% per annum and an effective yield of 11.6% per
annum for the year ended December 31, 1998. Monthly payments of interest on
these Certificates commenced in September 1998 and monthly payments of
principal and interest are scheduled to be made during the period September
2012 through June 2017.
The Company also acquired Class F-2, Class G-2 and Class H-2 Certificates
with adjustable pass through rates of LIBOR (defined as the per annum London
Interbank Offered Rate for 30 day dollar deposits) plus 2.25% per annum (7.33%
at December 31, 1998) and an effective yield of 11.3% per annum for the year
ended December 31, 1998. Monthly payments of interest on these Certificates
commenced in September 1998 and monthly payments of principal and interest are
scheduled to be made during the period April 2012 through March 2017.
10. Line of Credit:
In March 1996, the Company entered into a $15,000,000 line of credit and
security agreement with a bank, the proceeds of which were to be used by the
Company to offer Secured Equipment Leases. In August 1997, the Company's
$15,000,000 line of credit was amended and restated to enable the Company to
receive advances on a revolving $35,000,000 uncollateralized line of credit
(the "Line of Credit") to provide equipment financing, to purchase and develop
Properties and to fund Mortgage Loans. The advances bear interest at a rate of
LIBOR plus 1.65% or the bank's prime rate, whichever the Company selects at the
time of borrowing. Interest only is repayable monthly until July 31, 1999, at
which time all remaining interest and principal shall be due. The Line of
Credit provides for two one-year renewal options.
As of December 31, 1998 and 1997, $10,143,044 and $2,459,043, respectively,
of principal was outstanding relating to the Line of Credit. As of December 31,
1998 and 1997, the interest rates on amounts outstanding under the Line of
Credit were 7.2743% and 7.6187% (LIBOR plus 1.65%), respectively. The weighted
average interest rates on the Line of Credit were 7.2256% and 7.7290% at
December 31, 1998 and 1997, respectively. The Company believes, based on
current terms, that the carrying value of its Line of Credit at December 31,
1998 and 1997 approximated fair value. The terms of the Line of Credit include
financial covenants which provide for the maintenance of certain financial
ratios. The Company was in compliance with such covenants as of December 31,
1998.
During 1996, the Company entered into interest rate swap agreements with a
commercial bank to reduce the impact of changes in interest rates on its
floating rate debt. The agreements effectively change the Company's interest
rate exposure on notional amounts totalling approximately $2,110,000 of the
outstanding floating rate notes to fixed rates ranging from 8.75% to nine
percent per annum. The notional amounts of the interest rate swap agreements
amortize over the period of the agreements which approximate the term of the
related notes. As of December 31, 1998, the notional balance was approximately
$1,339,900. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreements;
however, the Company does not anticipate nonperformance by the counterparty.
Management does not believe the impact of any payments of a termination
penalty, in the event the Company determines to terminate the swap agreements
prior to the end of their respective terms, would be material to the Company's
financial position or results of operations.
Interest costs (including amortization of loan costs) incurred for the years
ended December 31, 1998, 1997 and 1996 were $402,292, $544,788 and $127,012,
respectively, all of which were capitalized as part of the cost of buildings
under construction. For the years ended December 31, 1998, 1997 and 1996, the
Company paid interest of $338,569, $502,680 and $91,757, respectively.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
11. Redemption of Shares:
In October 1998, the Board of Directors elected to implement the Company's
redemption plan. Under the redemption plan, the Company elected to redeem
shares, subject to certain conditions and limitations. During the year ended
December 31, 1998, 34,757 shares were redeemed at $18.40 per share ($639,528)
and retired from shares outstanding of common stock.
12. Stock Issuance Costs:
The Company has incurred certain expenses in connection with the public
offerings of its shares of common stock, 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 offerings.
During the years ended December 31, 1998, 1997 and 1996, the Company
incurred $38,415,512, $22,422,045 and $9,216,102, respectively, in stock
issuance costs, including $31,142,123, $17,798,605 and $8,063,439,
respectively, in commissions, marketing support and due diligence expense
reimbursement fees and soliciting dealer servicing fees (see Note 14).
13. Distributions:
For the years ended December 31, 1998, 1997 and 1996, 84.87%, 93.33% and
90.25%, respectively, of the distributions received by stockholders were
considered to be ordinary income and 15.13%, 6.67% and 9.75%, respectively,
were considered a return of capital for federal income tax purposes. No amounts
distributed to stockholders for the years ended December 31, 1998, 1997 and
1996 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.
14. Related Party Transactions:
Certain directors and officers of the Company hold similar positions with
the Advisor and the managing dealer of the Company's common stock offerings,
CNL Securities Corp.
CNL Securities Corp. is entitled to receive selling commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the Company's offerings of shares, a substantial portion of
which has been or will be paid as commissions to other broker-dealers. During
the years ended December 31, 1998, 1997 and 1996, the Company incurred
$28,914,297, $16,686,192 and $7,559,474, respectively, of such fees, of which
approximately $26,033,000, $15,563,500 and $7,059,000, respectively, was 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 years ended December 31, 1998, 1997 and 1996, the
Company incurred $1,927,620, $1,112,413 and $503,965, respectively, of such
fees, the majority of which was reallowed to other broker-dealers and from
which all bona fide due diligence expenses were paid.
CNL Securities Corp. is also entitled to receive, in connection with each
common stock offering, a soliciting dealer servicing fee payable annually by
the Company beginning on December 31 of the year following the year in which
the offering terminates in the amount of 0.20% of the stockholders' investment
in the Company. CNL Securities Corp. in turn may reallow all or a portion of
such fee to broker-dealers whose clients purchased shares in such offering and
held shares on such date. As of December 31, 1998, the Company had incurred
$300,206 of such fees relating to the Initial Offering which terminated in
February 1997. No such fees were incurred during the years ended December 31,
1997 and 1996.
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Advisor is entitled to receive acquisition fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of the total amount raised from the sale of shares. During the years
ended December 31, 1998, 1997 and 1996, the Company incurred $17,317,297,
$10,011,715 and $4,535,685, respectively, of such fees. Such fees are included
in land and buildings on operating leases, net investment in direct financing
leases, mortgage notes receivable, investment in joint venture and other
assets.
In 1998, the Board of Directors approved an amendment to the advisory
agreement between the Company and the Advisor providing for the payment of
acquisition fees to the Advisor for acquisitions made by the Company after the
completion of the 1998 Offering and the investment of all of the proceeds
received by the Company from the 1998 Offering (the "Offering Completion
Date"). After the Offering Completion Date, the Company intends to continue to
expand its Property portfolio by acquiring additional Properties using funds
from its Line of Credit. To the extent the Company uses funds from its Line of
Credit to acquire Properties after the Offering Completion Date, the Company
will pay the Advisor an acquisition fee equal to 4.5% of the purchase price
paid by the Company. As of December 31, 1998, the Company had not used funds
from its Line of Credit to acquire Properties because it had net offering
proceeds available for investment.
In connection with the acquisition of Properties that are being or have been
constructed or renovated by affiliates, subject to approval by the Company's
Board of Directors, the Company may incur development or construction
management fees, payable to affiliates of the Company. Such fees are included
in the purchase price of the Properties and are therefore included in the basis
on which the Company charges rent on the Properties. During the years ended
December 31, 1998, 1997 and 1996, the Company incurred $229,153, $387,728 and
$166,695, respectively, of such amounts relating to six, six and four
Properties, respectively.
In connection with the acquisition of Properties that are being or have been
renovated, subject to approval by the Company's Board of Directors, the Company
may incur advisory fees payable to affiliates of the Company. Such fees are
included in the purchase price of the Properties and are therefore included in
the basis on which the Company charges rent on the Properties. During the year
ended December 31, 1998, the Company incurred $67,389 of such fees relating to
three Properties. No such fees were incurred for the years ended December 31,
1997 and 1996.
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor is entitled to receive a one-time Secured
Equipment Lease servicing fee of two percent of the purchase price of the
equipment that is the subject of a Secured Equipment Lease. During the years
ended December 31, 1998, 1997 and 1996, the Company incurred $54,998, $87,665
and $70,070, respectively, in Secured Equipment Lease servicing fees.
The Company and the Advisor have entered into an advisory agreement pursuant
to which the Advisor will receive a monthly asset management fee of one-twelfth
of 0.60% of the Company's real estate asset value and the outstanding principal
balance of the Mortgage Loans as of the end of the preceding month. The
management fee, which will not exceed fees which are competitive for similar
services in the same geographic area, may or may not be taken, in whole or in
part as to any year, in the sole discretion of the Advisor. All or any portion
of the management fee not taken as to any fiscal year shall be deferred without
interest and may be taken in such other fiscal year as the Advisor shall
determine. During the years ended December 31, 1998, 1997 and 1996, the Company
incurred $1,911,128, $881,668 and $278,902 respectively, of such fees, $60,124,
$76,789 and $27,702, respectively, of which has been capitalized as part of the
cost of buildings for Properties that have been or are being constructed.
Prior to such time, if any, as shares of the Company's common stock are
listed on a national securities exchange or over-the-counter market, the
Advisor is entitled to receive a deferred, subordinated real estate
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
disposition fee, payable upon the sale of one or more Properties based on the
lesser of one-half of a competitive real estate commission or three percent of
the sales price if the Advisor provides a substantial amount of services in
connection with the sale. However, if the sales proceeds are reinvested in a
replacement property, no such real estate disposition fees will be incurred
until such replacement property is sold and the net sales proceeds are
distributed. The real estate disposition fee is payable only after the
stockholders receive distributions equal to the sum of an annual, aggregate,
cumulative, noncompounded eight percent return on their invested capital
("Stockholders' 8% Return") plus their aggregate invested capital. As of
December 31, 1998, no deferred, subordinated real estate disposition fees had
been incurred.
A subordinated share of net sales proceeds will be paid to the Advisor upon
the sale of Company assets in an amount equal to ten percent of net sales
proceeds. However, if net sales proceeds are reinvested in replacement
Properties or replacement Secured Equipment Leases, no such share of net sales
proceeds will be paid to the Advisor until such replacement Property or Secured
Equipment Lease is sold. This amount will be payable only after the
stockholders receive distributions equal to the sum of the stockholders'
aggregate invested capital and the Stockholders' 8% Return. As of December 31,
1998, no such payments had been made to the Advisor.
The Advisor and its affiliates provide accounting and administrative
services to the Company on a day-to-day basis as well as services in connection
with the offering of shares. For the years ended December 31, 1998, 1997 and
1996, expenses incurred for these services were classified as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Stock issuance costs...................... $3,103,046 $1,676,226 $ 769,225
General operating and administrative
expenses................................. 1,189,471 556,240 334,603
---------- ---------- ----------
$4,292,517 $2,232,466 $1,103,828
========== ========== ==========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, the Company
acquired five, five and four Properties, respectively, for approximately
$8,770,000, $5,450,000 and $2,610,000, respectively, from affiliates of the
Company. The affiliates had purchased and temporarily held title to these
Properties in order to facilitate the acquisition of the Properties by the
Company. Each Property was acquired at a cost no greater than the lesser of the
cost of the Property to the affiliate, including carrying costs, or the
Property's appraised value.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Due to the Advisor:
Expenditures incurred on behalf of the Company and
accounting and administrative services............ $1,238,148 $ 126,205
Acquisition fees................................... 39,788 386,972
---------- ----------
1,277,936 513,177
---------- ----------
Due to CNL Securities Corp:
Commissions........................................ 30,528 940,520
Marketing support and due diligence expense
reimbursement fees................................ -- 63,097
---------- ----------
30,528 1,003,617
---------- ----------
Due to other affiliates.............................. -- 7,500
---------- ----------
$1,308,464 $1,524,294
========== ==========
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
15. Concentration of Credit Risk:
The following schedule presents rental, earned and interest income from
individual lessees or borrowers, or affiliated groups of lessees or borrowers,
each representing more than ten percent of the Company's total rental, earned
income and interest income from its Properties, Mortgage Loans, Secured
Equipment Leases and Certificates for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Foodmaker, Inc.............................. $4,101,214 $1,980,338 $ N/A
Houlihan's Restaurants, Inc. ............... N/A 1,847,574 N/A
Golden Corral Corporation................... N/A N/A 577,003
Castle Hill Holdings V, L.L.C.,
Castle Hill Holdings VI, L.L.C. and
Castle Hill Holdings VII, L.L.C. .......... N/A 2,636,004 1,699,986
</TABLE>
In addition, the following schedule presents total rental, earned income and
interest income from individual restaurant chains, each representing more than
ten percent of the Company's total rental, earned income and interest income
from its Properties, Mortgage Loans, Secured Equipment Leases and Certificates
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Golden Corral Family Steakhouse
Restaurants............................. $4,373,687 $2,531,941 $1,459,349
Jack in the Box.......................... 4,101,214 1,980,338 N/A
Pizza Hut................................ N/A 2,636,004 1,699,986
Boston Market............................ N/A 2,338,949 547,590
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or group of affiliated tenants and the chains did not represent more
than ten percent of the Company's total rental, earned income and interest
income.
Although the Company's Properties are geographically diverse throughout the
United States and the Company's lessees and borrowers operate a variety of
restaurant concepts, failure of any one of these restaurant chains or any one
of these lessees or borrowers that contributes more than ten percent of the
Company's rental, earned and interest income could significantly impact the
results of operations of the Company if the Company is not able to re-lease the
Properties in a timely manner.
16. Commitments:
The Company has entered into various development agreements with tenants
which provide terms and specifications for the construction of buildings the
tenants have agreed to lease or equipment financing the Company has agreed to
provide. The agreements provide a maximum amount of development costs
(including the purchase price of the land and closing costs) to be paid by the
Company. The aggregate maximum development costs the Company has agreed to pay
are approximately $61,307,000, of which approximately $44,253,000 in land and
other costs had been incurred as of December 31, 1998. The buildings currently
under construction are expected to be operational by June 1999. In connection
with the purchase of each Property, the Company, as lessor, entered into a
long-term lease agreement. The general terms of the lease agreements are
substantially the same as those described in Note 3.
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
17. Subsequent Events:
During the period January 1, 1999 through March 11, 1999, the Company
received the last subscription proceeds for 21,073 shares ($210,735) of common
stock relating to the 1998 Offering.
On January 1, February 1 and March 1, 1999, the Company declared
distributions of $4,744,904, $4,746,243 and $4,746,243, respectively, or
$.12708 per share of common stock, payable in March 1999, to stockholders of
record on January 1, February 1 and March 1, 1999, respectively.
During the period January 1, 1999 through March 11, 1999, the Company
acquired 60 Properties (33 on which restaurants are being constructed or
renovated) for cash at a total cost of approximately $54,283,000. The buildings
under construction are expected to be operational by September 1999. In
connection with the purchase of each Property, the Company as lessor, has
entered into a long-term, triple-net lease agreement.
On March 11, 1999, the Company entered into agreements to acquire (i) the
Advisor, (ii) CNL Financial Corp. and CNL Financial Services, Inc., affiliates
of the Advisor that provide mortgage loans and perform securitization
transactions and (iii) up to 18 CNL Income Funds, limited partnerships
affiliated with the Advisor whose properties are substantially the same type as
the Company's (the "Income Funds"). In connection therewith, the Company has
agreed to issue 3.8 million, 2.35 million and up to 30.5 million shares of
common stock, respectively. The acquisition of each of the Income Funds is
contingent upon certain conditions, including approval by the Company's
stockholders to increase the number of authorized shares of common stock and
approval by a majority of the limited partners of each Income Fund.
18. Reverse Stock Split
On May 27, 1999, the shareholders approved a one-for-two reverse split of
common stock that was effective on June 3, 1999 with the filing of the amended
Articles of Incorporation with the Maryland Department of Assessments and
Taxation. A total of $69,724 was transferred from common stock to additional
paid in capital in connection with the stock split. This transaction has been
recorded herein in the year ended December 31, 1995. The par value of the
common stock remains unchanged. All share and per share amounts have been
restated herein to reflect the one for two reverse stock split.
F-32
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................. F-34
Financial Statements
Consolidated Balance Sheets--As of December 31, 1998 and June 30, 1998.. F-35
Consolidated Statements of Income--For the Six-month Period Ended
December 31, 1998 and the Year Ended June 30, 1998..................... F-36
Consolidated Statements of Stockholders' Equity--For the Six-month
Period Ended December 31, 1998 and the Year Ended June 30, 1998........ F-37
Consolidated Statements of Cash Flows--For the Six-month Period Ended
December 31, 1998 and the Year Ended June 30, 1998..................... F-38
Notes to Consolidated Financial Statements--For the Six-month Period
Ended December 31, 1998 and the Year Ended June 30, 1998............... F-39
</TABLE>
F-33
<PAGE>
Independent Auditor's Report
To the Stockholders
CNL Fund Advisors, Inc.
Orlando, Florida
We have audited the accompanying consolidated balance sheets of CNL Fund
Advisors, Inc. and Subsidiary as of December 31, 1998 and June 30, 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for the six-month period ended December 31, 1998 and the year ended June
30, 1998. These consolidated financial statements are the responsibility of CNL
Fund Advisors, Inc.'s management. Our responsibility is to express an opinion
on these financial statements based on our audit.
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CNL Fund Advisors, Inc. and Subsidiary as of December 31, 1998 and June 30,
1998, and the results of its operations and its cash flows for the six-month
period ended December 31, 1998 and the year ended June 30, 1998 in conformity
with generally accepted accounting principles.
April 30, 1999
Orlando, Florida
F-34
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and June 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 713,308 $ 254,569
Accounts receivable--Related parties................. 6,764,034 6,031,010
Notes receivable..................................... -- 340,000
---------- ----------
Total current assets............................... 7,477,342 6,625,579
Investments and Other Assets........................... 50,469 227,454
Office Furnishings and Equipment....................... 417,122 173,553
---------- ----------
$7,944,933 $7,026,586
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $1,366,120 $1,247,197
Dividends payable.................................... 119,808 2,220,000
Current portion of notes payable--Related party...... 117,919 67,620
---------- ----------
Total current liabilities.......................... 1,603,847 3,534,817
Long-Term Indebtedness:
Notes payable--Related party......................... 242,760 145,927
Amounts Due Under Deferred Compensation Agreements..... 50,469 27,454
---------- ----------
Total liabilities and deferred expenses............ 1,897,076 3,708,198
---------- ----------
Stockholders' Equity:
Capital Stock:
Class A Common Stock--Authorized 10,000 shares; par
value $1.00 per share; issued and outstanding
6,400............................................. 6,400 6,400
Class B Common Stock--Authorized 5,000 shares; par
value $1.00 per share; issued and outstanding
3,600 shares (3,400 shares--June 30, 1998)........ 3,600 3,400
Additional paid-in capital........................... 3,328,375 3,308,575
Retained earnings.................................... 2,709,482 13
---------- ----------
Total stockholders' equity......................... 6,047,857 3,318,388
---------- ----------
$7,944,933 $7,026,586
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-35
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For The Six-Month Period Ended December 31, 1998
and The Year Ended June 30, 1998
<TABLE>
<CAPTION>
Six-Month
Period Ended Year Ended
December 31, June 30,
1998 1998
------------ -----------
<S> <C> <C>
Revenues:
Fees--Related parties............................... $14,408,750 $19,954,188
Other income--($85,603 and $212,326, respectively,
from related parties).............................. 89,415 227,597
----------- -----------
Total revenues.................................... 14,498,165 20,181,785
----------- -----------
Expenses:
Commissions......................................... 272,073 --
Salaries............................................ 2,986,409 3,698,192
General and administrative.......................... 3,048,275 4,069,811
----------- -----------
Total expenses.................................... 6,306,757 7,768,003
----------- -----------
Income Before Provision for Income Taxes and
Cumulative Effect of a Change in Accounting for
Start-up Costs....................................... 8,191,408 12,413,782
Provision for Income Taxes............................ 3,235,606 4,903,444
----------- -----------
Net Income Before Cumulative Effect of a Change in
Accounting for Start-up Costs........................ 4,955,802 7,510,338
Cumulative Effect of a Change in Accounting for Start-
up Costs, Net of Income Taxes of $24,617............. -- 39,237
----------- -----------
Net Income............................................ $ 4,955,802 $ 7,471,101
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-36
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Six-Month Period Ended December 31, 1998
and The Year Ended June 30, 1998
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-In Retained
Stock Stock Capital Earnings Total
------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997... $1,000 $ -- $1,914,915 $ 960,478 $ 2,876,393
Net income for the year
ended June 30, 1998... -- -- -- 7,471,101 7,471,101
Dividends to parent.... -- -- -- (8,431,566) (8,431,566)
Stock split (Note 2)... 5,400 -- (5,400) -- --
Issuance of common
stock--Class B
(Note 1).............. -- 3,400 336,600 -- 340,000
Contributions to
capital............... -- -- 1,062,460 -- 1,062,460
------ ------ ---------- ----------- -----------
Balance, June 30, 1998... 6,400 3,400 3,308,575 13 3,318,388
Net income for the six-
month period ended
December 31, 1998..... -- -- -- 4,955,802 4,955,802
Dividends to parent.... -- -- -- (2,126,525) (2,126,525)
Dividends to Class B
stockholders.......... -- -- -- (119,808) (119,808)
Issuance of common
stock--Class B
(Note 1).............. -- 200 19,800 -- 20,000
------ ------ ---------- ----------- -----------
Balance, December 31,
1998.................... $6,400 $3,600 $3,328,375 $ 2,709,482 $ 6,047,857
====== ====== ========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-37
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six-Month Period Ended December 31, 1998
and The Year Ended June 30, 1998
<TABLE>
<CAPTION>
Six-Month
Period Ended Year Ended
December 31, June 30,
1998 1998
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Cash collected from customers....................... $13,675,726 $17,845,526
Cash paid to employees and other operating cash
payments........................................... (5,997,650) (6,608,547)
Income tax paid..................................... (3,235,606) (5,826,285)
Investment and other income......................... 89,415 227,597
Interest paid....................................... (86,141) (219,022)
----------- -----------
Net cash provided by operating activities........... 4,445,744 5,419,269
----------- -----------
Cash Flows From Investing Activities:
Purchase of office furnishings and equipment........ (324,597) --
Proceeds from notes receivable...................... 340,000 --
Increase in cash surrender value of life insurance.. (23,015) --
Transfer of investment to parent.................... 200,000 (129,134)
----------- -----------
Net cash provided by (used in) investing
activities......................................... 192,388 (129,134)
----------- -----------
Cash Flows From Financing Activities:
Net proceeds from borrowings........................ 147,132 84,400
Contributions to capital............................ -- 1,062,460
Issuance of Class B stock........................... 20,000 --
Dividends paid to parent............................ (4,346,525) (6,211,566)
----------- -----------
Net cash used in financing activities............... (4,179,393) (5,064,706)
----------- -----------
Net Increase in Cash and Cash Equivalents........... 458,739 225,429
Cash and Cash Equivalents, Beginning of Period...... 254,569 29,140
----------- -----------
Cash and Cash Equivalents, End of Period............ $ 713,308 $ 254,569
=========== ===========
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Net income per statements of income................. $ 4,955,802 $ 7,471,101
Add item not requiring (providing) cash:
Depreciation........................................ 81,028 63,319
Change in accounting for start-up costs............. -- 39,237
----------- -----------
Total............................................... 5,036,830 7,573,657
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable..................... (733,024) (2,108,662)
Decrease in income tax payable...................... -- (922,841)
Increase in accounts payable........................ 118,923 849,661
Increase in amount due under deferred compensation
agreements......................................... 23,015 27,454
----------- -----------
Net cash provided by operating activities........... $ 4,445,744 $ 5,419,269
=========== ===========
Supplemental Disclosure of Non-Cash Financing
Activity:
Notes receivable from issuance of class B common
stock.............................................. $ -- $ 340,000
=========== ===========
Dividends declared and unpaid....................... $ 119,808 $ 2,220,000
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-38
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six-Month Period Ended December 31, 1998
and The Year Ended June 30, 1998
Note 1--Summary of Significant Accounting Policies:
CNL Fund Advisors, Inc.'s (the "Company") accounting policies are in
conformity with generally accepted accounting principles.
Organization--The Company was organized under the laws of the State of
Florida, as a wholly owned subsidiary of CNL Group, Inc. All outstanding shares
of class A common stock are owned by CNL Group, Inc.
In June, 1998 the Company acquired the stock of CNL Restaurant Development
Company ("CRD") (a wholly owned subsidiary of CNL Group, Inc.) by exchanging
shares of common stock. CRD became a wholly owned subsidiary of the Company.
Accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of CRD for all periods presented.
Effective July 1, 1997, the Company acquired CNL Growth Fund Advisors, Inc.
(a wholly owned subsidiary of CNL Group, Inc.) by exchanging shares of common
stock. The Company has accounted for the merger in a manner similar to the
pooling-of-interests method.
On June 30, 1998, the Company amended its Articles of Incorporation to
authorize 10,000 shares of Class A common stock and 5,000 shares of Class B
common stock. The Class B common shares are generally deemed to be, on a share-
for-share basis, equivalent to one-tenth of a share of the Company's common
shares with regard to voting rights, dividends and liquidation distributions.
On June 30, 1998, the Company issued 3,400 Class B common shares in exchange
for notes receivable of $340,000. On December 31, 1998, the Company issued 200
Class B common shares in exchange for $20,000.
Basis of Presentation--The accompanying consolidated financial statements
include the accounts of the Company and CRD, its wholly owned subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments--The carrying amounts of cash, accounts
receivable, notes receivable and accounts payable approximate fair value
because of the short maturity of these items. The carrying amounts of notes
payable--related party approximate fair value because the interest rates on
these instruments change with market interest rates.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--Cash flows, cash and cash equivalents include
cash and cash invested in liquid instruments with an original maturity date of
three months or less.
Accounts Receivable--The Company provides an allowance for doubtful accounts
when necessary. However, in the opinion of management, at December 31, 1998 and
June 30, 1998, all accounts were considered collectible and no allowance was
necessary.
Office Furnishings and Equipment--Office furnishings and equipment are
stated at cost and are depreciated primarily using the double-declining balance
method over their estimated useful lives of five to seven years. Major renewals
and betterments are capitalized; replacements, maintenance and repairs which do
not improve or extend the lives of the respective assets are expensed as
incurred. When office furnishings and equipment are sold or disposed of, the
asset account and related accumulated depreciation account are relieved, and
any resulting gain or loss is included in income.
F-39
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Six-Month Period Ended December 31, 1998 and The Year Ended June 30,
1998
Note 1--Summary of Significant Accounting Policies (continued):
Income Taxes--The Company follows the consolidation policies of its parent
company, CNL Group, Inc. in paying its portion of the consolidated Federal and
State income taxes, if any, to the parent company. Provision for income taxes
included in the Company's statements of income have been allocated on a
separate return basis.
The Company is reporting on the accrual basis of accounting for both
financial statement and income tax reporting purposes.
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company considers all expected future events other than
enactments of changes in the tax law or rates. Changes in tax laws or rates
will be recognized in the future years in which they occur. For the six-month
period ended December 31, 1998 and the year ended June 30, 1998, deferred taxes
were immaterial.
Amount Due Under Deferred Compensation Agreements--The Company is included
with its parent company's deferred compensation agreements. The parent company
has entered into nonqualified deferred compensation agreements with certain key
employees. The agreements provide for employee contributions under a salary
reduction plan. Upon retirement, the Company is liable for the employee
contribution and earnings per the employees directed investments. To fund this
future liability, the parent company has acquired life insurance contracts. The
Company anticipates that the death benefit and/or cash value will be available
as the liability comes due.
Note 2--Capital Stock:
On June 30, 1998, the Company's board of directors approved a 6.4-for-1
split of the Class A common stock. As a result, 5,400 shares were issued and
additional paid-in capital was reduced by $5,400. The par value of the shares
remained unchanged.
Note 3--Change in Method of Accounting:
During the year ended June 30, 1998, the Company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities". This statement
requires all start-up activities and organizational costs to be expensed as
incurred. This resulted in a write-off of $63,854 of capitalized costs, net of
income taxes of $24,617, during the year ended June 30, 1998.
Note 4--Notes Receivable:
The amount due was represented by promissory notes from employees. The notes
carried interest at 7.5% and were collateralized by class B common shares. The
notes were collected in full on December 31, 1998.
Note 5--Investments and Other Assets:
Investments and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
Common stock--CNL American Properties Fund, Inc.
carried at cost which approximated fair market
value................................................ $ -- $200,000
Cash surrender value of life insurance................ 50,469 27,454
------- --------
Total............................................... $50,469 $227,454
======= ========
</TABLE>
F-40
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Six-Month Period Ended December 31, 1998 and The Year Ended June 30,
1998
Note 6--Office Furnishings and Equipment:
Office furnishings and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ---------
<S> <C> <C>
Office furnishings and equipment..................... $ 859,424 $ 355,036
Less: Accumulated depreciation....................... (442,302) (181,483)
--------- ---------
Total.............................................. $ 417,122 $ 173,553
========= =========
</TABLE>
Depreciation expense amounted to $81,028 and $63,319 for the six-month
period ended December 31, 1998 and the year ended June 30, 1998, respectively.
Note 7--Income Taxes:
Income taxes are summarized as follows:
<TABLE>
<S> <C>
Balance, July 1, 1997......................................... $ 947,458
Provision for income taxes.................................. 4,903,444
Income tax relating to cumulative effect of change in
accounting for start-up costs.............................. (24,617)
-----------
Total..................................................... 5,826,285
Less: Payments to parent company............................ (5,826,285)
-----------
Balance, June 30, 1998........................................ --
Provision for income taxes.................................. 3,235,606
Less: Payments to parent company............................ (3,235,606)
-----------
Balance, December 31, 1998.................................... $ --
===========
</TABLE>
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
Six-month Year
Period Ended Ended
December 31, June 30,
1998 1998
------------ ----------
<S> <C> <C>
Federal............................................. $2,785,079 $4,220,686
State............................................... 450,527 682,758
---------- ----------
Total provision for income taxes.................. $3,235,606 $4,903,444
========== ==========
</TABLE>
Note 8--Related Party Transactions:
Certain directors and officers of the Company are also directors and
officers of certain real estate investment trusts ("REITs") and investment
partnerships.
The Company provides site selection and property acquisition services to the
various related partnerships and CNL American Properties Fund, Inc. ("APF"), an
unlisted REIT. For the six-month period ended December 31, 1998 and the year
ended June 30, 1998, the Company earned acquisition fees in the amount of
$10,561,891 and $13,888,823, respectively.
F-41
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Six-Month Period Ended December 31, 1998 and The Year Ended June 30,
1998
Note 8--Related Party Transactions (continued):
The Company also provides property management and advisory services to
certain related partnerships and APF. For the six-month period ended December
31, 1998 and the year ended June 30, 1998, the Company earned management and
advisory fees in the amount of $1,522,951 and $2,278,569, respectively.
The Company also provides development services to CNL Restaurant Services,
Inc., a related company. For the six-month period ended December 31, 1998 and
the year ended June 30, 1998 the Company earned development fees of $352,397
and $822,987, respectively.
The Company also receives an origination fee from CNL Financial Services,
Inc. ("CFS"), a majority-owned subsidiary of CNL Group, Inc. (See Note 1), for
services rendered in connection with loans originated and serviced by CFS. In
addition, the Company pays CFS for providing credit underwriting services on
its behalf. For the six-month period ended December 31, 1998 and the year ended
June 30, 1998, the Company earned origination fees of $671,996 and $1,695,452,
respectively, and paid expenses of $247,042 and $304,190, respectively, related
to credit underwriting services.
The Company also receives fees for negotiating secured equipment leases for
APF. During the six-month period ended December 31, 1998 and the year ended
June 30, 1998, the Company earned $57,861 and $326,425, respectively, for these
services.
The Company also provides marketing, investor services, administration,
accounting, tax, compliance and property management services to the related
partnerships, unlisted REITS and related companies for which it receives
personnel reimbursement fees, in addition to the fees described above. For the
six-month period ended December 31, 1998 and the year ended June 30, 1998, such
reimbursements amounted to $1,100,383 and $818,733, respectively.
During the six-month period ended December 31, 1998 and the year ended June
30, 1998, certain affiliated entities provided accounting and administrative
services to the Company. The Company incurred costs of $48,958 and $58,943,
respectively, for such services.
Account receivable--related parties represent amounts due from related
partnerships, corporations and real estate investment trusts for services
rendered, expenses paid on behalf of, and loans advanced to the various
entities. Interest income earned on amounts advanced during the six-month
period ended December 31, 1998 and the year ended June 30, 1998 amounted to
$85,603 and $212,388, respectively.
Notes Payable--See Note 11
During the six-month period ended December 31, 1998, the Company transferred
its investment in the common stock of APF to its parent company, CNL Group,
Inc. for $200,000, which was its cost basis and approximated fair market value.
Note 9--Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash equivalents and
accounts receivable.
F-42
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For The Six-Month Period Ended December 31, 1998 and The Year Ended June 30,
1998
Note 9--Concentration on Risk (continued):
The Company maintains cash balances at financial institutions and invests in
unsecured money market funds. Accounts at these institutions are insured by the
Federal Deposit Insurance Corporation up to $100,000. At December 31, 1998,
uninsured cash deposits and cash invested in money market funds totaled
$610,963.
Concentrations of credit risk with respect to accounts receivable relates to
the Company's business activity being primarily within the real estate
industry. The Company limits its credit risk by the dispersion of activity
across many geographic areas throughout the United States.
Note 10--Profit Sharing Plan:
The Company is included with its parent company's defined contribution
profit sharing plan. This plan qualifies under Section 401(a) and 501(a) of the
Internal Revenue Code of 1974 (ERISA) and is not subject to
minimum funding requirements. The plan covers all eligible employees of the
Company and its subsidiaries upon completion of one year of service. The plan
provides for employee contributions under a salary reduction plan, section
401(k). The employees may elect to contribute from 1% to 15% of salary to a
maximum under IRS regulations. The Company is required to match 50% of the
employee contribution to a maximum of 3% of salary. For the six-month period
ended December 31, 1998 and the year ended June 30, 1998, the Company's
contribution, including administration costs, amounted to $42,801 and $54,208,
respectively.
Note 11--Notes Payable--Related Party:
The Company was allocated a portion of various notes of its parent company
for the acquisition of certain office furniture and equipment used by the
Company. The notes carry interest at prime plus one-quarter to one-half
percent. The aggregate maturities of the allocated indebtedness to the
Company's parent at December 31, 1998 is as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999.............................................................. $117,919
2000.............................................................. 110,286
2001.............................................................. 103,034
2002.............................................................. 29,440
--------
Total........................................................... $360,679
========
</TABLE>
Interest expense amounted to $86,141 and $219,022 for the six-month period
ended December 31, 1998 and the year ended June 30, 1998, respectively.
Note 12--Dividends:
During the year ended June 30, 1998, the Company declared dividends to the
Class A shareholders (parent company) of $8,431,566, of which $6,211,566 was
paid, and dividends of $2,220,000 were declared by the Board of Directors for
shareholders of record on June 29, 1998, payable prior to September 1, 1998.
During the six-month period ended December 31, 1998, the Company declared
and paid dividends of $2,126,525 to the Class A shareholders (parent company).
The Company declared $119,808 in dividends to the Class B common shareholders
of record on December 31, 1998, to be paid in 1999.
F-43
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-45
Financial Statements
Consolidated Balance Sheets--As of December 31, 1998, June 30, 1997 and
1998................................................................... F-46
Consolidated Statements of Operations--For the Six-month period ended
December 31, 1998, the Years ended June 30, 1997 and 1998 and the
Period from inception (October 9, 1995) through June 30, 1996.......... F-47
Consolidated Statements of Comprehensive Income (Loss) for the Six-month
Period Ended December 31, 1998, the Years Ended June 30, 1998 and 1997
and the Period from Inception (October 9, 1995) through June 30, 1996.. F-48
Consolidated Statements of Stockholders' Equity--For the Six-month
period ended December 31, 1998, the Years ended June 30, 1997 and 1998
and the Period from inception (October 9, 1995) through June 30, 1996.. F-49
Consolidated Statements of Cash Flows--For the Six-month period ended
December 31, 1998, the Years ended June 30, 1997 and 1998 and the
Period from inception (October 9, 1995) through June 30, 1996.......... F-50
Notes to Consolidated Financial Statements.............................. F-51
</TABLE>
F-44
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
CNL Financial Corporation:
We have audited the accompanying consolidated balance sheets of CNL
Financial Corporation (a Florida corporation) and subsidiaries as of December
31, 1998, and June 30, 1998 and 1997, and the related consolidated statements
of operations, comprehensive income (loss), stockholders' equity and cash flows
for the six-month period ended December 31, 1998, the years ended June 30, 1998
and 1997, and the period from inception (October 9, 1995) through June 30,
1996. 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 audits 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 Financial Corporation
and subsidiaries as of December 31, 1998, and June 30, 1998 and 1997, and the
results of their operations and their cash flows for the six-month period ended
December 31, 1998, the years ended June 30, 1998 and 1997, and the period from
inception (October 9, 1995) through June 30, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Orlando, Florida,
March 24, 1999 (except with respect to the matters discussed in Note 11, as to
which the date is September 1, 1999)
F-45
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998, and June 30, 1998 and 1997
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............. $ 2,526,078 $ 1,808,758 $ 567,534
Restricted cash....................... 450,782 10,103,916 3,285,313
Due from related party (Note 6)....... 1,043,527 -- --
Notes receivable (Notes 3 and 8)...... 211,280,226 374,482,298 140,781,095
Loan and swap costs, less accumulated
amortization of $1,123,682, $699,735
and $60,122 at December 31, 1998, and
June 30, 1998 and 1997,
respectively......................... 3,094,733 3,905,133 1,425,802
Investment in available for sale
securities (Notes 1 and 3)........... 5,388,213 -- --
Other assets (Note 2)................. 72,190 1,298,434 251,803
Deferred tax assets, net (Note 5)..... 80,327 185,258 --
------------ ------------ ------------
Total assets...................... $223,936,076 $391,783,797 $146,311,547
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued
expenses............................. $ 581,213 $ 1,836,818 $ 1,122,160
Accrued interest (Note 4)............. 963,449 993,564 593,876
Notes payable (Note 4)................ 192,687,152 358,265,820 140,450,990
Notes payable to related parties
(Notes 4 and 6)...................... 25,126,000 24,290,775 3,854,641
Due to related party (Note 6)......... 630,446 2,600,458 132,526
Income tax payable.................... -- 72,009 20,583
Other liabilities..................... 3,465 -- 5,000
------------ ------------ ------------
Total liabilities................. 219,991,725 388,059,444 146,179,776
------------ ------------ ------------
Commitments (Note 9)
Stockholders' Equity (Note 7):
Common stock--Class A, $1 par value;
10,000 shares authorized; 200, 200
and 100 shares issued and
outstanding at December 31, 1998,
and June 30, 1998 and 1997,
respectively....................... 200 200 100
Common stock--Class B, $1 par value;
5,000 shares authorized; 501 issued
and outstanding at December 31,
1998............................... 501 -- --
Additional paid-in capital............ 3,937,096 3,887,497 --
Other accumulated comprehensive loss.. (644,419) -- --
Retained earnings (deficit)........... 650,973 (163,344) 131,671
------------ ------------ ------------
Total stockholders' equity........ 3,944,351 3,724,353 131,771
------------ ------------ ------------
$223,936,076 $391,783,797 $146,311,547
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-46
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997,
and The Period from Inception (October 9, 1995) through June 30, 1996
<TABLE>
<CAPTION>
Period from
Six-month Inception
Period (October 9,
Ended Year Ended Year Ended 1995) through
December June 30, June 30, June 30,
31, 1998 1998 1997 1996
----------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues:
Interest income (Notes 3
and 8).................... $10,187,384 $20,324,223 $3,346,226 $52,063
Gain on securitization
(Note 3).................. 3,694,351 -- -- --
Other income, net.......... 418,079 -- -- --
----------- ----------- ---------- -------
Total revenues........... 14,299,814 20,324,223 3,346,226 52,063
----------- ----------- ---------- -------
Expenses:
Interest and loan cost
amortization and write-off
(Note 4).................. 10,879,294 17,452,876 2,875,881 43,251
Servicing and
administrative fees,
related party (Note 6).... 617,541 1,089,516 205,837 3,543
Advisory fees, related
party (Note 6)............ 734,890 1,155,523 -- --
General and
administrative............ -- 19,740 54,004 956
Other amortization......... 85,086 17,891 8,641 --
Professional services...... 541,087 616,867 6,978 --
Other expenses............. 133,864 361,249 5,130 --
----------- ----------- ---------- -------
Total expenses........... 12,991,762 20,713,662 3,156,471 47,750
----------- ----------- ---------- -------
Income (loss) before
provision (benefit) for
income taxes................ 1,308,052 (389,439) 189,755 4,313
Provision (benefit) for
income taxes (Note 5)....... 493,735 (94,504) 61,066 1,331
----------- ----------- ---------- -------
Net income (loss)............ $ 814,317 $ (294,935) $ 128,689 $ 2,982
=========== =========== ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-47
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For The Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997,
and The Period From Inception (October 9, 1995) through June 30, 1996
<TABLE>
<CAPTION>
Period from
Inception
Six-month Year Year (October 9,
Period Ended Ended Ended 1995) through
December 31, June 30, June 30, June 30,
1998 1998 1997 1996
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
Net income (loss)............... $814,317 $(294,935) $128,689 $2,982
Other comprehensive loss:
Loss in market value from
investment in available for
sale securities, net of tax
benefit of $388,804.......... (644,419) -- -- --
-------- --------- -------- ------
Comprehensive income (loss)..... $169,898 $(294,935) $128,689 $2,982
======== ========= ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-48
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997,
and The Period from Inception (October 9, 1995) through June 30, 1996
<TABLE>
<CAPTION>
Class Class
A B Other
Number Number Additional Accumulated Retained
of Par of Par Paid-in Comprehensive Earnings
Shares Value Shares Value Capital Income (Loss) (Deficit) Total
------ ----- ------ ----- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 9,
1995................... -- $-- -- $-- $ -- $ -- $ -- $ --
Issuance of Class A
common stock.......... 100 100 -- -- -- -- -- 100
Net income............. -- -- -- -- -- -- 2,982 2,982
--- ---- --- ---- ---------- --------- -------- ----------
BALANCE, June 30, 1996.. 100 100 -- -- -- -- 2,982 3,082
Net income............. -- -- -- -- -- -- 128,689 128,689
--- ---- --- ---- ---------- --------- -------- ----------
BALANCE, June 30, 1997.. 100 100 -- -- -- -- 131,671 131,771
Stock split............ 80 80 -- -- -- -- (80) --
Issuance of Class A
common stock, net of
issuance costs........ 20 20 -- -- 3,887,497 -- -- 3,887,517
Net loss............... -- -- -- -- -- -- (294,935) (294,935)
--- ---- --- ---- ---------- --------- -------- ----------
BALANCE, June 30, 1998.. 200 200 -- -- 3,887,497 -- (163,344) 3,724,353
Issuance of Class B
common stock.......... -- -- 501 501 49,599 -- 50,100
Market revaluation on
available for sale
securities, net of tax
benefit of $388,804... -- -- -- -- -- (644,419) -- (644,419)
Net income............. -- -- -- -- -- -- 814,317 814,317
--- ---- --- ---- ---------- --------- -------- ----------
BALANCE, December 31,
1998................... 200 $200 501 $501 $3,937,096 $(644,419) $650,973 $3,944,351
=== ==== === ==== ========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-49
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997,
and The Period from Inception (October 9, 1995) through June 30, 1996
<TABLE>
<CAPTION>
Period from
Six-month Inception
Period Ended (October 9,
December 31, Year Ended Year Ended 1995) through
1998 June 30, 1998 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net income (loss)...... $ 814,317 $ (294,935) $ 128,689 $ 2,982
------------- ------------- ------------- -----------
Adjustments to
reconcile net cash
(used in) provided by
operating activities--
Gain on
securitization........ (3,356,538) -- -- --
Amortization of loan
costs and write-offs
included in interest
expense............... 1,849,930 639,613 60,019 103
Other amortization..... 85,086 17,891 8,263 284
Provision for (benefit
from) deferred taxes.. 493,735 (185,258) -- --
Net cash proceeds from
securitization of
notes receivable...... 265,871,668 -- -- --
Investment in notes
receivable............ (124,395,215) (248,861,590) (138,368,232) (6,000,000)
Collections on notes
receivable............ 18,290,592 15,707,935 4,216,313 --
Decrease (increase) in
restricted cash....... 9,653,134 (6,818,603) (3,285,313) --
Decrease (increase) in
other assets.......... 1,141,158 (96,113) (10,996) --
Increase in accrued
interest income
included in notes
receivable............ (138,206) (547,551) (617,698) (11,478)
(Increase) decrease due
from related party.... (1,043,527) 2,117,991 44,748 115,985
(Decrease) increase in
accounts payable,
accrued expenses,
other liabilities and
income tax payable.... (1,324,149) 108,908 84,640 5,082
Increase in accrued
interest included in
notes payable to
related parties....... 835,225 414,196 -- --
(Decrease) increase in
accrued interest...... (30,115) 399,689 564,232 29,644
Payment of note costs.. -- -- (73,483) --
Payment of organization
costs................. -- (45,517) (60,754) (3,179)
------------- ------------- ------------- -----------
Total adjustments..... 167,932,778 (237,148,409) (137,438,261) (5,863,559)
------------- ------------- ------------- -----------
Net cash provided by
(used in) operating
activities........... 168,747,095 (237,443,344) (137,309,572) (5,860,577)
------------- ------------- ------------- -----------
Cash Flows from
Investing Activities:
Net loss in market
value from investments
in trading
securities............ 295,514 -- -- --
Proceeds from retained
interest and
securities, excluding
investment income..... 212,821 -- -- --
------------- ------------- ------------- -----------
Net cash provided by
investing
activities........... 508,335 -- -- --
------------- ------------- ------------- -----------
Cash Flows from
Financing Activities:
Proceeds from borrowing
on notes payable...... 237,256,258 230,275,399 219,208,505 6,000,000
(Repayments to)
proceeds from
borrowing on note
payable to related
party................. (1,970,012) 20,021,938 3,800,000 --
Repayments on notes
payable............... (402,834,926) (12,460,567) (84,757,515) --
Payment of loan and
swap costs............ (1,039,530) (3,134,657) (544,861) 3,179
Contributions from
stockholders.......... 50,100 3,887,517 -- 100
Proceeds from related
party................. -- 94,938 28,275 --
------------- ------------- ------------- -----------
Net cash (used in)
provided by financing
activities........... (168,538,110) 238,684,568 137,734,404 6,003,279
------------- ------------- ------------- -----------
Net Increase in Cash and
Cash Equivalents....... 717,320 1,241,224 424,832 142,702
Cash and Cash
Equivalents, Beginning
of Period.............. 1,808,758 567,534 142,702 --
------------- ------------- ------------- -----------
Cash and Cash
Equivalents, End of
Period................. $ 2,526,078 $ 1,808,758 $ 567,534 $ 142,702
============= ============= ============= ===========
Supplemental Disclosures
of Cash Flow
Information:
Cash paid for
interest.............. $ (8,543,157) $ (15,881,209) $ (2,069,137) $ (13,218)
Cash paid for income
taxes................. $ (68,545) $ (39,327) $ (41,814) $ --
Summary of
securitization
proceeds--
Gross proceeds from
securitization,
including retained
interest and
securities............ $ 282,715,925 $ -- $ -- $ --
Swap breakage cost..... (3,455,471) -- -- --
Securitization
transaction costs..... (5,905,162) -- -- --
Investment in retained
interest and
securities............ (6,929,772) -- -- --
Bond interest paid..... (553,852) -- -- --
------------- ------------- ------------- -----------
Net cash proceeds from
securitization of
notes receivable..... $ 265,871,668 $ -- $ -- $ --
============= ============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-50
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
1. Significant Accounting Policies:
Organization and Nature of Business
CNL Lending Corporation, a Florida C corporation, was organized on October
9, 1995, and on December 15, 1995, its name was changed to CNL Financial
Corporation (CFC or the Company). CFC owns, directly or indirectly, 100 percent
of the common stock, membership units or partnership interests of CNL Financial
I, Inc. (Fin I), CNL Financial II, Inc. (Fin II), CNL Financial III, LLC (Fin
III), CNL Financial III, SPC, Inc., CNL Funding Corporation, CNL Financial LP
Holding Corp. (the Holding Corporation), CNL Financial LP GP Holding
Corporation, CNL Financial IV, Inc., CNL Financial IV, LP (Fin IV), CNL
Financial V, Inc. and CNL Financial V, LP (Fin V) (collectively, the
Subsidiaries).
CFC, through the Subsidiaries, is primarily engaged in making loans to
restaurant franchisors and franchisees operating in national and regional fast-
food, family-style and casual dining restaurant chains.
During the year ended June 30, 1998, the Company sold 20 shares of Class A
common stock for approximately $3,887,000, net of issuance costs of $112,484,
to Five Arrows Realty Securities LLC (Five Arrows).
During the six-month period ended December 31, 1998, the Company sold 501
shares of Class B common stock for approximately $50,100 (see Note 7).
Fiscal Year-end
Subsequent to June 30, 1998, the Company changed its fiscal year-end from
June 30 to December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of CFC and its
Subsidiaries. All significant intercompany amounts have been eliminated.
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. Cash equivalents are stated at
cost, which approximates market value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks 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, the Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Restricted Cash
Restricted cash consists of cash held in special trust accounts in the name
of the Magenta Trustee and Variable Funding Capital Corporation. The funds on
deposit consist primarily of principal and interest payments received from
borrowers, as well as the required Magenta reserves (see Note 4). These funds
may be invested in direct obligations of the U.S. Government, short-term
commercial paper, money market mutual funds or other interest-bearing time
deposits. Restricted cash is stated at cost, which approximates market value.
Notes Receivable
In accordance with Statement of Financial Accounting Standards (SFAS) No.
65, "Accounting for Certain Mortgage Banking Activities," notes receivable are
recorded at the lower of cost or market, using the
aggregate loan basis. The unpaid principal and accrued interest on the notes
receivable, are included in notes receivable in the accompanying consolidated
balance sheets.
F-51
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
Loan Costs
Loan costs consist of costs to issue debt instruments such as attorney fees,
trustee costs and arrangement fees. These costs related to notes payable and
interest-rate swaps have been capitalized and are being amortized over the
terms of the loan commitments using the straight-line method.
Investments in Available for Sale Securities
Investments in available for sale securities include an investment in an
interest only strip and the Company's retained interest in the receivables that
were securitized on August 14, 1998 (see Note 3). The securities are stated at
fair market value in the accompanying consolidated balance sheets. Beginning
October 1, 1998, the market valuation adjustment was included in the
accompanying consolidated statement of comprehensive income (loss). Prior to
October 1, 1998, these securities were considered investments in trading
securities and the market value adjustments were included in the accompanying
consolidated statement of operations.
Stock Split
A 1.8-for-one stock split was effected September 24, 1997, with the issuance
of 80 common shares and the transfer of $80 from retained earnings to the
common stock account. Par value remained $1 per share subsequent to the split.
Interest-rate Swaps
Derivatives are used to hedge interest rate exposures by modifying the
interest rate characteristics of related balance sheet instruments. Derivatives
used as hedges must be effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
derivative contract. The Company has entered into interest-rate swap agreements
(the Agreements) as a means of managing its interest-rate exposure. The
Agreements are accounted for as hedge positions as of December 31, 1998, June
30, 1998 and 1997. The Agreements have the effect of converting certain draws
on the Company's variable-rate notes payable to fixed-rate notes payable. Net
amounts paid or received are reflected as adjustments to interest expense. As
hedging does not take place prior to funding a loan, the possibility of
canceling a contract is remote. If a contract is canceled prior to its
termination date, the cumulative change in the market value of such derivatives
is recorded as an adjustment to the carrying value of the underlying liability
and is recognized in net interest expense over the expected remaining life of
the related liability. In instances where the underlying instrument is sold or
extinguished, the fair value of the associated derivative is recognized
immediately in the component of earnings relating to the underlying instrument.
The fair values are the estimated amounts that the Company would receive or pay
to terminate the Agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the counterparties. At
December 31, 1998, June 30, 1998 and 1997, the Company estimates it would have
paid approximately $6,999,000, $8,826,155 and $1,280,375, respectively, to
terminate the Agreements.
Revenue Recognition
The Company recognizes interest income using the effective interest method.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements and tax returns. In estimating
future tax
consequences, the Company considers all expected future events other than
enactments of changes in the tax law or rates. Changes in tax laws or rates
will be recognized in the future years in which they occur.
F-52
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), which will require the Company to recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and measure those
instruments at fair value. SFAS 133 is effective for all fiscal years beginning
after June 15, 2000. SFAS 133 should not be applied retroactively to
consolidated financial statements of prior periods. As of December 31, 1998,
the Company has not yet determined the impact of the implementation of this
standard.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" (SFAS 134), which allows the Company to
account for its interests in retained securities as available for sale in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company elected early adoption of SFAS 134, effective
October 1, 1998. If the Company had not elected to early adopt, SFAS 134 would
have been effective the first quarter beginning after December 15, 1998.
Accordingly, the Company changed the classification of its interest in retained
securities from trading to available for sale securities. Prior to October 1,
1998, the Company accounted for its interest in retained securities as trading
securities, with gains and losses from market value adjustments recognized in
the consolidated statements of operations. For the period from August 14, 1998,
to October 1, 1998, the Company recorded a net loss from market valuation
adjustments of which the initial gain of $337,813 is included in gain on
securitization and a loss of $633,327 is included in other income, net, in the
accompanying consolidated statements of operations. For the period from October
1, 1998, to December 31, 1998, the Company recorded a net loss from market
valuation adjustments of $1,033,223 ($644,419, net of tax benefit) and it is
included, net of tax benefit, in the accompanying consolidated statements of
stockholders' equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
2. Other Assets:
Other assets consisted of the following:
<TABLE>
<CAPTION>
December June 30, June 30,
31, 1998 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
Securitization costs.......................... $ -- $ 935,626 $ --
Organizational costs.......................... -- 109,209 76,427
Prepaid expenses.............................. -- 119,929 --
Other......................................... 72,190 157,838 181,653
------- ---------- --------
72,190 1,322,602 258,080
Less--Accumulated amortization................ -- (24,168) (6,277)
------- ---------- --------
$72,190 $1,298,434 $251,803
======= ========== ========
</TABLE>
F-53
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
As of June 30, 1998, securitization costs consisted of costs incurred
related to the securitization, such as attorney and accounting fees (see Note
3). These costs were expensed during the six-month period ended December 31,
1998, when the securitization occurred and have been included net of the gain
on securitization in the accompanying consolidated statements of operations.
Organizational costs consisted of costs incurred in the formation of the
Company, including legal and accounting fees. These costs were being amortized
over five years using the straight-line method. The Company early adopted the
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
during the six-month period ended December 31, 1998, and wrote off all
organization costs. These costs, which were $85,041, are included in other
expense in the accompanying consolidated statements of operations.
3. Notes Receivable:
Notes receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding principal................ $209,965,294 $373,305,571 $140,151,919
Accrued interest income.............. 1,314,932 1,176,727 629,176
------------ ------------ ------------
$211,280,226 $374,482,298 $140,781,095
============ ============ ============
</TABLE>
During the six-month period ended December 31, 1998, and the years ended
June 30, 1998 and 1997, the Company funded $108,300,451, $218,940,681, and
$125,123,451 in new loans, respectively. During the six-month period ended
December 31, 1998, and the years ended June 30, 1998 and 1997, the Company also
funded construction draws of $16,094,764, $29,920,909 and $13,244,781,
respectively.
The amortization periods of the notes receivable range from four to 20
years. The variable-rate notes receivable, which totaled $21,628,776 at
December 31, 1998, had interest rates ranging from 8.25 percent to 8.90
percent. The fixed-rate notes receivable, which totaled $184,391,311 at
December 31, 1998, had interest rates ranging from 7.17 percent to 10.89
percent. The construction notes receivable totaled $3,945,207 at December 31,
1998, with interest rates ranging from 7.87 percent to 10.25 percent.
The following is a schedule of the annual maturities of the Company's
outstanding notes receivable for each of the next five years and thereafter:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------------
<S> <C>
1999.......................................................... $ 6,861,338
2000.......................................................... 7,591,746
2001.......................................................... 8,338,424
2002.......................................................... 9,863,448
2003.......................................................... 10,620,029
Thereafter.................................................... 166,690,309
------------
$209,965,294
============
</TABLE>
The notes receivable are secured by fee simple and/or leasehold interests in
real estate and/or restaurant equipment and business enterprise value.
The fair value of the notes receivable is estimated based on one of the
following methods: (i) quoted market prices, (ii) current rates for similar
issues, or (iii) present value of the expected cash flows. At December 31,
1998, the Company estimates that the fair value is $214,113,218.
F-54
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
On August 14, 1998, the Company securitized some of its notes receivable
with a carrying value of approximately $269,445,000. In accordance with SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the Company accounted for the securitization
as a sale; however, for tax purposes, the securitization was accounted for as a
financing transaction. The securitization involved notes receivable held by Fin
I, Fin III and Fin IV. Gross cash proceeds of $275,786,153 were allocated among
these entities based upon the net book value of the notes receivable that were
securitized. As a result of the securitization, the Company retired
$265,164,843 in notes payable held by Fin I, Fin III and Fin IV. The Company
retained certain securities and interests from the securitization with an
allocated cost basis of $6,929,772 and estimated fair value of approximately
$7,267,585 as of August 14, 1998. Accordingly, upon the sale, the notes
receivable were removed from the balance sheet and a gain from the sale was
recognized for the difference between the carrying value of the notes
receivable and the net proceeds, including the Company's retained interest and
securities. The Company recorded a gain, net of the securitization costs, from
the securitization and the initial market value adjustment of the retained
securities and interests of approximately $3,694,000.
Concurrent with the securitization, the servicing rights related to the
securitized notes receivable were granted to CFS. CFS receives 30 basis points
annually in exchange for servicing the securitized notes receivable.
The retained interests and securities held by the Company include: an Equity
One interest, an Equity Two interest and an interest only strip (IO2). The
Equity One interest is derived from the underlying fixed rate loans in the
pool, while the Equity Two interest is derived from the underlying variable
rate loans in the pool. The equity interests represent the residual cash flows
after the waterfall of payments (all payments to bondholders, hedge counter
parties, servicing and administration fees, and operating expenses) and have no
coupon rate. The IO2 security represents the interest spread derived from the
difference between the interest rates paid on the outstanding bonds versus the
interest rates charged on the underlying variable rate loans in the securitized
pool.
At December 31, 1998, the Company used various assumptions relating to
default, prepayment, and discount rates in valuing each of its investments. For
the Equity One, Equity Two and IO2, the Company assumed a zero percent default
rate. The prepayment assumptions for the Equity One interest was 5 percent
annually, applied to the entire pool, net of estimated yield maintenance due to
bondholders and any amounts due if prepayment is made during the lock-out
period (typically, no prepayment is allowed during the first five years of the
loans and a sliding scale is applied to determine penalties over the next five
years). The prepayment assumption for the Equity Two interest was 5 percent and
is applied each period to the entire pool after a 14-month lockout period. The
prepayment assumption for the IO2 security was 100 percent, applied annually to
the entire variable pool after a 14-month lockout period. The discount rate for
both the Equity One and Equity Two interests was 40 percent. A 10.14 percent
discount rate was applied to the IO2 security based upon the nature of the
security and prepayment assumption. Management reviews the discount rates used
in the market and by several investment bankers and believes the valuations and
assumptions used provide a reasonable estimate of the fair value of the
retained interests and securities as of December 31, 1998. As of December 31,
1998, the estimated fair market value of the Equity One, Equity Two and IO2 was
$5,388,213, and is disclosed as investments in available for sale securities on
the accompanying consolidated balance sheets.
4. Notes Payable:
The carrying amounts of the Company's notes payable approximate fair value
at December 31, 1998, and June 30, 1998 and 1997, since their interest rates
approximate rates currently available to the Company for borrowings.
F-55
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
On September 25, 1997, the Company entered into a credit agreement (the
Credit Agreement) with Five Arrows, a related party. As of December 31, 1998,
and June 30, 1998, Five Arrows owned 10 percent of Class A common stock of the
Company. As of December 31, 1998, Five Arrows owned 16.85 percent of Class B
common stock of the Company. There was no Class B common stock issued or
outstanding at June 30, 1998. The Credit Agreement provides that the Company is
entitled to receive advances of up to $25,000,000 until September 24, 2003. The
outstanding principal balance is due on September 24, 2003. The Credit
Agreement is guaranteed by CFS, a related party (See Note 6). The outstanding
balance under the Credit Agreement at December 31, 1998, and June 30, 1998, was
$20,000,000, plus accrued interest of $659,257 and $55,233 included in notes
payable to related parties in the accompanying consolidated balance sheets,
respectively. The availability under the Credit Agreement at December 31, 1998,
was $5,000,000. The Company incurred legal fees and closing costs of
approximately $550,000 in connection with the Credit Agreement, which are
classified as loan costs on the accompanying consolidated balance sheets.
Advances under the Credit Agreement bear interest at 12 percent and are payable
quarterly. The Credit Agreement contains restrictive covenants which, among
other things, require the Company to maintain a minimum fixed-charge coverage
ratio and debt to capital ratio before incurring additional indebtedness or
paying dividends and distributions, as defined in the Credit Agreement. On
April 22, 1996, Fin I entered into a Franchise Loan Warehousing Agreement (the
Fin I Loan) with a bank, with limited guarantees by CNL Group, Inc., a related
party (See Note 6). The agreement was amended on December 29, 1997. Pursuant to
the terms of the Fin I Loan, Fin I is entitled to make loans to the owners of
quick service, family style, casual dining or other lender-approved type of
restaurant facility, operated by a franchisor or under a franchise agreement,
and partially secured by (a) the underlying real property or a leasehold of
real property, and (b) the furnishings, equipment and fixtures used in the
restaurant facility, guaranties, and/or a collateral assignment of the related
franchise agreement. The Fin I Loan provides that Fin I was entitled to receive
advances of up to $150,000,000 until September 29, 1998. After September 29,
1998, Fin I is entitled to receive advances of up to $100,000,000 until
November 12, 1999, with possible extensions, at the option of Fin I, through
November 12, 2001. Principal repayments are based on the related notes
receivable amortization schedule. The outstanding balance under the Fin I Loan
at December 31, 1998, and June 30, 1998 and 1997, was $34,398,752, $88,019,396
and $39,215,472, respectively, and accrued interest, including interest-rate
swap charges, was $213,794, $543,731 and $319,799, respectively. The
availability on the Fin I Loan at December 31, 1998, was $65,601,248. Fin I
incurred legal fees and closing costs of $311,996 in connection with the Fin I
Loan, which are classified as loan costs on the accompanying consolidated
balance sheets. Loan costs increased by $93,455 during the year ended June 30,
1998, as a result of the renegotiations and loan amendment entered into during
the year. Advances under the Fin I Loan bear interest at the average LIBOR rate
plus 180 basis points (6.86 percent, 7.46 percent and 7.49 percent at December
31, 1998, and June 30, 1998 and 1997, respectively).
On April 9, 1997, Fin III entered into a loan agreement (the Fin III Loan)
with Magenta Capital Corporation (Magenta). The Fin III Loan was amended on
March 27, 1998 (the Fin III Loan Amendment). Pursuant to the terms of the Fin
III Loan, Fin III is entitled to obtain loans for making secured loans to
restaurant franchisees or franchisors, acquiring property and equipment, which
is to be leased to restaurant franchisees or franchisors, and carrying out
certain other business activities. The Fin III Loan provides that Fin III is
entitled to receive advances of up to $300,000,000 until April 9, 2002. On
October 2, 1998, the Company reduced the availability on the Fin III Loan from
$300,000,000 to $150,000,000 and suspended the use of the line. The Fin III
Loan has no set repayment terms and the aggregate outstanding principal is due
April 9, 2024. The outstanding balance under the Fin III Loan at December 31,
1998, and June 30, 1998 and 1997, was $0, $220,043,424 and $101,235,518,
respectively, and accrued interest, including interest-rate swap charges, was
F-56
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
$0, $367,771 and $274,077, respectively. The availability on the Fin III Loan
at December 31, 1998, was $150,000,000. Fin III incurred legal fees and closing
costs of $2,516,284 in connection with the Fin III Loan, which are classified
as loan costs on the accompanying consolidated balance sheets. Loan costs
increased by $1,301,166 during the year ended June 30, 1998, as a result of the
renegotiations and the Fin III Loan
Amendment entered into during the year. As a result of the reduction of the Fin
III Loan, during the six-month period ended December 31, 1998, the Company
wrote off approximately $939,000, one-half of the unamortized loan costs
associated with the Fin III Loan, which is included in other expenses on the
accompanying consolidated statement of operations.
Advances under the Fin III Loan bear interest at the average rate on the
commercial paper (5.63 percent, 5.76 percent and 5.88 percent at December 31,
1998, and June 30, 1998 and 1997, respectively) used by Magenta to fund the
advances.
The loans made by Magenta to Fin III are secured by certain of Fin III's
assets currently existing and which may arise in the future. CNL Group, Inc., a
related party, is also contingently liable under a performance guarantee in
favor of Fin III and Magenta for the payment and performance of any and all
obligations of CFS related to the Fin III Loan. The Fin III Loan Amendment
requires a reserve of 10 percent of the commitment amount to be held by the
Magenta Trustee (the Trustee). The total required reserve of $30 million was to
be delivered to the Trustee through an initial contribution of $2 million at
the closing of the original loan, with additional contributions of $1 million
per month beginning June 30, 1997. The Fin III Loan Amendment required that $12
million in reserves be held at the end of March 1998, with additional
contributions of $1 million per month continuing beginning April 31, 1998.
Reserves in excess of the $2 million initial contribution can be used by the
Trustee to fund borrowings. The required reserve at June 30, 1998, was $15
million with $10,046,288 included in restricted cash on the accompanying
consolidated balance sheets. The remainder of the $15 million was used to fund
loans during the year ended June 30, 1998. As the Company suspended the use of
the Fin III Loan and there were no outstanding borrowings as of December 31,
1998, there was no required reserve amount.
On April 6, 1998, Fin IV entered into a Franchise Loan and Wholesale
Warehouse Mortgage Agreement (the Fin IV Loan) with a bank, with limited
guarantees by CNL Group, Inc., a related party. Pursuant to the terms of the
Fin IV Loan, Fin IV is entitled to make loans to quick service, family style,
casual dining or other lender-approved type of restaurant facility and are
secured by the underlying real property or leasehold of real property,
furnishings, equipment and fixtures used in the restaurant facility, and
guaranties and/or a collateral assignment of the related franchise agreement.
The Fin IV Loan provides that Fin IV is entitled to receive advances of up to
$100,000,000 for the first 180 days after the closing date of the Fin IV Loan,
as well as each securitization transaction, and thereafter, $200,000,000 until
April 5, 1999, with a possible extension through April 4, 2000, at the option
of Fin IV. Fin IV, at its sole discretion, may increase the facility amount to
$200,000,000 during the 180 days following each securitization transaction. The
aggregate outstanding principal on the Fin IV Loan is due April 5, 1999.
However, the Company has the option to extend the maturity date of the Fin IV
Loan by 364 days via written request to the bank. At the expiration of each
extension, the Company has the option of an additional 364-day extension via
written request to the bank. The bank will continue to grant these extensions
so long as the loan repayments are made in accordance with the notes
receivable's principal amortization schedule. If any note receivable goes into
default, the bank must be notified and the amount is payable to the bank upon
demand. The Fin IV Loan has been extended through June 6, 1999, and the Company
has been advised that the Fin IV Loan will be extended to the date of the
merger with APF (see Note 10).
F-57
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
The outstanding balance at December 31, 1998, and June 30, 1998, was
$58,540,012 and $50,203,000, respectively, and accrued interest, including
interest-rate swap charges, was $183,784 and $82,062, respectively. The
availability on the Fin IV Loan at December 31, 1998, was $41,459,988.
Fin IV incurred legal fees and closing costs of $1,034,618 in connection
with the Fin IV Loan, which are classified as loan costs on the accompanying
consolidated balance sheets. Advances under the Fin IV Loan bear interest at
the average rate on commercial paper (5.37 percent and 6.02 percent at December
31, 1998, and June 30, 1998, respectively) used by the bank to fund the
advances.
On September 18, 1998, Fin V entered into a Wholesale Mortgage Warehouse and
Security Agreement (the Fin V Loan) with Prudential Securities Credit
Corporation (Prudential), a Delaware Corporation with limited guarantees by CNL
Group, Inc. and CNL Financial Services, Inc., both related parties. Pursuant to
the terms of the Fin V Loan, Fin V is entitled to make loans to quick service,
family style, casual dining or other lender-approved type of restaurant
facility, and are secured by the underlying real property or leasehold of real
property, furnishings, equipment and fixtures used in the restaurant facility,
and guarantees and/or a collateral assignment of the related franchise
agreement. The Fin V Loan provides that Fin V is entitled to receive advances
of up to $300,000,000. The aggregate outstanding principal on the Fin V Loan is
due September 17, 1999. However, the Company has the option to extend the
maturity date of the Fin V Loan by 364 days via written request to Prudential.
At the expiration of the extension, the Company has the option of an additional
364-day extension via written request to Prudential. Prudential will continue
to grant these extensions so long as the loan repayments are made in accordance
with the notes receivable's principal amortization schedule. If any note
receivable goes into default, Prudential must be notified and the amount is
payable to Prudential upon demand. The outstanding balance on the Fin V Loan at
December 31, 1998, was $99,748,388, and accrued interest was $565,869 including
interest rate swap charges. The availability on the Fin V Loan at December 31,
1998, was $200,251,612. Fin V incurred legal fees and closing costs of $978,060
in connection with the Fin V Loan, which are classified as loan costs on the
accompanying consolidated balance sheets. Advances under the Fin V Loan bear
interest at the rate of LIBOR plus .95 percent (6.01 percent at December 31,
1998).
Interest expense for the Company for the six-month period ended December 31,
1998, the years ended June 30, 1998 and 1997, and the period from inception
(October 9, 1995) through June 30, 1996, was $10,879,294, $17,452,876,
$2,875,881 and $43,251, respectively, including $1,687,271, $639,613, $60,019
and $0, respectively, of loan and swap cost amortization. The weighted average
interest rate on the Fin I Loan during the six-month period ended December 31,
1998, and the years ended June 30, 1998 and 1997, was 8.62 percent, 8.50
percent and 8.65 percent, respectively, including amortization of loan and swap
costs and the swap interest charges. The weighted average interest rate on the
Fin III Loan during the six-month period ended December 31, 1998, and the years
ended June 30, 1998 and 1997, was 7.81 percent, 6.66 percent, and 7.23 percent,
respectively, including amortization of loan and swap costs and the swap
interest charges. The weighted average interest rate on the Fin IV Loan during
the six-month period ended December 31, 1998, and the period from inception
(March 23, 1998) through June 30, 1998, was 7.16 percent and 9.94 percent,
respectively, including amortization of loan and swap costs and the swap
interest charges.
The weighted average interest rate on the Fin V Loan during the period from
inception (September 15, 1998) through December 31, 1998, was 8.25 percent,
including amortization of loan and swap costs and the swap interest charges.
During the six-month period ended December 31, 1998, the Company entered
into interest-rate swap agreements with three banking institutions to reduce
the effect of changes in interest rates on its floating-rate
F-58
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
debt. The agreements effectively change the Company's interest-rate exposure on
certain floating-rate debt totaling approximately $155,405,000 to fixed rates
ranging from 5.48 percent to 7.39 percent. The costs incurred to enter the
interest-rate swap agreements are amortized over the period of the agreements,
ranging from 10 to 20 years. The Company is exposed to credit loss in the event
of non-performance by the other party to the interest-rate swap agreements;
however, the Company does not anticipate non-performance by the counterparty.
Maturities of the Company's outstanding indebtedness, assuming Fin IV and
Fin V exercise their options to extend the maturity date of the respective loan
agreements and the loan repayments are made in accordance with the notes
receivable's principal amortization schedule, were as follows at December 31,
1998:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------------
<S> <C>
1999.......................................................... $ 6,631,589
2000.......................................................... 7,049,350
2001.......................................................... 7,740,269
2002.......................................................... 9,166,418
2003.......................................................... 9,861,244
Thereafter.................................................... 152,238,282
------------
$192,687,152
============
</TABLE>
5. Income Taxes:
The provision (benefit) for income taxes consisted of the following for the
six-month period ended December 31, 1998, the years ended June 30, 1998 and
1997, and the period from inception (October 9, 1995) through June 30, 1996:
<TABLE>
<CAPTION>
December 31, June 30, June 30, June 30,
1998 1998 1997 1996
------------ --------- -------- --------
<S> <C> <C> <C> <C>
Current:
Federal......................... $ -- $ 56,349 $54,986 $1,137
State........................... -- 34,405 6,080 194
-------- --------- ------- ------
-- 90,754 61,066 1,331
-------- --------- ------- ------
Deferred:
Federal......................... 422,252 (172,267) -- --
State........................... 71,483 (12,991) -- --
-------- --------- ------- ------
493,735 (185,258) -- --
-------- --------- ------- ------
Total provision (benefit) for
income taxes................. $493,735 $ (94,504) $61,066 $1,331
======== ========= ======= ======
</TABLE>
F-59
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
A reconciliation of the Company's provision (benefit) for income taxes to
the amount calculated at the U.S. Federal statutory rate is as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30, June 30,
1998 1998 1997 1996
------------ --------- -------- --------
<S> <C> <C> <C> <C>
Computed income taxes at
statutory rate................. $444,738 $(132,407) $64,517 $1,466
State and local tax effects, net
of federal benefit............. 47,482 12,991 6,080 156
Personal holding company tax.... -- 24,490 -- --
Other, net...................... 1,515 422 (9,531) (291)
-------- --------- ------- ------
Provision (benefit) for income
taxes........................ $493,735 $ (94,504) $61,066 $1,331
======== ========= ======= ======
</TABLE>
Deferred taxes consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......... $3,386,159 $ -- $ --
Amortization costs, loan costs, legal
fees and other.......................... 358,586 233,860 --
---------- -------- -----
Total deferred tax assets.............. 3,744,745 233,860 --
---------- -------- -----
Deferred tax liabilities:
Net deferred gain from securitized notes
receivable.............................. 3,664,418 -- --
Other.................................... -- (48,602) --
---------- -------- -----
Total deferred tax liabilities......... 3,664,418 (48,602) --
---------- -------- -----
$ 80,327 $185,258 $ --
========== ======== =====
</TABLE>
At December 31, 1998, the Company has federal tax loss carryforwards of
$3,386,159, which expire in December 2018.
The Internal Revenue Service has approved the change in the Company's fiscal
year-end from June 30 to December 31.
6. Related-Party Transactions:
One of the stockholders and officers of the Company, James M. Seneff, Jr.,
is a principal stockholder of CNL Group, Inc., the parent company of CNL
Financial Services, Inc. (CFS) Another stockholder and officer of the Company,
Robert A. Bourne, is the president of CNL Group, Inc., an officer and
stockholder of CFS and the sole stockholder of CNL Restaurants II, Inc.
The Company and its Subsidiaries have entered into servicing and
administration agreements pursuant to which CFS is entitled to receive an
annual fee of 50 basis points of the applicable notes receivable balance, as
defined in each agreement, payable monthly, based on a 360-day year. The duties
of CFS in the role of servicer and administrator, includes soliciting
applications for the loan program, evaluating creditworthiness of applicants,
servicing and collecting of principal and interest on the outstanding notes
receivable balances, maintaining the accounting records and providing reports
to parties of the loan agreements. The Company incurred $617,541, $1,089,516,
$205,837 and $3,543 in servicing and administrative fees for the six-month
period ended December 31, 1998, the years ended June 30, 1998 and 1997, and the
period from inception (October 9, 1995) through June 30, 1996, respectively.
F-60
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
On October 1, 1997, the Company entered into a management and advisory
agreement, pursuant to which the Company pays for certain services rendered to
the Company by CFS. Under the management and advisory agreement, and the
subsequent amendment effective August 1998, the Company must pay CFS a
management fee, advisory fee, arrangement fee, executive fee, guarantee fee and
administration fee, as defined in the management and advisory agreement. The
Company incurred $734,890 and $1,155,523 related to these fees for the six-
month period ended December 31, 1998, and the year ended June 30, 1998,
respectively. Of the amount incurred during the year ended June 30, 1998,
$250,000 was capitalized into loan costs and is being amortized to expense over
the life of the loan, and approximately $100,000 was accounted for as a
reduction of capital related to the issuance of stock. Additionally, the
agreement provides that CFS be eligible for a performance bonus. The
performance bonus shall be determined at the discretion of the Company's Board
of Directors. For the six-month period ended December 31, 1998, and the year
ended June 30, 1998 and 1997, no bonuses were approved.
At December 31, 1998, the Company recorded a net receivable of $796,510 from
CNL Financial 98-1, LP, a related party through common ownership, resulting
from the securitization of note receivables transaction. Additionally, the
Company recorded a receivable of $238,577 from CNL Capital Corporation (CCC),
another related party through common ownership. Other miscellaneous related
party receivables at December 31, 1998, totaled $8,440.
Application, commitment and origination fees collected by the Company from
the borrowers are remitted to CFS on a monthly basis and are not shown on the
Company's consolidated statements of operations. At December 31, 1998, and June
30, 1998 and 1997, the Company had recorded a liability to CFS of $624,762,
$2,600,458 and $132,526, respectively, primarily related to application,
commitment and origination fees collected by the Company on behalf of CFS and
organization, management, administrative, arrangement and advisory fees due to
CFS by the Company.
The Company entered into three promissory note agreements during the year
ended June 30, 1997, and three promissory note agreements during the year ended
June 30, 1998 (collectively, CFS Related Party Notes) with CFS, under which the
Company had borrowed $3,821,938, $3,821,938 and $3,800,000, as of December 31,
1998, and June 30, 1998 and 1997, respectively. No promissory note agreements
were entered into during the six-month period ended December 31, 1998. The CFS
Related Party Notes bear interest at 12 percent, are unsecured and are due upon
demand. At December 31, 1998, and June 30, 1998 and 1997, accrued interest on
the CFS Related Party Notes of $644,805, $413,604 and $54,641, respectively,
was included in notes payable to related parties on the accompanying
consolidated balance sheets.
On January 16, 1997, Fin I loaned $7.4 million to Main Street California II,
Inc., which is owned 100 percent by CNL Restaurants II, Inc., to purchase five
TGI Friday's sites. The loan was subsequently modified on April 30, 1998.
Payments were $77,968 per month, with an annual interest rate of 9.64 percent.
The loan period was for 180 months and was secured by leasehold improvements
and equipment. Interest earned from the related party was $83,329 and $709,533
for the six-month period ended December 31, 1998, and the year ended June 30,
1998, respectively. At June 30, 1998 and 1997, the outstanding balance on this
loan of $7,071,565 and $7,326,991, respectively, was included in notes
receivable on the accompanying consolidated balance sheets. On August 14, 1998,
this loan was included in the Company's securitization (see Note 3).
Accordingly, there was no outstanding balance on this loan as of December 31,
1998.
F-61
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
7. Stockholders' Equity:
On December 30, 1998, the Board of Directors of the Company approved an
amendment to the Articles of Incorporation to increase the number of authorized
shares of Class A common stock (Class A) from 1,000 to 10,000 and authorized
the creation of 5,000 shares of Class B common stock (Class B). On December 31,
1998, the Board of Directors authorized and approved the sale of 501 Class B
shares. Class B shares have one-tenth the voting rights of Class A shares and
receive one-tenth the dividends as Class A shares. Class B shares vest evenly
over a four-year period, beginning at the date of issuance. The Company has the
right to repurchase any such unvested shares at the initial purchase price,
upon a stockholder's termination of employment with a related company. In the
event of a change in control, the Class B stockholders will have substantially
the same rights and privileges as the Class A stockholders.
8. Concentration of Credit Risk:
The Company did not record any interest income from an individual obligor
prior to the securitization (see Note 3), that represented more than 10 percent
of the Company's total interest income for the period July 1, 1998, through
August 14, 1998. The following schedule presents interest income by obligor
subsequent to the securitization (see Note 3), each representing more than 10
percent of the Company's total interest income for the period August 15, 1998,
through December 31, 1998:
<TABLE>
<CAPTION>
Obligor Amount
------- --------
<S> <C>
WHG RE East, LLC and WHG RE South, LLC (both of which are
subsidiaries or affiliates of Wisconsin Hospitality Group)...... $547,891
</TABLE>
The following schedule presents interest income by individual restaurant
chain prior to the securitization (see Note 3), each representing more than 10
percent of the Company's total interest income for the period July 1, 1998,
through August 14, 1998:
<TABLE>
<CAPTION>
Chain Amount
----- ----------
<S> <C>
Applebee's...................................................... $1,094,060
Burger King..................................................... 1,042,790
TGI Friday's.................................................... 899,560
</TABLE>
The following schedule presents interest income by individual restaurant
chain subsequent to the securitization (see Note 3), each representing more
than 10 percent of the Company's total interest income for the period August
15, 1998, through December 31, 1998:
<TABLE>
<CAPTION>
Chain Amount
----- ----------
<S> <C>
Applebee's...................................................... $1,394,460
TGI Friday's.................................................... 766,528
Taco Bell....................................................... 529,400
</TABLE>
The following schedule presents the notes receivable by obligor, each
representing more than 10 percent of the Company's total notes receivable
balances at December 31, 1998:
<TABLE>
<CAPTION>
Obligor Amount
------- -----------
<S> <C>
WHG RE East, LLC and WHG RE South, LLC (both of which are
subsidiaries or affiliates of Wisconsin Hospitality Group)... $32,042,193
</TABLE>
F-62
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
The Company holds notes receivable with Wisconsin Hospitality Group (WHG),
totaling $32,042,193. WHG owns and operates 19 Applebee's properties,
principally located in the northern mid-west United States. Generally,
principal payments are due monthly and are spread evenly over the loan's
maturity. WHG's notes receivable range in maturity from 14 to 20 years. The
interest rates on the notes receivable range from 8.13 percent to 8.37 percent.
The Company does not participate in any expected residual profits of WHG. WHG's
notes receivable are fully collateralized by each property's land and
buildings.
The following schedule presents the notes receivable by individual
restaurant chain, each representing more than 10 percent of the Company's total
notes receivable balances at December 31, 1998:
<TABLE>
<CAPTION>
Chain Amount
----- -----------
<S> <C>
Applebee's..................................................... $72,968,646
TGI Friday's................................................... 29,169,969
Taco Bell...................................................... 25,243,715
Burger King.................................................... 24,956,751
</TABLE>
Although the Company's properties are geographically diverse throughout the
United States and the obligors operate a variety of restaurant concepts,
default by an obligor contributing more than 10 percent of the
Company's interest income or whose notes receivable balance represents more
than 10 percent of the Company's total notes receivable could significantly
impact the results of the Company. However, management believes the risk of
such default is reduced due to the essential or important nature of these
properties for the ongoing operations of the obligors.
9. Commitments:
In the ordinary course of business, the Company has outstanding loan
commitments to qualified borrowers that are not reflected in the accompanying
consolidated financial statements. These commitments, if accepted by the
potential borrower, obligate the Company to provide funding. The accepted and
unfunded commitment totaled approximately $19,721,942 at December 31, 1998. In
addition, the Company is committed to fund the outstanding loan commitments of
CFS. The accepted and unfunded commitment related to CFS, totaled approximately
$67,233,000 at December 31, 1998.
10. Subsequent Events:
On March 11, 1999, the Board of Directors for CFS and CFC approved merger
documents to sell all of the stock of CFS and CFC and its Subsidiaries to CNL
American Properties Fund, Inc. (APF), a real estate investment trust, a related
party through common ownership, in a stock transaction. Two of the significant
stockholders of the Company are officers in APF. The Board of Directors of APF
has approved the merger documents subject to certain contingencies. If the
merger takes place, the valuation of some of the Company's assets,
specifically, its deferred tax assets related to net operating loss
carryforwards, may not be realizable.
Subsequent to year-end, the Board of Directors of CFC extended CNL Capital
Corp. a line of credit in an amount not to exceed $250,000. The line of credit
was terminated on August 31, 1999.
Subsequent to year-end, the Board of Directors of CFC extended to Century
Capital Markets, LLC (CCM) a line of credit in an amount not to exceed
$1,800,000. The line of credit was terminated on August 31, 1999.
F-63
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Year Ended June 30, 1998 and 1997, and
the Period from Inception (October 9, 1995) through June 30, 1996
11. Events Subsequent To The Date of the Auditor's Report:
On September 1, 1999, CFC and CFS completed their merger transaction with
CNL American Properties Fund, Inc. (APF) and CFC and CFS were subsequently
dissolved. In connection with the merger, the Fin I Loan, Fin III Loan and Fin
IV Loan facilities were terminated and all of the outstanding debt and accrued
interest related to the Credit Agreement with Five Arrows, a related party, was
retired. As a result all of the related unamortized loan costs were written off
and a termination fee of $2,075,000 was paid to Five Arrows Reality Securities,
LLC.
As of August 31, 1999, the Company recorded a lower of cost or market
adjustment related to notes receivable of approximately $7,514,000 because of
increases in interest rates and bond spread widening. As indicated in Note 1,
the Company has entered into interest-rate swap agreements (the Agreements) as
a means of managing its interest-rate exposure related to the Company's
variable-rate notes payable. At August 31, 1999, the Company estimates it would
have received $11,758,000 to terminate the Agreements. However, the increase in
the fair value of the Agreements was not recorded by CFC because the Agreements
are accounted for as hedge positions that have the effect of converting certain
draws on the Company's variable-rate notes payable to fixed-rate notes payable.
F-64
<PAGE>
CNL FINANCIAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-66
Financial Statements
Balance Sheets--As of December 31, 1998, June 30, 1997 and 1998......... F-67
Statements of Operations--For the Six-month Period Ended December 31,
1998, the years ended June 30, 1997 and 1998 and the Period from
Inception (October 10, 1995 through June 30, 1996)..................... F-68
Statements of Stockholders' Equity--For the Six-month Period Ended
December 31, 1998, the years ended June 30, 1997 and 1998 and the
Period from Inception (October 10, 1995 through June 30, 1996)......... F-69
Statements of Cash Flows--For the Six-month Period Ended December 31,
1998, the years ended June 30, 1997 and 1998 and the Period from
Inception (October 10, 1995 through June 30, 1996)..................... F-70
Notes to Financial Statements--December 31, 1998, June 30, 1997 and
1998................................................................... F-71
</TABLE>
F-65
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
CNL Financial Services, Inc.:
We have audited the accompanying balance sheets of CNL Financial Services,
Inc. (a Florida corporation) as of December 31, 1998, and June 30, 1998 and
1997, and the related statements of operations, stockholders' equity and cash
flows for the six-month period ended December 31, 1998, the years ended June
30, 1998 and 1997, and the period from inception (October 10, 1995) through
June 30, 1996. 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 Financial Services,
Inc. as of December 31, 1998, and June 30, 1998 and 1997, and the results of
its operations and its cash flows for the six-month period ended December 31,
1998, the years ended June 30, 1998 and 1997, and the period from inception
(October 10, 1995) through June 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Orlando, Florida,
March 24, 1999 (except with respect to the matters discussed in Note 8, as to
which the date is September 1, 1999)
F-66
<PAGE>
CNL FINANCIAL SERVICES, INC.
BALANCE SHEETS -- December 31, 1998, and June 30, 1998 and 1997
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS.................. $ 962,573 $ 4,430 $ 251,498
DUE FROM RELATED PARTIES (Note 2).......... 5,215,244 6,836,000 3,990,489
PREPAID EXPENSES........................... 7,246 8,304 --
OFFICE FURNISHINGS AND EQUIPMENT, net of
accumulated depreciation of $123,897,
$88,462 and $19,996 at December 31, 1998,
and June 30, 1998 and 1997, respectively.. 253,161 239,612 26,844
OTHER ASSETS............................... 56,047 56,047 265,105
---------- ---------- ----------
$6,494,271 $7,144,393 $4,533,936
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses.... $ 513,869 $ 340,826 $ 58,117
Due to related parties (Note 2).......... 487,120 925,365 3,545,078
---------- ---------- ----------
Total liabilities...................... 1,000,989 1,266,191 3,603,195
---------- ---------- ----------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 6):
Common stock--Class A, $1 par value;
10,000 shares authorized, 2,000, 2,000
and 1,800 issued and outstanding at
December 31, 1998, and June 30, 1998 and
1997, respectively...................... 2,000 2,000 1,800
Common stock--Class B, $1 par value;
5,000 shares authorized, 724 issued and
outstanding at December 31, 1998........ 724 -- --
Additional paid-in capital............... 5,303,503 5,231,827 541,614
Class B stock subscription receivable.... (20,570) -- --
Retained earnings........................ 207,625 644,375 387,327
---------- ---------- ----------
Total stockholders' equity............. 5,493,282 5,878,202 930,741
---------- ---------- ----------
$6,494,271 $7,144,393 $4,533,936
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-67
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
For The Six-Month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
<TABLE>
<CAPTION>
Period From
Inception
Six-month Year Year (October 10,
Period Ended Ended Ended 1995) through
December 31, June 30, June 30, June 30,
1998 1998 1997 1996
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Fee Revenues (Note 2):
Borrower fees............ $ 1,126,085 $3,055,200 $1,588,020 $ --
Advisory fees, related
party................... 734,890 1,505,523 -- --
Servicing and
administration fees,
related party........... 896,958 1,089,515 205,837 --
Underwriting fees,
related party........... 247,042 307,190 10,500 --
Miscellaneous fees,
related party........... -- 17,457 -- --
----------- ---------- ---------- ---------
Total fee revenues..... 3,004,975 5,974,885 1,804,357 --
----------- ---------- ---------- ---------
Expenses:
Origination fees, related
party (Note 2).......... 671,996 1,695,452 -- --
Salaries................. 1,136,241 1,448,359 431,001 95,200
General and
administrative.......... 2,202,266 3,014,760 602,554 93,659
----------- ---------- ---------- ---------
Total expenses......... 4,010,503 6,158,571 1,033,555 188,859
----------- ---------- ---------- ---------
Operating (Loss) Income.... (1,005,528) (183,686) 770,802 (188,859)
----------- ---------- ---------- ---------
Interest Income (Note 2):
Interest income.......... 12,682 32,368 -- --
Interest income, related
party................... 270,946 576,192 54,641 --
----------- ---------- ---------- ---------
Total interest income.. 283,628 608,560 54,641 --
----------- ---------- ---------- ---------
(Loss) Income before
(Benefit) Provision for
Income Taxes.............. (721,900) 424,874 825,443 (188,859)
(Benefit) Provision for
Income Taxes (Note 3)..... (285,150) 167,826 326,050 (76,793)
----------- ---------- ---------- ---------
Net (Loss) Income.......... $ (436,750) $ 257,048 $ 499,393 $(112,066)
=========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997,
and The Period from Inception (October 10, 1995) through June 30, 1996
<TABLE>
<CAPTION>
Class A Class B
Number Class A Number Class B Additional Stock Retained
of Par of Par Paid-in Subscription (Deficit)/
Shares Value Shares Value Capital Receivable Earnings Total
------- ------- ------- ------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, at inception
(October 10, 1995)..... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock................. 1,800 1,800 -- -- 541,614 -- -- 543,414
Net loss............... -- -- -- -- -- -- (112,066) (112,066)
----- ------ --- ----- ---------- -------- --------- ----------
BALANCE, June 30, 1996.. 1,800 1,800 -- -- 541,614 -- (112,066) 431,348
----- ------ --- ----- ---------- -------- --------- ----------
Net income............. -- -- -- -- -- -- 499,393 499,393
BALANCE, June 30, 1997.. 1,800 1,800 -- -- 541,614 -- 387,327 930,741
Issuance of common
stock, net of issuance
costs.................. 200 200 -- -- 4,690,213 -- -- 4,690,413
Net income............. -- -- -- -- -- -- 257,048 257,048
----- ------ --- ----- ---------- -------- --------- ----------
BALANCE, June 30, 1998.. 2,000 2,000 -- -- 5,231,827 -- 644,375 5,878,202
Issuance of common
stock................. -- -- 724 724 71,676 (20,570) -- 51,830
Net loss............... -- -- -- -- -- -- (436,750) (436,750)
----- ------ --- ----- ---------- -------- --------- ----------
BALANCE, December 31,
1998................... 2,000 $2,000 724 $ 724 $5,303,503 $(20,570) $ 207,625 $5,493,282
===== ====== === ===== ========== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
For the Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
<TABLE>
<CAPTION>
Period from
Six-month Inception
Period (October 10, 1995)
Ended Year Ended Year Ended through
December 31, June 30, June 30, June 30,
1998 1998 1997 1996
------------ ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Cash received from
customers............ $ 4,804,987 $ 3,802,221 $ 1,685,914 $ --
Other interest
income............... 104,372 197,650 54,641 --
Cash paid to employees
and other operating
cash payments........ (4,196,890) (6,211,431) (895,804) (180,908)
Income tax refunded
(paid)............... 261,782 (493,876) 76,793 --
----------- ----------- ----------- ---------
Net cash provided by
(used in) operating
activities......... 974,251 (2,705,436) 921,544 (180,908)
----------- ----------- ----------- ---------
Cash Flows from
Investing Activities:
Payment of
organizational
expenses............. -- -- -- (361,506)
Purchase of office
furnishings and
equipment............ (48,984) (281,235) (35,434) --
----------- ----------- ----------- ---------
Net cash used in
investing
activities......... (48,984) (281,235) (35,434) (361,506)
----------- ----------- ----------- ---------
Cash Flows from
Financing Activities:
Net (repayments)
proceeds (to) from
related party from
borrowings for office
furnishings and
equipment............ (18,954) 15,592 29,512 --
Proceeds from issuance
of common stock...... 51,830 4,690,413 -- 543,414
Net (repayments)
advances from related
parties.............. -- (1,944,466) 3,189,517 --
Net repayments to
related parties...... -- (21,936) (3,854,641) --
----------- ----------- ----------- ---------
Net cash provided by
(used in) financing
activities......... 32,876 2,739,603 (635,612) 543,414
----------- ----------- ----------- ---------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ 958,143 (247,068) 250,498 1,000
Cash and Cash
Equivalents, Beginning
of Period.............. 4,430 251,498 1,000 --
----------- ----------- ----------- ---------
Cash and Cash
Equivalents, End of
Period................. $ 962,573 $ 4,430 $ 251,498 $ 1,000
=========== =========== =========== =========
Reconciliation of Net
(Loss) Income to Net
Cash Provided By (Used
In) Operating
Activities:
Net (loss) income...... $ (436,750) $ 257,048 $ 499,393 $(112,066)
----------- ----------- ----------- ---------
Adjustments to
reconcile net cash
provided by (used in)
operating activities-
Amortization.......... -- 25,105 72,301 24,100
Depreciation.......... 35,435 45,830 8,590 --
Decrease (increase) in
due from related
parties.............. 1,620,756 (2,583,575) 284,400 (94,198)
Decrease (increase) in
prepaid expenses..... 1,058 (8,304) -- --
Decrease in due to
related parties...... (419,291) (724,249) -- --
Increase in accounts
payable and accrued
expenses............. 173,043 282,709 56,860 1,256
----------- ----------- ----------- ---------
Total adjustments... 1,411,001 (2,962,484) 422,151 (68,842)
----------- ----------- ----------- ---------
Net cash provided by
(used in) operating
activities......... $ 974,251 $(2,705,436) $ 921,544 $(180,908)
=========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
For the Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
1. Significant Accounting Policies:
Organization and Nature of Business
CNL Financial Services, Inc. (the Company), a Florida corporation, was
organized on October 10, 1995. The Company is a majority-owned subsidiary of
CNL Group, Inc. (the Parent). Operations began in March 1996.
The Company is primarily engaged in soliciting applications for CNL
Financial Corporation (CFC), an affiliate under common control, and
subsidiaries' loan program, evaluating creditworthiness of applicants,
servicing and collecting principal and interest on the outstanding notes
receivable balances, maintaining the accounting records, and providing reports
to parties of the loan agreements.
During the year ended June 30, 1998, the Company sold 200 shares of Class A
common stock for $1,000,000, net of issuance costs, to Five Arrows Realty
Securities, LLC (Five Arrows). As part of this transaction, the Parent
contributed an additional $3,690,413 to the Company.
During the six-month period ended December 31, 1998, the Company sold 724
shares of Class B common stock for $72,400 (see Note 7).
Fiscal Year-end
Subsequent to June 30, 1998, the Company changed its fiscal year-end from
June 30 to December 31.
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.
Office Furnishings and Equipment
Office furnishings and equipment are stated at cost and are depreciated
primarily using an accelerated method over their estimated useful lives of five
to 10 years. Major renewals and betterments are capitalized; replacements,
maintenance and repairs, which do not improve or extend the lives of the
respective assets, are expensed as incurred. When office furnishings and
equipment are sold or disposed of, the asset account and related accumulated
depreciation account are relieved, and any resulting gain or loss is included
in income.
Stock Split
A 1.8-for-1 stock split was effected September 24, 1997, with the issuance
of 800 common shares and the transfer of $800 from additional paid-in capital
to the common stock account. Par value remained $1 per share subsequent to the
split. All references to number of shares, except authorized shares in the
financial statements, have been adjusted to reflect the stock split on a
retroactive basis.
Revenue Recognition
Fee revenues include fees earned for borrower, advisory, servicing and
administration, underwriting and miscellaneous services. Borrower fees
represent permanent and construction origination fees and commitment fees paid
from borrowers. The Company recognizes fee revenues as the services are
provided.
F-71
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
Income Taxes
The Company's taxable income or loss is includable in its Parent's
consolidated federal and state income tax returns. The Company accounts for
income taxes as if it were filing tax returns on a stand-alone basis using an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, the Company considers all expected future
events other than enactments of changes in the tax law or rates. Changes in tax
laws or rates will be recognized in the future years in which they occur.
Amounts payable or receivable related to income taxes are included in the due
from or to related parties accounts. For the years ended December 31, 1998, and
June 30, 1998 and 1997, deferred taxes were immaterial.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
2. Related-Party Transactions:
One of the principal shareholders of the Parent, James M. Seneff, Jr., is a
stockholder and officer of CFC. Additionally, the president of the Parent and
officer and stockholder of the Company, Robert A. Bourne, is a stockholder and
officer of CFC.
Fees
A significant portion of all fee revenues of the Company is for services
provided to CFC and its subsidiaries. In addition, on October 1, 1997, the
Company and CFC entered into a management and advisory agreement, whereby CFC
pays the Company advisory fees, as defined in the agreement. Additionally, the
management and advisory agreement provides that the Company is eligible for a
performance bonus, if approved, by the Board of Directors of CFC at its
discretion. No such bonus was approved for the six-month period ended December
31, 1998, or the year ended June 30, 1998.
On August 14, 1998, CFC securitized some of its notes receivable with a
carrying value of approximately $269,445,000. Concurrent with the
securitization, the servicing rights related to the securitized notes
receivable were granted to the Company. CFS receives 30 basis points annually
in exchange for servicing the securitized notes receivable. During the six-
month period ended December 31, 1998, the Company earned servicing and
administration fees related to the securitized notes receivable of
approximately $279,000.
F-72
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
Due From Related Parties
Due from related parties consisted of the following at:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Fees receivable........................... $ 588,500 $2,360,458 $ 135,848
Advances receivable....................... 4,466,744 4,235,542 3,854,641
Organization costs........................ 160,000 240,000 --
---------- ---------- ----------
$5,215,244 $6,836,000 $3,990,489
========== ========== ==========
</TABLE>
The fees receivable are due from related parties for services provided by
the Company as described above. Amounts due are unsecured and bear interest at
12 percent per annum. There are no defined payment terms.
The advances receivable are due from CFC, are unsecured, bear interest at 12
percent per annum, and are due on demand. For the six-month period ended
December 31, 1998, the years ended June 30, 1998 and 1997, and the period from
inception (October 10, 1995) through June 30, 1996, the Company earned interest
of $270,946, $576,192, $54,641 and $0, respectively, related to the fees
receivable and advances.
As of December 31, 1998, the organization costs receivable is due from CFC,
is unsecured and noninterest-bearing, and is due in installments of $80,000 for
each of the next two years.
CNL Group, Inc. Loan Conversion Option
The Parent has a line of credit with a bank under which the bank had the
option to convert the line of credit to a subordinated debenture prior to
November 12, 1998. On November 12, 1998, this option lapsed.
Performance and Loan Guarantees
The Company is contingently liable under a performance guarantee in favor of
CFC and Five Arrows for the payment and performance of any and all obligations
of the Company related to agreements, which it has entered into with CFC and
Five Arrows. As of December 31, 1998, and June 30, 1998, CFC had $20,000,000
outstanding related to these agreements.
The Parent is contingently liable under a Limited Recourse Agreement related
to a $100 million Warehouse Agreement between CNL Financial I, Inc. (Fin I), a
subsidiary of CFC, as borrower, and First Union National Bank of Florida, as
lender. Under the terms of the Limited Recourse Agreement, the Parent is liable
for amounts drawn on the Warehouse loan for the purpose of making mortgage
loans if, and only if, the loan was not made in accordance with underwriting
and servicing criteria set forth by the lender. Such underwriting services are
performed by the Company. At December 31, 1998, and June 30, 1998, Fin I had
$34,398,752 and $88,019,396 outstanding, respectively, related to this
agreement.
The Parent is also contingently liable under a performance guarantee in
favor of CNL Financial III, LLC (Fin III), a subsidiary of CFC, and Magenta
Capital Corporation, an unrelated third party, for the payment and performance
of any and all obligations of the Company related to an agreement, which it has
entered into with Fin III and Magenta Capital Corporation (Fin III Loan). Under
the terms of the performance guarantee, the Parent is liable for amounts drawn
on the Fin III Loan for the purpose of making loans if, and only if, the loan
was not made in accordance with underwriting and servicing criteria set forth
by the lender. Such underwriting services are performed by the Company. As of
December 31, 1998, and June 30, 1998, Fin III had $0 and $220,043,424
outstanding, respectively, related to this agreement.
F-73
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
The Parent is also contingently liable under a performance guarantee in
favor of CNL Financial IV, LP (Fin IV), a subsidiary of CFC, and Variable
Funding Capital Corporation, an unrelated third party, for the payment and
performance of any and all obligations of the Company related to an agreement
which it has entered into with Fin IV and Variable Funding Capital Corporation
(Fin IV Loan). Under the terms of the performance guarantee, the Parent is
liable for amounts drawn on the Fin IV Loan for the purpose of making loans if,
and only if, the loan was not made in accordance with underwriting and
servicing criteria set forth by the lender. Such underwriting services are
performed by the Company. As of December 31, 1998, and June 30, 1998, Fin IV
had $58,540,012 and $50,203,000, respectively, outstanding related to this
agreement.
Additionally, the Parent is contingently liable under a performance
guarantee in favor of CNL Financial V, LP (Fin V), a subsidiary of CFC, for the
payment and performance of any and all obligations of the Company related to an
agreement, which it has entered into with Fin V (Fin V Loan). Under the terms
of the performance guarantee, the Parent is liable for amounts drawn on the Fin
V Loan for the purpose of making loans if, and only if, the loan was not made
in accordance with underwriting and servicing criteria set forth by the lender.
Such underwriting services are performed by the Company. As of December 31,
1998, Fin V had $99,748,388 outstanding related to this agreement.
Due to Related Parties
During the six-month period ended December 31, 1998, the years ended June
30, 1998 and 1997, and the period from inception (October 10, 1995) through
June 30, 1996, certain affiliated entities provided accounting and
administrative services to the Company for which the Company incurred expenses
of $721,634, $1,114,175, $210,628 and $19,017, respectively, which are included
in general and administrative expense on the accompanying statement of
operations. The amount due to related parties of $404,924, $824,215 and
$3,499,975 at December 31, 1998, and June 30, 1998 and 1997, respectively,
represents amounts due to the Parent or its subsidiaries for these services.
Amounts due are unsecured and noninterest-bearing. There are no defined payment
terms.
Certain key employees of the Company are included in the Parent's
nonqualified deferred compensation plan (the Deferred Plan). The Deferred Plan
provides for employee contributions under a salary reduction plan. Upon
termination of employment, the Company is liable for the employee contribution
and earnings per the employees directed investments. To fund this future
liability, the Parent has acquired life insurance contracts. The Parent
anticipates that the death benefit and/or cash value will be available as the
liability comes due, and will reimburse the Company for amounts paid to
participants under the terms of the Deferred Plan. For the six-month period
ended December 31, 1998, and the year ended June 30, 1998, the Company recorded
a liability of $56,047 related to these agreements.
F-74
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
The Company was allocated a portion of the indebtedness of the Parent for
the acquisition of certain office furniture and equipment used by the Company.
The balances outstanding at December 31, 1998, and June 30, 1998 and 1997, were
$26,149, $45,103 and $29,511, respectively, and are included in due to related
parties in the accompanying balance sheets. The indebtedness bears interest at
rates ranging between 8.0 percent and 8.25 percent, and is secured by the
underlying office furnishings and equipment of the Company. The aggregate
maturities of the allocated indebtedness to the Parent at December 31, 1998,
were as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------- -------
<S> <C>
1999............................................................. $ 9,526
2000............................................................. 9,314
2001............................................................. 5,094
2002............................................................. 2,215
-------
$26,149
=======
</TABLE>
Transactions with Related Party
Effective July 1, 1997, the Company entered into an arrangement with CNL
Fund Advisors, Inc. (CFA), a majority-owned subsidiary of CNL Group, Inc.,
which requires CFA to pay the Company for providing credit underwriting
services on its behalf. Additionally, the Company is required to pay CFA an
origination fee for services rendered in connection with all loans originated
and serviced by the Company. The Company received income of $247,042 and
$304,190 related to credit underwriting services included in fee revenue on the
accompanying statements of operations, and incurred expenses of $671,996 and
$1,695,452 related to origination fees for the six-month period ended December
31, 1998, and the year ended June 30, 1998, respectively.
3. Income Taxes:
The (benefit) provision for income taxes consisted of the following
components for the six-month period ended December 31, 1998, the years ended
June 30, 1998 and 1997, and the period from inception (October 10, 1995)
through June 30, 1996:
<TABLE>
<CAPTION>
Period From
Inception
Six-month Year Year (October 10,
Period Ended Ended Ended 1995) through
December 31, June 30, June 30, June 30,
1998 1998 1997 1996
------------ -------- -------- -------------
<S> <C> <C> <C> <C>
Current:
Federal....................... $(245,446) $144,458 $280,651 $(66,406)
State......................... (39,704) 23,368 45,399 (10,387)
--------- -------- -------- --------
$(285,150) $167,826 $326,050 $(76,793)
========= ======== ======== ========
</TABLE>
The difference between the income tax calculated at the U.S. Federal
statutory rates is primarily because of the inclusion of state income taxes,
net of federal benefit.
The Internal Revenue Service (IRS) has approved the change in the Company's
fiscal year-end from June 30 to December 31.
F-75
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the Six-month Period Ended December 31, 1998,
The Years Ended June 30, 1998 and 1997, and
the Period from Inception (October 10, 1995) through June 30, 1996
4. Profit Sharing Plan:
Employees of the Company are included in the Parent's defined contribution
profit sharing plan (the Plan). The Plan is designed in accordance with the
applicable sections of the Internal Revenue Code, and is not subject to minimum
funding requirements. The Plan covers all eligible employees of the Company and
its subsidiaries upon completion of one year of service. The Plan provides for
employee contributions under a salary reduction plan, section 401(k). The
employees may elect to contribute up to 15 percent of salary to a maximum under
IRS regulations. The Company matches 50 percent of the first 6 percent of each
employee's contribution up to a maximum of 3 percent of salary. For the six-
month period ended December 31, 1998, the years ended June 30, 1998 and 1997,
and the period from inception (October 10, 1995) through June 30, 1996, the
Company's contribution, including administration costs, amounted to $10,441,
$8,376, $3,076 and $2,236, respectively.
5. Commitments:
The Company has outstanding loan commitments to qualified borrowers that are
not reflected in the accompanying financial statements. These commitments, if
accepted by the potential borrower, obligate the
Company to provide funding. Upon closing of the loan commitments, the funding
will be provided by CFC's subsidiaries. The unfunded commitment totaled
approximately $67,233,000 at December 31, 1998.
6. Stockholders' Equity:
On December 30, 1998, the Board of Directors of the Company (the Board)
approved an amendment to the Articles of Incorporation to increase the number
of authorized shares of Class A common stock (Class A) from 1,000 shares to
10,000 shares and authorized 5,000 shares of Class B common stock (Class B). On
December 31, 1998, the Board authorized and approved the sale of 724 Class B
shares. Class B has one-tenth the voting rights of Class A and receives one-
tenth the dividends as Class A. Class B vests evenly over a four-year period,
beginning at the date of issuance. The Company has the right to repurchase any
such unvested shares at the initial purchase price, upon a stockholder's
termination from a related company. In the event of a change in control, the
Class B stockholders will have substantially the same rights and privileges as
the Class A stockholders.
7. Subsequent Events:
On March 11, 1999, the Board of Directors for CFC and the Company approved
merger documents to sell the stock of CFC and the Company to CNL American
Properties Fund, Inc. (APF), a real estate investment trust, in a stock
transaction. Two significant stockholders of CFC and one stockholder of the
Parent are officers of APF. The Board of Directors of APF has approved the
merger documents subject to certain contingencies.
On February 23, 1999, the Board authorized the Company to guarantee the
obligations of CNL Capital Corporation (CCC), a related party under common
control, under a loan agreement between CCC and a bank, of up to $2,500,000.
The guarantee was terminated on August 27, 1999.
8. Events Subsequent To The Date of the Auditor's Report:
On September 1, 1999, CFC and CFS completed their merger transaction with
CNL American Properties Fund, Inc. (APF) and CFC and CFS were subsequently
dissolved.
F-76
<PAGE>
CNL INCOME FUND, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-78
Condensed Statements of Income for the Quarters and the Six Months Ended
June 30, 1999 and 1998................................................... F-79
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-80
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-81
Notes to Condensed Financial Statements for the Quarters and the Six
Months Ended June 30, 1999 and 1998...................................... F-82
Report of Independent Certified Public Accountants........................ F-83
Balance Sheets as of December 31, 1998 and 1997........................... F-84
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-85
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-86
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-87
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-88
</TABLE>
F-77
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,379,237 and $2,277,627,
respectively.......................................... $7,472,578 $7,574,188
Investment in joint ventures........................... 832,194 841,379
Cash and cash equivalents.............................. 203,524 252,521
Receivables, less allowance for doubtful accounts of
$30,168 in 1999....................................... 10,896 30,959
Prepaid expenses....................................... 6,623 5,463
Lease costs, less accumulated amortization of $25,625
and $24,375, respectively............................. 24,375 25,625
Accrued rental income.................................. 31,065 30,791
---------- ----------
$8,581,255 $8,760,926
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 32,083 $ 736
Escrowed real estate taxes payable..................... 4,100 1,024
Distributions payable.................................. 266,982 266,982
Due to related parties................................. 149,805 129,060
Rents paid in advance and deposits..................... 17,930 36,105
---------- ----------
Total liabilities.................................... 470,900 433,907
Commitments and Contingencies (Note 2)
Partners' capital...................................... 8,110,355 8,327,019
---------- ----------
$8,581,255 $8,760,926
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-78
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases...... $248,493 $257,223 $482,159 $530,832
Interest and other income................ 3,605 9,327 5,203 12,456
-------- -------- -------- --------
252,098 266,550 487,362 543,288
-------- -------- -------- --------
Expenses:
General operating and administrative..... 17,404 23,354 39,080 45,502
Professional services.................... 8,937 9,817 11,202 12,602
Real estate taxes........................ -- 1,080 1,091 2,161
State and other taxes.................... -- 43 5,667 4,450
Depreciation and amortization............ 51,430 52,171 102,860 105,822
Transaction costs........................ 26,454 -- 57,570 --
-------- -------- -------- --------
104,225 86,465 217,470 170,537
-------- -------- -------- --------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Building.................................. 147,873 180,085 269,892 372,751
Equity in Earnings of Joint Ventures....... 23,518 20,584 47,408 41,457
Gain on Sale of Land and Building.......... -- 235,804 -- 235,804
-------- -------- -------- --------
Net Income................................. $171,391 $436,473 $317,300 $650,012
======== ======== ======== ========
Allocation of Net Income:
General partners......................... $ 1,714 $ 3,022 $ 3,173 $ 5,157
Limited partners......................... 169,677 433,451 314,127 644,855
-------- -------- -------- --------
$171,391 $436,473 $317,300 $650,012
======== ======== ======== ========
Net Income Per Limited Partner Unit........ $ 5.66 $ 14.45 $ 10.47 $ 21.50
======== ======== ======== ========
Weighted Average Number of Limited Partner
Units Outstanding......................... 30,000 30,000 30,000 30,000
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-79
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 330,430 $ 321,759
Net income..................................... 3,173 8,671
---------- -----------
333,603 330,430
---------- -----------
Limited partners:
Beginning balance.............................. 7,996,589 8,707,291
Net income..................................... 314,127 992,766
Distributions ($17.80 and $56.78 per limited
partner unit, respectively)................... (533,964) (1,703,468)
---------- -----------
7,776,752 7,996,589
---------- -----------
Total partners' capital...................... $8,110,355 $ 8,327,019
========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-80
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities................ $484,967 $557,386
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.................. -- 661,300
Decrease in restricted cash.............................. -- 126,009
-------- --------
Net cash provided by investing activities................ -- 787,309
-------- --------
Cash Flows from Financing Activities:
Distributions to limited partners........................ (533,964) (632,442)
-------- --------
Net cash used in financing activities.................. (533,964) (632,442)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....... (48,997) 712,253
Cash and Cash Equivalents at Beginning of Period........... 252,521 184,130
-------- --------
Cash and Cash Equivalents at End of Period................. $203,524 $896,383
======== ========
Supplemental Schedule of Non-Cash Financing Activities:
Deferred real estate disposition fee incurred and unpaid
at end of period........................................ $ -- $ 20,400
Distributions declared and unpaid at end of period....... $266,982 $853,283
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-81
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income
Fund, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 578,880 shares of its
common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $11,384,042 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
3. Subsequent Event:
In July 1999, the Partnership entered into a promissory note with the
corporate general partner for a loan in the amount of $21,000 in connection
with the operations of the Partnership. The loan is uncollateralized, non-
interest bearing and due on demand.
F-82
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund, Ltd. (a Florida
Limited partnership) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except for
Note 10 for which the date is
March 11, 1999 and Note 11 for
which the date is June 3, 1999
F-83
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accumulated
depreciation........................................... $7,574,188 $8,185,465
Investment in and due from joint ventures............... 841,379 919,476
Cash and cash equivalents............................... 252,521 184,130
Restricted cash......................................... -- 129,257
Receivables, less allowance for doubtful accounts of
$3,092 in 1997......................................... 30,959 21,331
Prepaid expenses........................................ 5,463 4,989
Lease costs, less accumulated amortization of $24,375
and $21,875............................................ 25,625 28,125
Accrued rental income................................... 30,791 27,305
---------- ----------
$8,760,926 $9,500,078
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable........................................ $ 736 $ 2,595
Escrowed real estate taxes payable...................... 1,024 734
Distributions payable................................... 266,982 316,221
Due to related parties.................................. 129,060 115,741
Rents paid in advance and deposits...................... 36,105 35,737
---------- ----------
Total liabilities..................................... 433,907 471,028
Partners' capital....................................... 8,327,019 9,029,050
---------- ----------
$8,760,926 $9,500,078
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-84
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,015,292 $1,038,443 $1,115,530
Contingent rental income................... 22,193 22,205 56,409
Interest and other income.................. 21,087 22,210 101,293
---------- ---------- ----------
1,058,572 1,082,858 1,273,232
---------- ---------- ----------
Expenses:
General operating and administrative....... 87,080 86,780 92,462
Professional services...................... 17,110 12,772 13,262
Real estate taxes.......................... 3,969 3,929 4,009
State and other taxes...................... 4,450 5,138 5,260
Depreciation and amortization.............. 268,260 208,807 210,206
Transaction costs.......................... 7,322 -- --
---------- ---------- ----------
388,191 317,426 325,199
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Buildings................................... 670,381 765,432 948,033
Equity in Earnings of Joint Ventures......... 95,252 250,142 116,076
Gain on Sale of Land and Buildings........... 235,804 233,183 19,000
---------- ---------- ----------
Net Income................................... $1,001,437 $1,248,757 $1,083,109
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 8,671 $ 11,577 $ 10,641
Limited partners........................... 992,766 1,237,180 1,072,468
---------- ---------- ----------
$1,001,437 $1,248,757 $1,083,109
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 33.09 $ 41.24 $ 35.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 30,000 30,000 30,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-85
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $ 193,400 $106,141 $13,314,525 $(13,429,078) $10,705,104 $(1,663,140) $ 9,226,952
Distributions to
limited partners
($42.16 per limited
partner unit)......... -- -- -- (1,264,884) -- -- (1,264,884)
Net income............. -- 10,641 -- -- 1,072,468 -- 1,083,109
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 193,400 116,782 13,314,525 (14,693,962) 11,777,572 (1,663,140) 9,045,177
Distributions to
limited partners
($42.16 per limited
partner unit)......... -- -- -- (1,264,884) -- -- (1,264,884)
Net income............. -- 11,577 -- -- 1,237,180 -- 1,248,757
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 193,400 128,359 13,314,525 (15,958,846) 13,014,752 (1,663,140) 9,029,050
Distributions to
limited partners
($44.45 per limited
partner unit)......... -- -- (369,939) (1,333,529) -- -- (1,703,468)
Net income............. -- 8,671 -- -- 992,766 -- 1,001,437
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $ 193,400 $137,030 $12,944,586 $(17,292,375) $14,007,518 $(1,663,140) $ 8,327,019
========= ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-86
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,030,115 $1,227,883 $1,096,290
Distributions from joint ventures......... 113,770 152,019 133,296
Cash paid for expenses.................... (131,054) (84,642) (106,546)
Interest received......................... 20,958 21,556 9,648
---------- ---------- ----------
Net cash provided by operating
activities............................. 1,033,789 1,316,816 1,132,688
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................... 661,300 793,009 20,000
Additions to land and building........... -- (863,135) --
Return of capital from joint venture..... -- 472,373 --
Investment in joint venture.............. -- (303,419) --
Decrease (increase) in restricted cash... 126,009 (126,009) --
---------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 787,309 (27,181) 20,000
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from loan from corporate
general partner......................... -- 133,000 83,100
Repayment of loan from corporate general
partner................................. -- (133,000) (83,100)
Distributions to limited partners........ (1,752,707) (1,264,884) (1,264,884)
---------- ---------- ----------
Net cash used in financing activities... (1,752,707) (1,264,884) (1,264,884)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 68,391 24,751 (112,196)
Cash and Cash Equivalents at Beginning of
Year...................................... 184,130 159,379 271,575
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 252,521 $ 184,130 $ 159,379
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,001,437 $1,248,757 $1,083,109
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 206,181 206,307 207,706
Amortization.............................. 62,079 2,500 2,500
Equity in earnings of joint ventures, net
of distributions......................... 18,518 (98,123) 17,220
Gain on sale of land and buildings........ (235,804) (233,183) (19,000)
Decrease (increase) in receivables........ (6,380) 158,360 (151,105)
Increase in prepaid expenses.............. (474) (524) (650)
Decrease (increase) in accrued rental
income................................... (3,486) (3,706) 1,234
Increase (decrease) in accounts payable
and accrued expenses..................... (1,569) 673 (11,712)
Increase (decrease) in due to related
parties.................................. (7,081) 20,729 19,873
Increase (decrease) in rents paid in
advance and deposits..................... 368 15,026 (16,487)
---------- ---------- ----------
Total adjustments....................... 32,352 68,059 49,579
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,033,789 $1,316,816 $1,132,688
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fee
incurred and unpaid at end of year....... $ 20,400 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 266,982 $ 316,221 $ 316,221
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-87
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are generally leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating expenses
relating to the property, including property taxes, insurance, maintenance and
repairs. The leases are accounted for using the operating method. Under the
operating method, land and building leases are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged to operations as
incurred. Buildings are depreciated on the straight-line method over their
estimated useful lives of 30 years. When scheduled rentals vary during the
lease term, income is recognized on a straight-line basis so as to produce a
constant periodic rent over the lease term commencing on the date the property
is placed in service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease or events or changes in
circumstances indicate that the tenant will not lease the property through the
end of the lease term, the Partnership either reserves or writes-off the
cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonable
possible that changes could occur in the near term which could adversely affect
the general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
the allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Sand Lake
Road Joint Venture, Orange Avenue Joint Venture, and a property in Vancouver,
Washington, held as tenants-in-common with affiliates, are accounted for using
the equity method since the Partnership shares control with affiliates which
have the same general partners.
F-88
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or three successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
F-89
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 3,759,766 $ 3,999,700
Buildings.......................................... 6,092,049 6,358,678
----------- -----------
9,851,815 10,358,378
Less accumulated depreciation...................... (2,277,627) (2,172,913)
----------- -----------
$ 7,574,188 $ 8,185,465
=========== ===========
</TABLE>
In August 1997, the Partnership sold its property in Casa Grande, Arizona,
to a third party for $840,000 and received net sales proceeds of $793,009,
resulting in a gain of $233,183 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1986 and had a cost of
approximately $667,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $128,400 in excess of its original purchase price. In October
1997, the Partnership reinvested the majority of the net sales proceeds in a
property located in Camp Hill, Pennsylvania.
During the year ended December 31, 1998, the Partnership sold its property
in Kissimmee, Florida for $680,000 and received net sales proceeds of $661,300
resulting in a gain of $235,804 for financial reporting purposes. This property
was originally acquired by the Partnership in 1987 and had a cost of
approximately $475,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold this property for
approximately $185,900 in excess of its original purchase price. In connection
with the sale, the Partnership incurred a deferred, subordinated, real estate
disposition fee of $20,400 (See Note 8).
Certain leases provide for escalating guaranteed minimum rents throughout
the lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998 and 1997, the Partnership recognized $3,486 and $3,706, respectively,
of such income. For the year ended December 31, 1996, rental payments received
exceeded the rental income recognized on a straight-line basis by $1,234.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 894,752
2000.............................................................. 894,405
2001.............................................................. 870,528
2002.............................................................. 457,415
2003.............................................................. 456,511
Thereafter........................................................ 4,013,686
----------
$7,587,297
==========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-90
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Investment in Joint Ventures:
In August 1997, Seventh Avenue Joint Venture, in which the Partnership owned
a 50 percent interest, sold its property to its tenant for $950,000, and
received net sales proceeds of $944,747, resulting in a gain to the joint
venture of approximately $295,100 for financial reporting purposes. The
property was originally acquired by Seventh Avenue Joint Venture in June 1986
and had a total cost of approximately $770,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $177,400 in excess of its original purchase price.
During 1997, as a result of the sale of the property, the joint venture was
dissolved in accordance with the joint venture agreement. As a result, the
Partnership received approximately $472,400, representing its pro-rata share of
the net sales proceeds received by the joint venture.
In December 1997, the Partnership acquired a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 12.17% interest in this property.
As of December 31, 1998, the Partnership had a 50 percent interest in the
profits and losses of Orange Avenue Joint Venture and Sand Lake Road Joint
Venture, and owned a 12.17% interest in a property in Vancouver, Washington, as
tenants-in-common. These joint ventures, and the Partnership and affiliates, as
tenants-in-common, each own and lease one property to an operator of national
fast-food or family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the property held as
tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $3,261,368 $3,338,774
Cash................................................ 1,354 1,636
Prepaid expenses.................................... 219 --
Accrued rental income............................... 23,087 --
Liabilities......................................... 1,619 1,677
Partners' capital................................... 3,284,409 3,338,733
Revenues............................................ 420,677 246,236
Gain on sale of land and building................... -- 295,080
Net income.......................................... 340,503 500,285
</TABLE>
The Partnership recognized income totaling $95,252, $250,142 and $116,076
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
5. Restricted Cash:
As of December 31, 1997, the remaining net sales proceeds of $126,009 from
the sale of the property in Casa Grande, Arizona, plus accrued interest of
$3,248, were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional property or use
for other Partnership purposes. During 1998, the funds were returned to the
Partnership and used to pay distributions to the limited partners.
F-91
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $1,703,468, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $1,264,884. Distributions for the year ended
December 31, 1998, included $586,300 in a special distribution, as a result of
the distribution of net sales proceeds from the sale of the property in
Kissimmee, Florida. This special distribution was effectively a return of a
portion of the limited partners' investment, although, in accordance with the
Partnership agreement, $216,361 was applied toward the limited partners' 10%
Preferred Return and the balance of $369,939 was treated as a return of capital
for purposes of calculating the limited partners' 10% Preferred Return. As a
result of the return of capital, and the returns of capital in prior years, the
amount of the limited partners' invested capital contributions (which generally
is the limited partners' capital contributions, less distributions from the
sale of a property that are considered to be a return of capital) was
decreased; therefore, the amount of the limited partners' invested capital
contributions on which the 10% Preferred Return is calculated was lowered
accordingly. As a result of the sale of the property during 1998, the
Partnership's total revenue was reduced, while the majority of the
Partnership's operating expenses remained fixed. Therefore, distributions of
net cash flow were adjusted during the quarter ended June 30, 1998. No
distributions have been made to the general partners to date.
F-92
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,001,437 $1,248,757 $1,083,109
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (87,967) (104,279) (108,995)
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... 58,632 (233,183) --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of
joint ventures for tax reporting
purposes............................... 49,058 (18,410) (17,987)
Capitalization of transaction costs for
tax reporting purposes................. 7,322 -- --
Accrued rental income................... (3,486) (3,706) 1,234
Rents paid in advance................... 368 15,026 (16,487)
Allowance for doubtful accounts......... (3,091) 1,679 (120,724)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $1,022,273 $ 905,884 $ 820,150
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. James M. Seneff, Jr. is director, chairman of the board of
directors and chief executive officer of CNL Fund Advisors, Inc. The other
individual general partner, Robert A. Bourne, serves as treasurer, director and
vice chairman of the board of CNL Fund Advisors, Inc. During the years ended
December 31, 1998, 1997, and 1996, CNL Fund Advisors, Inc. (hereinafter
referred to as the "Affiliate") performed certain services for the Partnership,
as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures or competitive fees for comparable
services. In addition, these fees will be incurred and will be payable only
after the limited partners receive their aggregate, noncumulative 10% Preferred
Return. Due to the fact that these fees are noncumulative, if the limited
partners do not receive their 10% Preferred Return in any particular year, no
management fees will be due or payable for such year. As a result of such
threshold, no management fees were incurred during the years ended December 31,
1998, 1997, and 1996.
The Affiliate is entitled to receive a deferred, subordinated real estate
disposition fee, payable upon the sale of one or more properties based on the
lesser of one-half of a competitive real estate commission or three percent of
the sales price if the Affiliate provides a substantial amount of services in
connection with the sale. However, if the net sales proceeds are reinvested in
a replacement property, no such real estate disposition fees
F-93
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
will be incurred until such replacement property is sold and the net sales
proceeds are distributed. Payment of the real estate disposition fee is
subordinated to receipt by the limited partners of the 10% Preferred Return on
a cumulative basis, plus their adjusted capital contributions. For the year
ended December 31, 1998, the Partnership incurred $20,400 in a deferred,
subordinated real estate disposition fee as a result of the sale of a property
(See Note 3). No deferred, subordinated real estate disposition fees were
incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $63,981, $57,679 and $67,685 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to CNL Fund Advisors, Inc. and its affiliates:
Deferred, subordinated real estate disposition fee....... $ 87,150 $ 66,750
Expenditures incurred on behalf of the Partnership....... 15,123 17,902
Accounting and administrative services................... 26,787 31,089
-------- --------
$129,060 $115,741
======== ========
</TABLE>
The deferred, subordinated real estate disposition fees are the result of
the Partnership's sale of one property during 1998 and two properties in prior
years. These fees will not be paid until after the limited partners have
received their cumulative 10% Preferred Return, plus their adjusted capital
contributions, as described above.
9. Concentration of Credit Risk:
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnership's total rental
income (including the Partnership's share of rental income from joint ventures
and the property held as tenants-in-common with an affiliate), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $452,653 $452,653 $452,653
Wendy's International, Inc....................... N/A 164,857 212,322
Restaurant Management Services, Inc.............. N/A 128,737 129,633
</TABLE>
In addition, the following schedule presents total rental income from
individual restaurant chains, each representing more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from joint ventures and the property held as tenant-in-common with an
affiliate), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $452,653 $452,653 $452,653
Wendy's Old Fashioned Hamburger Restaurants..... 352,330 443,335 507,642
Popeyes Famous Fried Chicken.................... N/A 128,737 129,633
</TABLE>
F-94
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
10. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,157,759 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $11,384,042 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
11. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 578,880 shares valued at $20.00 per
APF share.
F-95
<PAGE>
CNL INCOME FUND II, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-97
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-98
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-99
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-100
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-101
Report of Independent Certified Public Accountants....................... F-103
Balance Sheets as of December 31, 1998 and 1997.......................... F-104
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-105
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-106
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-107
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-108
</TABLE>
F-96
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,732,540 and
$3,631,359, respectively............................. $12,186,046 $12,835,304
Investment in joint ventures.......................... 4,326,459 4,353,427
Mortgage note receivable.............................. -- 6,872
Cash and cash equivalents............................. 842,128 889,891
Restricted cash....................................... 683,770 --
Receivables, less allowance for doubtful accounts of
$56,630 and $55,435, respectively.................... 108,847 122,560
Prepaid expenses...................................... 8,628 4,801
Lease costs, less accumulated amortization of $16,353
and $14,889, respectively............................ 4,210 5,674
Accrued rental income................................. 185,562 174,382
----------- -----------
$18,345,650 $18,392,911
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 73,729 $ 4,621
Escrowed real estate taxes payable.................... 3,368 8,065
Distributions payable................................. 515,629 515,629
Due to related parties................................ 164,293 183,303
Rents paid in advance and deposits.................... 24,161 40,412
----------- -----------
Total liabilities................................. 781,180 752,030
Commitment and Contingencies (Note 4).................
Partners' capital..................................... 17,564,470 17,640,881
----------- -----------
$18,345,650 $18,392,911
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-97
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases..... $437,442 $438,324 $857,643 $871,144
Interest and other income............... 22,201 19,785 35,872 42,739
-------- -------- -------- --------
459,643 458,109 893,515 913,883
-------- -------- -------- --------
Expenses:
General operating and administrative.... 24,557 34,944 60,381 64,870
Professional services................... 13,467 19,924 16,984 25,640
State and other taxes................... 185 167 15,711 14,732
Depreciation and amortization........... 81,536 83,312 164,585 166,624
Transaction costs....................... 56,198 -- 88,522 --
-------- -------- -------- --------
175,943 138,347 346,183 271,866
-------- -------- -------- --------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and
Building, and Real Estate Disposition
Fees..................................... 283,700 319,762 547,332 642,017
Equity in Earnings of Joint Ventures...... 107,524 105,499 214,763 214,915
Gain on Sale of Land and Building......... -- -- 192,752 --
Real Estate Disposition Fees.............. -- -- -- (45,150)
-------- -------- -------- --------
Net Income................................ $391,224 $425,261 $954,847 $811,782
======== ======== ======== ========
Allocation of Net Income:
General partners........................ $ 3,911 $ 4,252 $ 8,239 $ 8,569
Limited partners........................ 387,313 421,009 946,608 803,213
-------- -------- -------- --------
$391,224 $425,261 $954,847 $811,782
======== ======== ======== ========
Net Income Per Limited Partner Unit....... $ 7.75 $ 8.42 $ 18.93 $ 16.06
======== ======== ======== ========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000 50,000
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-98
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 390,900 $ 373,111
Net income......................................... 8,239 17,789
----------- -----------
399,139 390,900
----------- -----------
Limited partners:
Beginning balance.................................. 17,249,981 18,828,538
Net income......................................... 946,608 1,715,950
Distributions ($20.63 and $65.89 per limited
partner unit, respectively)....................... (1,031,258) (3,294,507)
----------- -----------
17,165,331 17,249,981
----------- -----------
Total partners' capital.............................. $17,564,470 $17,640,881
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-99
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........... $ 976,678 $1,088,196
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building........... 677,678 --
Investment in joint ventures...................... -- (834,888)
Decrease (Increase) in restricted cash............ (677,678) 2,457,670
Collections on mortgage note receivable........... 6,817 --
----------- ----------
Net cash provided by investing activities....... 6,817 1,622,782
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (1,031,258) (2,341,628)
----------- ----------
Net cash used in financing activities........... (1,031,258) (2,341,628)
----------- ----------
Net Increase in Cash and Cash Equivalents............. (47,763) 369,350
Cash and Cash Equivalents at Beginning of Period...... 889,891 470,194
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 842,128 $ 839,544
=========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period............................ $ -- $ 45,150
=========== ==========
Distributions declared and unpaid at end of period.. $ 515,629 $ 515,625
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-100
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
II, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Buildings on Operating Leases:
In March 1999, the Partnership sold its property in Columbia, Missouri, to a
third party for $682,500 and received net sales proceed of $677,678, resulting
in a gain of $192,752 for financial reporting purposes. This property was
originally acquired by the Partnership in November 1987 and had a cost of
approximately $511,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $166,500 in excess of its original purchase price.
3. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $677,678 from the sale of the
property in Columbia, Missouri, plus accrued interest of $6,092 were being held
in an interest-bearing escrow account pending the release of funds to acquire
an additional property.
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,196,634 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for three reverse stock split which occurred on June 3, 1999) in the previous
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $23,548,652 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited
F-101
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
partners at the special meeting approve the Merger, APF will own the Properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-102
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund II, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund II, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 13, 1999, except for Note 12 for which the date is March 11, 1999 and
Note 13 for which the date is June 3, 1999
F-103
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $12,835,304 $13,164,568
Investment in joint ventures.......................... 4,353,427 3,568,155
Mortgage note receivable.............................. 6,872 42,734
Cash and cash equivalents............................. 889,891 470,194
Restricted cash....................................... -- 2,470,175
Receivables, less allowance for doubtful accounts of
$55,435 and $83,254.................................. 122,560 80,577
Prepaid expenses...................................... 4,801 5,510
Lease costs, less accumulated amortization of $14,889
and $11,520.......................................... 5,674 9,043
Accrued rental income................................. 174,382 148,103
----------- -----------
$18,392,911 $19,959,059
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,621 $ 7,170
Accrued and escrowed real estate taxes payable........ 8,065 4,656
Distributions payable................................. 515,629 594,000
Due to related parties................................ 183,303 126,284
Rents paid in advance and deposits.................... 40,412 25,300
----------- -----------
Total liabilities..................................... 752,030 757,410
Partners' capital..................................... 17,640,881 19,201,649
----------- -----------
$18,392,911 $19,959,059
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-104
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,773,925 $2,024,119 $2,224,500
Contingent rental income................... 51,029 68,920 79,313
Interest and other income.................. 80,486 64,900 21,075
---------- ---------- ----------
1,905,440 2,157,939 2,324,888
---------- ---------- ----------
Expenses:
General operating and administrative....... 160,220 137,924 131,628
Professional services...................... 34,731 21,576 26,634
Bad debt expense........................... -- 27,965 --
Real estate taxes.......................... -- 410 4,647
State and other taxes...................... 14,733 10,403 4,255
Depreciation and amortization.............. 332,633 399,820 421,759
Transaction costs.......................... 16,208 -- --
---------- ---------- ----------
558,525 598,098 588,923
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and
Buildings, Real Estate Disposition Fees, and
Lease Termination Income.................... 1,346,915 1,559,841 1,735,965
Equity in Earnings of Joint Ventures......... 431,974 389,915 130,996
Gain on Sale of Land and Buildings........... -- 1,476,124 --
Real Estate Disposition Fees................. (45,150) -- --
Lease Termination Income..................... -- 214,000 --
---------- ---------- ----------
Net Income................................... $1,733,739 $3,639,880 $1,866,961
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 17,789 $ 30,736 $ 18,670
Limited partners........................... 1,715,950 3,609,144 1,848,291
---------- ---------- ----------
$1,733,739 $3,639,880 $1,866,961
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 34.32 $ 72.18 $ 36.97
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-105
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $162,000 $161,705 $25,000,000 $(20,317,377) $16,130,302 $(2,689,822) $18,446,808
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,670 -- -- 1,848,291 -- 1,866,961
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 162,000 180,375 25,000,000 (22,693,377) 17,978,593 (2,689,822) 17,937,769
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 30,736 -- -- 3,609,144 -- 3,639,880
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 162,000 211,111 25,000,000 (25,069,377) 21,587,737 (2,689,822) 19,201,649
Distributions to
limited partners
($65.89 per limited
partner unit)......... -- -- -- (3,294,507) -- -- (3,294,507)
Net income............. -- 17,789 -- -- 1,715,950 -- 1,733,739
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $162,000 $228,900 $25,000,000 $(28,363,884) $23,303,687 $(2,689,822) $17,640,881
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-106
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 1,796,989 $ 2,054,519 $ 2,295,531
Distributions from joint ventures..... 482,671 147,995 164,718
Cash paid for expenses................ (227,335) (80,744) (130,042)
Interest received..................... 83,366 36,142 17,524
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,135,691 2,157,912 2,347,731
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................ -- 4,659,078 --
Proceeds received from tenant in
connection with termination of
leases............................... -- 214,000 --
Additions to land and buildings on
operating leases..................... -- (29,526) (11,107)
Investment in joint ventures.......... (835,969) (2,136,289) --
Return of capital from joint venture.. -- 124,440 --
Collections on mortgage note
receivable........................... 35,183 -- --
Decrease (increase) in restricted
cash................................. 2,457,670 (2,457,670) 25,000
Payment of lease costs................ -- (4,507) (1,930)
Other................................. -- -- (25,000)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................ 1,656,884 369,526 (13,037)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate
general partner...................... -- 721,000 203,900
Repayment of loans from corporate
general partner...................... -- (721,000) (203,900)
Distributions to limited partners..... (3,372,878) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,372,878) (2,376,000) (2,376,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 419,697 151,438 (41,306)
Cash and Cash Equivalents at Beginning
of Year................................ 470,194 318,756 360,062
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 889,891 $ 470,194 $ 318,756
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,733,739 $ 3,639,880 $ 1,866,961
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... -- 27,965 --
Depreciation.......................... 329,264 395,837 417,776
Amortization.......................... 3,369 3,983 3,983
Gain on sale of land and buildings.... -- (1,476,124) --
Lease termination income.............. -- (214,000) --
Equity in earnings of joint ventures,
net of distributions................. 50,697 (241,920) 33,722
Increase in receivables............... (28,799) (4,166) (8,803)
Decrease (increase) in prepaid
expenses............................. 709 (691) (1,570)
Increase in accrued rental income..... (26,279) (30,746) (33,234)
Decrease in other assets.............. -- -- 1,750
Increase (decrease) in accounts
payable and accrued expenses......... 860 (2,304) 4,014
Increase in due to related parties.... 57,019 81,206 35,824
Increase (decrease) in rents paid in
advance and deposits................. 15,112 (21,008) 27,308
----------- ----------- -----------
Total adjustments.................... 401,952 (1,481,968) 480,770
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,135,691 $ 2,157,912 $ 2,347,731
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted as consideration
in sale of land and building.......... $ -- $ 42,000 $ --
=========== =========== ===========
Deferred real estate disposition fees
incurred and unpaid at end of period.. $ 45,150 $ -- $ --
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 515,629 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-107
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund II, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using the operating method. Under the operating
method, land and building leases are recorded at cost, revenue is recognized as
rentals are earned and depreciation is charged to operations as incurred.
Buildings are depreciated on the straight-line method over their estimated
useful lives of 30 years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce a constant
periodic rent over the lease term commencing on the date the property is placed
in service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease, or events or changes
in circumstance indicate that the tenant will not lease the property through
the end of the lease term, the Partnership either reserves or writes-off the
cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, are removed from the accounts and gains or
losses from sales are reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the asset exceeds its
fair market value. Although the general partners have made their best estimate
of these factors based on current conditions, it is reasonably possible that
changes could occur in the near term which could adversely affect the general
partners' estimate of net cash flows expected to be generated from its
properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for uncollectible accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Kirkman Road
Joint Venture, Holland Joint Venture and Show Low Joint Venture, and the
properties in Arvada, Colorado; Mesa, Arizona; Smithfield, North Carolina;
Vancouver, Washington; Overland Park, Kansas; and Memphis, Tennessee, each of
F-108
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
which is held as tenants-in-common with affiliates, are accounted for using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method. When a property is sold or a lease is
terminated, the related lease cost, if any, net of accumulated amortization is
removed from the accounts and charged against income.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage.
The lease options generally allow tenants to renew the leases for two to
four successive five-year periods subject to the same terms and conditions as
the initial lease. Most leases also allow the tenant to purchase the property
at fair market value after a specified portion of the lease has elapsed.
F-109
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 6,608,400 $ 6,608,400
Buildings.......................................... 9,858,263 9,858,263
----------- -----------
16,466,663 16,466,663
Less accumulated depreciation...................... (3,631,359) (3,302,095)
----------- -----------
$12,835,304 $13,164,568
=========== ===========
</TABLE>
In June 1997, the Partnership sold its property in Eagan, Minnesota, to the
tenant, for $668,033 and received net sales proceeds of $665,882, of which
$42,000 were in the form of a promissory note, resulting in a gain of $158,251
for financial reporting purposes. This property was originally acquired by the
Partnership in August 1987 and had a cost of approximately $601,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $64,800 in excess of its
original purchase price. In October 1997, the Partnership used the net sales
proceeds to acquire a property in Mesa, Arizona, as tenants-in-common (see Note
4).
In addition, during 1997, the Partnership sold its properties in
Jacksonville, Plant City and Avon Park, Florida; its property in Mathis, Texas
and two properties in Farmington Hills, Michigan to third parties for aggregate
sales prices of $4,162,006 and received aggregate net sales proceeds (net of
$18,430, which represents amounts due to the former tenant for prorated rent)
of $4,035,196, resulting in aggregate gains of $1,317,873 for financial
reporting purposes. These six properties were originally acquired by the
Partnership during 1987 and had aggregate costs of approximately $3,338,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold these six properties for approximately $714,400, in the
aggregate, in excess of their original aggregate purchase prices. During 1997,
the Partnership reinvested approximately $1,512,400 of these net sales proceeds
in a property in Vancouver, Washington, and a property in Smithfield, North
Carolina, as tenants-in-common with affiliates of the General Partners (see
Note 4). In January 1998, the Partnership reinvested a portion of these net
sales proceeds in a property in Overland Park, Kansas, and a property in
Memphis, Tennessee, as tenants-in-common with affiliates of the General
Partners (see Note 4). In connection with the sale of both of the Farmington
Hills, Michigan properties, the Partnership also received $214,000 as a lease
termination fee from the former tenant in consideration of the Partnership's
releasing the tenant from its obligation under the terms of the leases.
Some of the leases provide for escalating guaranteed minimum rents
throughout the lease terms. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $26,279,
$30,746, and $33,234, respectively, of such income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,617,078
2000............................................................. 1,545,876
2001............................................................. 1,561,629
2002............................................................. 1,394,850
2003............................................................. 1,146,347
Thereafter....................................................... 5,112,565
-----------
$12,378,345
===========
</TABLE>
F-110
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Investment in Joint Ventures:
The Partnership has a 50 percent interest, a 49 percent interest and a 64
percent interest in the profits and losses of Kirkman Road Joint Venture,
Holland Joint Venture and Show Low Joint Venture, respectively. The remaining
interests in Holland Joint Venture and Show Low Joint Venture are held by
affiliates of the general partners. The Partnership also has a 33.87% interest
in a property in Arvada, Colorado, with an affiliate of the general partners,
as tenants-in-common. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate. Amounts relating to its investment are included in investment in
joint ventures.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 64
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the property for approximately $306,500 in excess of its original purchase
price. In June 1997, Show Low Joint Venture reinvested $782,413 of the net
sales proceeds in a Darryl's property in Greensboro, North Carolina. As of
December 31, 1997, the Partnership had received approximately $124,400
representing a return of capital for its pro-rata share of the uninvested net
sales proceeds. As of December 31, 1998, the Partnership owned a 64 percent
interest in the profits and losses of the joint venture.
In October 1997, the Partnership used the net sales proceeds from the sale
of the property in Eagan, Minnesota (see Note 3) to acquire a property in Mesa,
Arizona, as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned an approximate 58 percent interest in
this property.
In December 1997, the Partnership used the net sales proceeds from the sale
of one of the properties in Farmington Hills, Michigan, to acquire a property
in Smithfield, North Carolina, as tenants-in-common with an affiliate of the
general partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1998, the Partnership owned a 47 percent interest
in this property.
In addition, in December 1997, the Partnership used the net sales proceeds
from the sale of the property in Plant City, Florida, to acquire a property in
Vancouver, Washington, as tenants-in-common with affiliates of the general
partners. The Partnership accounts for its investment in this property using
the equity method since the Partnership shares control with affiliates, and
amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1998, the Partnership owned an approximate 37
percent interest in this property.
In addition, in January 1998, the Partnership used the net sales proceeds
from the sales of the properties in Jacksonville, Florida and Mathis, Texas, to
acquire a 39.39% and a 13.38% interest in a property in Overland
F-111
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Park, Kansas, and a property in Memphis, Tennessee, respectively, as tenants-
in-common with affiliates of the general partners. The Partnership accounts for
its investments in these properties using the equity method since the
Partnership shares control with affiliates, and amounts relating to its
investments are included in investment in joint ventures.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint Venture
and the Partnership and affiliates, as tenants-in-common in six separate
tenancy-in-common arrangements, each own and lease one property to an operator
of national fast-food or family-style restaurants. The following presents the
combined, condensed financial information for the joint ventures and the six
properties held as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accu-
mulated depreciation.............................. $ 8,410,940 $7,091,781
Net investment in direct financing leases.......... 2,121,822 518,399
Cash............................................... 37,128 56,815
Receivables........................................ 1,570 4,685
Accrued rental income.............................. 207,239 102,913
Other assets....................................... 1,069 418
Liabilities........................................ 32,229 31,673
Partners' capital.................................. 10,747,539 7,743,338
Revenues........................................... 1,254,276 399,579
Gain on sale of land and building.................. -- 360,002
Net income......................................... 1,051,988 687,021
</TABLE>
The Partnership recognized income totalling $431,974, $389,915, and $130,996
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
5. Mortgage Note Receivable:
In connection with the sale in June 1997 of its property in Eagan,
Minnesota, the Partnership accepted a promissory note in the amount of $42,000.
The promissory note bears interest at a rate of 10.50% per annum and is
collateralized by personal property. Initially, the note was to be collected in
18 monthly installments of interest only and thereafter, the entire principal
balance shall become due. During 1998, the note was amended to require six
monthly installments of $7,368, including interest, commencing on July 1, 1998.
As of December 31, 1998 and 1997, the mortgage note receivable balance was
$6,872 and $42,734, including accrued interest of $56 and $734, respectively.
6. Restricted Cash:
As of December 31, 1997, remaining net sales proceeds of $2,470,175 from the
sales of several properties (see Note 3) including accrued interest of $12,505,
were being held in interest-bearing escrow accounts pending the release of
funds by the escrow agent to acquire additional properties on behalf of the
Partnership and to distribute net sales proceeds to the limited partners. In
1998, the funds were released from escrow to the Partnership and were used to
acquire two additional properties with affiliates of the general partners and
to make a special distribution to the limited partners (see note 4 and note 8).
F-112
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Receivables:
In March 1996, the Partnership accepted a promissory note from the former
tenant of the property in Gainesville, Texas, in the amount of $96,502,
representing past due rental and other amounts, which had been included in
receivables and for which the Partnership had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense by
the Partnership. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11 percent per annum, commencing on June 1,
1996. Due to the uncertainty of the collectibility of this note, the
Partnership established an allowance for doubtful accounts and is recognizing
income as collected. As of December 31, 1998 and 1997, the balances in the
allowance for doubtful accounts of $55,330 and $74,590, respectively, including
accrued interest of $2,654 in 1998 and 1997, represent the uncollected amounts
under this promissory note.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first on a pro rata basis to partners with positive balances
in their capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,294,507, $2,376,000, and
$2,376,000. Distributions for the year ended December 31, 1998, included
$1,232,003 as a result of the distribution of net sales proceeds from the 1997
sales of properties in Avon Park, Florida and Farmington Hills, Michigan. This
amount was applied toward the limited partners' cumulative 10% Preferred
Return. No distributions have been made to the general partners to date.
F-113
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,733,739 $3,639,880 $1,866,961
Depreciation for financial reporting
purposes in excess of depreciation for
tax reporting purposes................ 17,510 19,440 20,922
Gain on sale of land and buildings for
financial reporting purposes (in
excess of) less than gain for tax
reporting purposes.................... 335,644 (638,739) --
Equity in earnings of joint ventures
for tax reporting purposes less than
equity in earnings of joint ventures
for financial reporting purposes...... (32,934) (146,161) (1,240)
Capitalization of transaction costs for
tax reporting purposes................ 16,208 -- --
Allowance for doubtful accounts........ (27,819) (42,782) 25,225
Accrued rental income.................. (26,279) (30,746) (33,234)
Rents paid in advance.................. 18,112 (21,008) 22,508
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,034,181 $2,779,884 $1,901,142
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's Properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures and the properties held as tenants-in-
common with affiliates or competitive fees for comparable services. In
addition, these fees will be incurred and will be payable only after the
limited partners receive their aggregate, noncumulative 10% Preferred Return.
Due to the fact that these fees are noncumulative, if the limited partners do
not receive their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of such
threshold no property management fees were incurred during the years ended
December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. Payment of the real estate disposition
fee is subordinated to receipt by the limited partners of their aggregate,
cumulative 10% Preferred Return, plus their adjusted capital contributions. For
the year ended
F-114
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
December 31, 1998, the Partnership incurred $45,150 in deferred, subordinated,
real estate disposition fees as a result of the 1997 sales of properties in
Avon Park, Florida and Farmington Hills, Michigan. No deferred, subordinated,
real estate disposition fees were incurred for the years ended December 31,
1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $86,009, $78,139 and $79,624 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership acquired a property in Mesa, Arizona, as
tenants-in-common with an affiliate of the general partners, for a purchase
price of $630,554 from CNL BB Corp., also an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to this property in order
to facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the Partnership's percentage of
interest in the costs incurred by CNL BB Corp. to acquire and carry the
property, including closing costs.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $ 76,326 $ 59,608
Accounting and administrative services................. 61,827 66,676
Deferred, subordinated real estate disposition fee..... 45,150 --
-------- --------
$183,303 $126,284
======== ========
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnerships' total rental
income (including the Partnership's share of rental income from joint ventures
and the properties held as tenants-in-common with affiliates) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $485,839 $408,333 $403,875
Restaurant Management Services, Inc.............. 252,292 251,480 N/A
</TABLE>
In addition, the following schedule presents total rental and mortgage
interest income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental and mortgage interest income
(including the Partnership's share of rental income from joint ventures and
properties held as tenants-in-common with affiliates) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $485,839 $408,333 $403,875
Popeyes Famous Fried Chicken Restaurants........ 252,292 251,480 N/A
Wendy's Old Fashioned Hamburger Restaurants..... N/A 381,567 421,165
Denny's......................................... N/A N/A 388,050
KFC............................................. N/A 278,348 358,463
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental, mortgage interest, and earned income.
F-115
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,393,267 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $23,548,652 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,196,634 shares valued at $20.00 per
APF share.
F-116
<PAGE>
CNL INCOME FUND III, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-118
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-119
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-120
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-121
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-122
Report of Independent Certified Public Accountants....................... F-124
Balance Sheets as of December 31, 1998 and 1997.......................... F-125
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-126
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-127
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-128
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-129
</TABLE>
F-117
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,637,561 and $2,738,895,
respectively.......................................... $10,472,484 $11,418,836
Net investment in direct financing leases, less
allowance for impairment in carrying value of $25,821
in 1998............................................... 1,129,246 887,071
Investment in joint ventures........................... 2,150,281 2,157,147
Cash and cash equivalents.............................. 1,757,137 2,047,140
Restricted cash........................................ 1,097,485 --
Receivables, less allowance for doubtful accounts of
$6,158 and $153,598................................... 18,690 89,519
Prepaid expenses....................................... 9,830 6,751
Accrued rental income, less allowance for doubtful
accounts of $41,380 in 1998........................... 86,038 65,914
Other assets........................................... 29,354 29,354
----------- -----------
$16,750,545 $16,701,732
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 71,146 $ 2,072
Escrowed real estate taxes payable..................... 12,538 15,217
Distributions payable.................................. 500,000 500,000
Due to related party................................... 163,474 152,887
Rents paid in advance.................................. 20,614 25,579
----------- -----------
Total liabilities.................................... 767,772 695,755
Commitments and Contingencies (Note 5)
Minority interests..................................... 134,303 135,705
Partners' capital...................................... 15,848,470 15,870,272
----------- -----------
$16,750,545 $16,701,732
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-118
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1999 1998 1999 1998
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................ $297,471 $318,276 $680,349 $ 739,401
Earned income from direct financing
leases............................ 110,427 33,743 154,395 67,609
Contingent rental income........... 26,437 21,053 29,418 33,886
Interest and other income.......... 37,862 39,489 54,332 80,671
-------- -------- -------- ----------
472,197 412,561 918,494 921,567
-------- -------- -------- ----------
Expenses:
General operating and
administrative.................... 29,310 38,942 64,032 70,722
Professional services.............. 10,874 20,446 14,162 25,056
Real estate taxes.................. -- 3,306 -- 7,535
State and other taxes.............. 924 204 13,541 11,720
Depreciation and amortization...... 65,560 83,902 134,840 164,319
Transaction costs.................. 51,231 -- 82,113 --
-------- -------- -------- ----------
157,899 146,800 308,688 279,352
-------- -------- -------- ----------
Income Before Minority Interest in
Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures, and
Gain on Sale of Land and Buildings.. 314,298 265,761 609,806 642,215
Minority Interest in Income of
Consolidated Joint Venture.......... (4,232) (4,236) (8,577) (8,581)
Equity in Earnings of Unconsolidated
Joint Ventures...................... 41,998 18,523 83,457 41,274
Gain on Sale of Land and Buildings... 293,512 13,213 293,512 596,586
-------- -------- -------- ----------
Net Income........................... $645,576 $293,261 $978,198 $1,271,494
======== ======== ======== ==========
Allocation of Net Income:
General partners................... $ 5,883 $ 2,932 $ 9,209 $ 11,490
Limited partners................... 639,693 290,329 968,989 1,260,004
-------- -------- -------- ----------
$645,576 $293,261 $978,198 $1,271,494
======== ======== ======== ==========
Net Income Per Limited Partner Unit.. $ 12.79 $ 5.81 $ 19.38 $ 25.20
======== ======== ======== ==========
Weighted Average Number of Limited
Partner Units Outstanding........... 50,000 50,000 50,000 50,000
======== ======== ======== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-119
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Year Ended
Six Months Ended December
June 30, 31,
1999 1998
---------------- -----------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 354,638 $ 339,611
Net income..................................... 9,209 15,027
----------- -----------
363,847 354,638
----------- -----------
Limited partners:
Beginning balance.............................. 15,515,634 17,271,525
Net income..................................... 968,989 1,721,856
Distributions ($20.00 and $69.55 per limited
partner unit, respectively)................... (1,000,000) (3,477,747)
----------- -----------
15,484,623 15,515,634
----------- -----------
Total partners' capital.......................... $15,848,470 $15,870,272
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-120
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............ $ 958,915 $ 936,758
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings........... 1,792,169 3,214,616
Additions to land and building on operating lease.. (326,996) --
Investment in direct financing lease............... (612,920) --
Investment in joint venture........................ -- (801,682)
Collections on note receivable..................... -- 6,557
Decrease (increase) in restricted cash............. (1,091,192) 245,377
---------- ----------
Net cash provided by (used in) investing
activities...................................... (238,939) 2,664,868
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,000,000) (2,571,747)
Distributions to holders of minority interests..... (9,979) (10,099)
---------- ----------
Net cash used in financing activities............ (1,009,979) (2,581,846)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... (290,003) 1,019,780
Cash and Cash Equivalents at Beginning of Period....... 2,047,140 493,118
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,757,137 $1,512,898
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period............................. $ -- $ 53,400
========== ==========
Distributions declared and unpaid at end of period... $ 500,000 $ 500,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-121
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
III, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 69.07% interest in Tuscawilla Joint Venture
using the consolidation method. Minority interests represents the minority
joint venture partners' proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
2. Land and Buildings on Operating Leases:
In January 1999, the Partnership reinvested the majority of the net sales
proceeds from the 1998 sale of a Pro Folks property in Hagerstown, Maryland,
along with amounts collected in 1998, under a promissory note accepted in
connection with the 1997 sale of a Property in Roswell, Georgia in a Burger
King property in Montgomery, Alabama. The Property had an approximate cost of
$939,900. In accordance with Statement of Financial Accounting Standards No.
13, "Accounting for Leases," the land portion of this property was classified
as an operating lease while the building portion was classified as a direct
financing lease.
In April 1999, the Partnership sold its property in Flagstaff, Arizona, to
the tenant, for $1,103,127 and received net sales proceeds of $1,091,192,
resulting in a gain of $285,350 for financial reporting purposes. This property
was originally acquired by the Partnership in October 1998 and had a cost of
approximately $993,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $97,700 in excess of its original purchase price (see Note 4).
In June 1999, the Partnership sold its Denny's property in Hagerstown,
Maryland to the tenant, for $710,000 and received net sales proceeds of
$700,977, resulting in a gain of $8,162 for financial reporting purposes (see
Note 3).
3. Net Investment in Direct Financing Leases:
In June 1999, the Partnership sold its Denny's property in Hagerstown,
Maryland, for which the building portion had been classified as a direct
financing lease. In connection therewith, the gross investment (minimum lease
payments receivable and estimated residual value) and unearned income relating
to this property were removed from the accounts and the gain from the sale
relating to this property was reflected in income (see Note 2).
F-122
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
4. Restricted Cash:
As of June 30, 1999, net sales proceeds of $1,091,192 from the sale of the
property in Flagstaff, Arizona, plus accrued interest of $6,293, were being
held in interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property on behalf of the Partnership.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 7,041,451 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $20,535,734 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradeable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
these additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-123
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund III, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund III, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 14, 1999, except for Note 13 for which the date is March 11, 1999
and Note 14 for which the date is June 3, 1999
F-124
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $11,418,836 $14,635,583
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 887,071 926,862
Investment in joint ventures........................... 2,157,147 1,179,762
Mortgage note receivable............................... -- 681,687
Cash and cash equivalents.............................. 2,047,140 493,118
Restricted cash........................................ -- 251,879
Receivables, less allowance for doubtful accounts of
$153,598 and $154,469................................. 89,519 102,420
Prepaid expenses....................................... 6,751 14,361
Lease costs, less accumulated amortization of $12,000
and $2,762............................................ -- 9,238
Accrued rental income, less allowance for doubtful
accounts of $41,380 and $15,384....................... 65,914 154,738
Other assets........................................... 29,354 29,354
----------- -----------
$16,701,732 $18,479,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,072 $ 5,219
Accrued and escrowed real estate taxes payable......... 15,217 11,897
Distributions payable.................................. 500,000 594,000
Due to related parties................................. 152,887 97,388
Rents paid in advance and deposits..................... 25,579 20,745
----------- -----------
Total Liabilities.................................... 695,755 729,249
Minority interest...................................... 135,705 138,617
Partners' capital...................................... 15,870,272 17,611,136
----------- -----------
$16,701,732 $18,479,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-125
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,523,980 $1,859,911 $2,184,460
Adjustments to accrued rental income.... (103,830) -- --
Earned income from direct financing
leases................................. 134,702 70,575 89,390
Contingent rental income................ 98,915 157,648 157,993
Interest and other income............... 127,064 100,816 26,496
---------- ---------- ----------
1,780,831 2,188,950 2,458,339
---------- ---------- ----------
Expenses:
General operating and administrative.... 137,245 140,886 147,840
Professional services................... 36,591 27,314 50,064
Bad debt expense........................ -- 32,360 924
Real estate taxes....................... 11,966 47,165 1,973
State and other taxes................... 12,249 9,924 11,973
Depreciation and amortization........... 308,593 368,782 425,366
Transaction costs....................... 14,227 -- --
---------- ---------- ----------
520,871 626,431 638,140
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings (Loss) of Unconsolidated Joint
Ventures, Gain on Sale of Land and
Buildings and Provision for Loss on Land
and Building and Impairment in Carrying
Value of Net Investment in Direct
Financing Lease.......................... 1,259,960 1,562,519 1,820,199
Minority Interest in Income of
Consolidated Joint Venture............... (17,285) (17,285) (17,282)
Equity in Earnings (Loss) of
Unconsolidated Joint Ventures............ 22,708 (148,170) 11,740
Gain on Sale of Land and Buildings........ 497,321 1,027,590 --
Provision for Loss on Land and Building
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (25,821) (32,819) --
---------- ---------- ----------
Net Income................................ $1,736,883 $2,391,835 $1,814,657
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 15,027 $ 18,306 $ 18,147
Limited partners........................ 1,721,856 2,373,529 1,796,510
---------- ---------- ----------
$1,736,883 $2,391,835 $1,814,657
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 34.44 $ 47.47 $ 35.93
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-126
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $161,500 $141,658 $25,000,000 $(18,397,640) $14,116,024 $(2,864,898) $18,156,644
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,147 -- -- 1,796,510 -- 1,814,657
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 161,500 159,805 25,000,000 (20,773,640) 15,912,534 (2,864,898) 17,595,301
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,306 -- -- 2,373,529 -- 2,391,835
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 161,500 178,111 25,000,000 (23,149,640) 18,286,063 (2,864,898) 17,611,136
Distributions to
limited partners
($69.55 per limited
partner unit)......... -- -- -- (3,477,747) -- -- (3,477,747)
Net income............. -- 15,027 -- -- 1,721,856 -- 1,736,883
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $161,500 $193,138 $25,000,000 $(26,627,387) $20,007,919 $(2,864,898) $15,870,272
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............. $ 1,768,910 $ 2,268,568 $ 2,226,794
Distributions from unconsolidated joint
ventures.............................. 142,001 19,647 31,670
Cash paid for expenses................. (202,117) (325,067) (175,148)
Interest received...................... 112,502 58,541 8,438
----------- ----------- -----------
Net cash provided by operating
activities........................... 1,821,296 2,021,689 2,091,754
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings............................. 3,647,241 3,023,357 --
Deposit received on sale of land
parcel................................ -- -- 51,400
Additions to land and buildings........ (150,000) (1,272,960) --
Investment in joint ventures........... (1,096,678) (703,667) --
Collections on mortgage note
receivable............................ 678,730 6,270 --
Decrease (increase) in restricted
cash.................................. 245,377 (245,377) --
Decrease (increase) in other assets.... -- 2,135 (2,135)
----------- ----------- -----------
Net cash provided by investing
activities........................... 3,324,670 809,758 49,265
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from loans from corporate
general partner....................... -- 117,000 661,400
Repayment of loans from corporate
general partner....................... -- (117,000) (661,400)
Distributions to holder of minority
interest.............................. (20,197) (20,080) (20,082)
Distributions to limited partners...... (3,571,747) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,591,944) (2,396,080) (2,396,082)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 1,554,022 435,367 (255,063)
Cash and Cash Equivalents at Beginning
of Year................................ 493,118 57,751 312,814
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 2,047,140 $ 493,118 $ 57,751
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,736,883 $ 2,391,835 $ 1,814,657
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense....................... -- 32,360 924
Depreciation........................... 299,355 368,182 424,766
Amortization........................... 9,238 600 600
Minority interest in income of
consolidated joint venture............ 17,285 17,285 17,282
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 119,293 167,817 19,930
Gain on sale of land and buildings..... (497,321) (1,027,590) --
Provision for loss on land and building
and impairment in carrying value of
net investment in direct financing
lease................................. 25,821 32,819 --
Decrease (increase) in receivables..... (7,936) 182,433 (216,117)
Decrease in net investment in direct
financing leases...................... 13,970 12,056 7,331
Decrease (increase) in prepaid
expenses.............................. 7,610 (7,463) (1,297)
Decrease (increase) in accrued rental
income................................ 88,824 (40,000) (32,667)
Increase (decrease) in accounts payable
and accrued expenses.................. 173 (71,844) (4,732)
Increase (decrease) in due to related
parties............................... 2,099 (20,621) 48,944
Increase (decrease) in rents paid in
advance and deposits.................. 6,002 (16,180) 12,133
----------- ----------- -----------
Total adjustments..................... 84,413 (370,146) 277,097
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 1,821,296 $ 2,021,689 $ 2,091,754
=========== =========== ===========
Supplemental Schedule on Non-Cash
Investing and Financing Activities:
Mortgage note accepted as consideration
in sale of land and building.......... $ -- $ 685,000 $ --
=========== =========== ===========
Deferred real estate disposition fee
incurred and unpaid at end of year.... $ 53,400 $ 15,150 $ --
=========== =========== ===========
Distributions declared and unpaid at
end of year........................... $ 500,000 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-128
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund III, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for doubtful accounts are decreased accordingly.
F-129
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Investment in Joint Ventures--The Partnership accounts for its 69.07%
interest in Tuscawilla Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partners' proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
The Partnership's investment in Titusville Joint Venture, RTO Joint Venture,
and a property in each of Englewood, Colorado, Miami, Florida, and Overland
Park, Kansas held as tenants-in-common with affiliates, is accounted for using
the equity method since the Partnership shares control with affiliates of the
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method. Lease
costs are written off during the period in which a lease is terminated.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior year's financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases generally are classified as operating
leases; however, a few of the leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the
F-130
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
building portions of the property leases are accounted for as direct financing
leases while the land portion of these leases are operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $ 5,926,601 $ 7,325,960
Buildings....................................... 8,231,130 10,891,910
----------- -----------
14,157,731 18,217,870
Less accumulated depreciation................... (2,738,895) (3,341,624)
----------- -----------
11,418,836 14,876,246
Less allowance for loss on land and building.... -- (240,663)
----------- -----------
$11,418,836 $14,635,583
=========== ===========
</TABLE>
As of January 1, 1996, the Partnership had recorded an allowance for loss on
land and building in the amount of $207,844 for financial reporting purposes
for the Po Folks property in Hagerstown, Maryland. In addition, during 1997,
the Partnership increased the allowance for loss on land and building by an
additional $32,819 for such property.
The aggregate allowance represented the difference between the property's
carrying value at December 31, 1997, and the estimated net realizable value of
the property based on the anticipated sales price relating to this property.
The Partnership sold this property during the year ended December 31, 1998, as
described below.
In January 1997, the Partnership sold its property in Chicago, Illinois, to
a third party, for $505,000 and received net sales proceeds of $496,418,
resulting in a gain of $3,827 for financial reporting purposes. The Partnership
used $452,000 of the net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the limited partners. The balance of the
fund were used to pay past due real estate taxes relating to this property
incurred by the Partnership as a result of the former tenant declaring
bankruptcy.
In March 1997, the Partnership sold its property in Bradenton, Florida, to
the tenant, for $1,332,154 and received net sales proceeds of $1,305,671,
resulting in a gain of $361,368 for financial reporting purposes. This property
was originally acquired by the Partnership in June 1988 and had a cost of
approximately $1,080,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $229,500 in excess of its original purchase price. In June 1997,
the Partnership reinvested approximately $1,276,000 of the net sales proceeds
received in a property in Fayetteville, North Carolina.
In April 1997, the Partnership sold its property in Kissimmee, Florida, to a
third party, for $692,400 and received net sales proceeds of $673,159,
resulting in a gain of $271,929 for financial reporting purposes. This property
was originally acquired by the Partnership in March 1988 and had a cost of
approximately $474,800, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property
F-131
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
for approximately $196,400 in excess of its original purchase price. In July
1997, the Partnership reinvested approximately $511,700 of these net sales
proceeds in a property located in Englewood, Colorado, as tenants-in-common
with an affiliate of the general partners (see Note 5).
In April 1996, the Partnership received $51,400 as partial settlement in a
right of way taking relating to a parcel of land of the property in Plant City,
Florida. In April 1997, the Partnership received the remaining proceeds of
$73,600 finalizing the sale of the land parcel. In connection therewith, the
Partnership recognized a gain of $94,320 for financial reporting purposes.
In addition, in June 1997, the Partnership sold its property in Roswell,
Georgia, to a third party for $985,000 and received net sales proceeds of
$942,981, resulting in a gain of $237,608 for financial reporting purposes.
This property was originally acquired by the Partnership in June 1988 and had a
cost of approximately $775,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $167,800 in excess of its original purchase price. In connection
therewith, the Partnership received $257,981 in cash and accepted the remaining
sales proceeds in the form of a promissory note in the principal sum of
$685,000. During 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance of $678,730 (see Note 6). In
addition, in December 1997, the Partnership reinvested approximately $192,000
of the net sales proceeds in a property located in Miami, Florida, as tenants-
in-common, with an affiliate of the general partners (see Note 5).
In October 1997, the Partnership sold its property in Mason City, Iowa, to
the tenant for $218,790 and received net sales proceeds of $216,528, resulting
in a gain of $58,538 for financial reporting purposes. This property was
originally acquired by the Partnership in March 1988 and had a cost of
approximately $190,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $26,700 in excess of its original purchase price. In January
1998, the Partnership reinvested the net sales proceeds in a property in
Overland Park, Kansas, with affiliates of the general partners, as tenants-in-
common (see Note 5).
During the year ended December 31, 1998, the Partnership sold its properties
in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and Hagerstown,
Maryland, for a total of $3,280,000 and received net sales proceeds of
$3,214,616, resulting in a total gain of $596,586 for financial reporting
purposes. In connection with the sales of the properties in Daytona Beach and
Fernandina Beach, Florida, the Partnership incurred deferred, subordinated,
real estate disposition fees of $53,400 (see Note 11).
In September 1998, the Partnership entered into a new lease agreement for
the Golden Corral property located in Stockbridge, Georgia. In connection
therewith, the Partnership funded $150,000 in renovation costs.
In addition, during the year ended December 31, 1998, the Partnership sold
its property in Hazard, Kentucky to a third party for $435,000, and received
net sales proceeds of $432,625, resulting in a loss of $99,265 for financial
reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $88,824 (net of $25,996 in
reserves and $103,830 in write-offs), income during 1997 of $40,000 (net of
$15,384 in reserves) and income of $32,667 during 1996, of such rental income.
F-132
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,478,029
2000........................................................... 1,478,029
2001........................................................... 1,482,555
2002........................................................... 1,459,600
2003........................................................... 1,186,149
Thereafter..................................................... 6,731,050
-----------
$13,815,412
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease term. In addition, this table does not include any amounts for future
contingent rentals which may be received on the lease based on a percentage of
the tenants' gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Minimum lease payments receivable.................. $2,042,847 $2,191,519
Estimated residual value........................... 239,432 239,432
Less unearned income............................... (1,369,387) (1,504,089)
---------- ----------
912,892 926,862
Less allowance for impairment in carrying value of
investment in direct financing lease.............. (25,821) --
---------- ----------
Net investment in direct financing leases.......... $ 887,071 $ 926,862
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 148,672
2000............................................................ 148,672
2001............................................................ 148,672
2002............................................................ 148,672
2003............................................................ 148,672
Thereafter...................................................... 1,299,487
----------
$2,042,847
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or contingent rental payments that may become due in future periods
(see Note 3).
During 1998, the Partnership recorded an allowance for impairment in
carrying value of net investment in direct financing lease of $25,821 for
financial reporting purposes relating to the property in Hagerstown, Maryland,
due to financial difficulties the tenant is experiencing. The allowance
represents the difference between the carrying value of the property at
December 31, 1998, and the current estimated net realizable value for this
property.
F-133
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
5. Investment in Joint Ventures:
The Partnership has a 73.4% interest in the profits and losses of Titusville
Joint Venture which is accounted for using the equity method. The remaining
interest in the Titusville Joint Venture is held by an affiliate of the
Partnership which has the same general partners.
In July 1997, the Partnership acquired a property in Englewood Colorado, as
tenants-in-common with an affiliate of the general partners. The Partnership
accounts for its investment in this property using the equity method since the
Partnership shares control with an affiliate, and amounts relating to its
investment are included in investment in joint ventures. As of December 31,
1998, the Partnership owned a 33 percent interest in this property.
In addition, in December 1997, the Partnership acquired a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 9.84% interest in this property.
In January 1998, the Partnership acquired a property located in Overland
Park, Kansas, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 25.87% interest in this property.
In May 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. As of December 31, 1998, the Partnership had
contributed $676,952 to purchase land and pay for construction relating to the
joint venture. Construction was completed and rent commenced in December 1998.
The Partnership holds a 46.88% interest in the profits and losses of this joint
venture at December 31, 1998. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with an affiliate.
Titusville Joint Venture, RTO Joint Venture, and the Partnership and
affiliates, as tenants-in-common in three separate tenancy-in-common
arrangements, each own and lease one property to operators of national fast-
food or family-style restaurants. The following presents the joint venture's
condensed financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building................................. $3,598,641 $3,152,962
Net investment in direct financing leases.......... 3,418,537 1,003,680
Cash............................................... 19,254 16,481
Receivables........................................ 1,241 --
Accrued rental income.............................. 66,668 11,621
Other assets....................................... 2,679 1,480
Liabilities........................................ 59,453 18,722
Partners' capital.................................. 7,047,567 4,167,502
Revenues........................................... 604,672 82,837
Provision for loss on land and building............ 125,251 147,100
Net income (loss).................................. 404,446 (157,912)
</TABLE>
F-134
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Partnership recognized income of $22,708 and $11,740 for the years ended
December 31, 1998 and 1996, respectively, and recognized a loss totaling
$148,170, for the year ended December 31, 1997, relating to investment in joint
ventures.
6. Mortgage Note Receivable:
In connection with the sale of the property in Roswell, Georgia, in June
1997, the Partnership accepted a promissory note in the principal sum of
$685,000 collateralized by a mortgage on the property. The Partnership
collected the full amount of the outstanding mortgage note, including interest,
during the year ended December 31, 1998.
The mortgage note receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----- --------
<S> <C> <C>
Principal balance............................................ $ -- $678,730
Accrued interest receivable.................................. -- 2,957
----- --------
$ -- $681,687
===== ========
</TABLE>
7. Receivables:
During 1996, the Partnership terminated its lease with the former tenant of
its properties in Hagerstown, Maryland. In connection therewith, the
Partnership wrote off approximately $238,300 included in receivables relating
to both the Denny's and Po Folks properties in Hagerstown, Maryland, and the
related allowance for doubtful accounts. In October 1996, the Partnership
entered into a lease agreement with a new tenant to operate the Denny's
property and accepted a promissory note from the current tenant whereby
$25,000, which had been included in receivables for past due rents from the
former tenant, was converted to a loan receivable held by the Partnership to
facilitate the asset purchase agreement between the former and current tenants.
The promissory note bears interest at a rate of ten percent per annum, is being
collected in 36 equal monthly installments of $807 and commenced in October
1996. Receivables at December 31, 1998 and 1997, include $7,109 and $16,318,
respectively, including accrued interest of $142 and $164, respectively,
relating to the promissory note.
8. Restricted Cash:
As of December 31, 1997, net sales proceeds of $245,377 from the sale of the
property in Bradenton, Florida and Mason City, Iowa, plus accrued interest of
$6,502, were being held in interest-bearing escrow accounts pending the release
of funds by the escrow agent to acquire additional properties on behalf of the
Partnership. During the year ended December 31, 1998, these funds were released
by the escrow agent and were used to acquire additional properties.
9. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
F-135
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,477,747 and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $2,376,000. Distributions for the year ended
December 31, 1998, including $1,477,747 as a result of distributions of net
sales proceeds from the sale of the properties in Fernandina Beach and Daytona
Beach, Florida. This amount was applied toward the limited partners' cumulative
10% Preferred Return. No distributions have been made to the general partners
to date.
F-136
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $1,736,883 $2,391,835 $1,814,657
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes........................ (17,075) (21,782) (9,754)
Allowance for loss on land and building and
impairment in carrying value of net
investment in direct financing lease...... 25,821 32,819 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 13,970 12,056 7,330
Gain on sale of land for tax reporting
purposes.................................. -- -- 20,724
Gain on sale of land and buildings for
financial reporting purposes in excess of
gain on sale for tax reporting purposes... (115,137) (689,281) --
Equity in earnings of joint ventures for
tax reporting purposes in excess of (less
than) equity in earnings of joint ventures
for financial reporting purposes.......... 59,725 140,707 (1,329)
Allowance for doubtful accounts............ (871) 84,326 (283,135)
Accrued rental income...................... 88,824 (40,000) (32,667)
Capitalization of transaction costs for tax
reporting purposes........................ 14,227 -- --
Rents paid in advance...................... 6,002 (16,680) 12,133
Minority interest in timing differences of
consolidated joint venture................ (35) (133) (162)
---------- ---------- ----------
Net income for federal income tax
purposes.................................. $1,812,334 $1,893,867 $1,527,797
========== ========== ==========
</TABLE>
11. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
management fee of one-half of one percent of the Partnership assets under
management (valued at cost) annually. The property management fee is limited to
one percent of the sum of gross operating revenues from joint ventures or
competitive fees for comparable services. In addition, these fees will be
incurred and will be payable only after the limited partners receive their
aggregate, noncumulative 10% Preferred Return. Due to the fact that these fees
are noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no property management fees will be due or
payable for such year. As a result of such threshold, no property management
fees were incurred during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties, based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-137
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sales. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate, cumulative 10% Preferred Return, plus
their adjusted capital contributions. During the years ended December 31, 1998
and 1997, the Partnership incurred $53,400 and $15,150, respectively, in
deferred, subordinated real estate disposition fees as a result of the
Partnership's sale of the properties in Daytona Beach and Fernandina Beach,
Florida, and the Property in Chicago, Illinois, respectively. No deferred,
subordinated real estate disposition fees were incurred for the year ended
December 31, 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $89,756, $87,056, and $85,906 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership.......... $ 41,888 $38,492
Accounting and administrative services...................... 42,449 43,746
Deferred, subordinated real estate disposition fee.......... 68,550 15,150
-------- -------
$152,887 $97,388
======== =======
</TABLE>
12. Concentration of Credit Risk:
For the years ended December 31, 1998, 1997, and 1996, rental income from
Golden Corral Corporation was $454,380, $474,553, and $490,196, respectively,
representing more than ten percent of the Partnership's total rental and earned
income (including the Partnership's share of rental and earned income from
joint ventures and the properties held as tenants-in-common with affiliates).
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $454,380 $474,553 $490,196
KFC........................................... 277,508 261,415 254,646
Pizza Hut..................................... 211,507 255,055 292,795
Taco Bell..................................... N/A 250,140 254,395
Perkins....................................... N/A N/A 276,114
Denny's....................................... N/A 229,537 355,123
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-138
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
13. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,082,901 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $20,535,734 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
14. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 13 being adjusted to 1,041,451 shares valued at $20.00 per
APF share.
F-139
<PAGE>
CNL INCOME FUND IV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-141
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-142
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-143
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-144
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-145
Report of Independent Certified Public Accountants....................... F-147
Balance Sheets as of December 31, 1998 and 1997.......................... F-148
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-149
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-150
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-151
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-152
</TABLE>
F-140
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,947,353 and $3,744,609,
respectively.......................................... $15,283,715 $15,486,459
Net investment in direct financing leases.............. 1,211,023 1,231,482
Investment in joint ventures........................... 3,354,395 2,862,906
Cash and cash equivalents.............................. 651,282 739,382
Restricted cash........................................ -- 537,274
Receivables, less allowance for doubtful accounts of
$250,622 and $258,641, respectively................... 69,583 24,676
Prepaid expenses....................................... 13,317 9,836
Lease costs, less accumulated amortization of $23,710
and $21,450, respectively............................. 31,434 18,094
Accrued rental income.................................. 290,049 279,724
----------- -----------
$20,904,798 $21,189,833
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 85,694 $ 4,503
Accrued and escrowed real estate taxes payable......... 43,826 36,732
Distributions payable.................................. 600,000 600,000
Due to related parties................................. 160,865 148,978
Rents paid in advance and deposits..................... 52,445 59,620
----------- -----------
Total liabilities.................................... 942,830 849,833
Commitments and Contingencies (Note 3)
Partners' capital...................................... 19,961,968 20,340,000
----------- -----------
$20,904,798 $21,189,833
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-141
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------ ---------------------
1999 1998 1999 1998
-------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................... $496,860 $ 511,225 $ 993,393 $1,051,001
Earned income from direct
financing leases................. 30,864 31,872 61,990 63,981
Contingent rental income.......... 26,131 15,546 34,374 37,207
Interest and other income......... 7,051 8,347 16,969 21,192
-------- --------- ---------- ----------
560,906 566,990 1,106,726 1,173,381
-------- --------- ---------- ----------
Expenses:
General operating and
administrative................... 31,152 41,090 71,590 75,715
Professional services............. 11,364 26,397 21,364 32,645
Real estate taxes................. 8,576 -- 13,855 20,755
State and other taxes............. -- 106 15,395 15,747
Depreciation and amortization..... 102,473 107,626 205,004 222,777
Transaction costs................. 71,148 -- 104,166 --
-------- --------- ---------- ----------
224,713 175,219 431,374 367,639
-------- --------- ---------- ----------
Income Before Equity in Earnings
(Loss) of Joint Ventures and Gain
on Sale of Land and Buildings and
Provision for Loss on Land and
Building........................... 336,193 391,771 675,352 805,742
Equity in Earnings (Loss) of Joint
Ventures........................... 72,942 (191,062) 146,616 (148,888)
Gain on Sale of Land and Buildings.. -- -- -- 120,915
Provision for Loss on Land and
Building........................... -- (65,172) -- (65,172)
-------- --------- ---------- ----------
Net Income.......................... $409,135 $ 135,537 $ 821,968 $ 712,597
======== ========= ========== ==========
Allocation of Net Income:
General partners.................. $ 4,091 $ (66) $ 8,220 $ 2,417
Limited partners.................. 405,044 135,603 813,748 710,180
-------- --------- ---------- ----------
$409,135 $ 135,537 $ 821,968 $ 712,597
======== ========= ========== ==========
Net Income Per Limited Partner
Unit............................... $ 6.75 $ 2.26 $ 13.56 $ 11.84
======== ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding.......... 60,000 60,000 60,000 60,000
======== ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-142
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 769,078 $ 756,354
Net income......................................... 8,220 12,724
----------- -----------
777,298 769,078
----------- -----------
Limited partners:
Beginning balance.................................. 19,570,922 21,395,945
Net income......................................... 813,748 1,808,725
Distributions ($20.00 and $60.56 per limited
partner unit, respectively)....................... (1,200,000) (3,633,748)
----------- -----------
19,184,670 19,570,922
----------- -----------
Total partners' capital.......................... $19,961,968 $20,340,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-143
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.............. $1,127,102 $1,154,124
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings............. -- 1,468,825
Additions to land and buildings on operating leases.. -- (275,000)
Investment in joint ventures......................... (533,200) --
Decrease in restricted cash.......................... 533,598 --
Payment of lease costs............................... (15,600) --
---------- ----------
Net cash provided by (used in) investing activities.. (15,202) 1,193,825
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................... (1,200,000) (2,523,748)
---------- ----------
Net cash used in financing activities............ (1,200,000) (2,523,748)
---------- ----------
Net Decrease in Cash and Cash Equivalents.............. (88,100) (175,799)
Cash and Cash Equivalents at Beginning of Period....... 739,382 876,452
---------- ----------
Cash and Cash Equivalents at End of Period............. $ 651,282 $ 700,653
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period............................. $ -- $ 45,663
========== ==========
Distributions declared and unpaid at end of period... $ 600,000 $ 600,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-144
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
IV, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Investment in Joint Ventures:
In January 1999, the Partnership invested $533,200 in a property in
Zephyrhills, Florida as tenants-in-common with CNL Income Fund XVII, Ltd., an
affiliate of the general partners. As of March 31, 1999, the Partnership had a
76 percent interest in the property. The Partnership accounts for its
investment in this property using the equity method since the Partnership
shares control with an affiliate, and amounts relating to its investment are
included in investment in joint ventures.
The following presents the combined, condensed financial information for all
of the Partnership's investment in joint ventures and properties held as
tenants-in-common at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................. $5,288,090 $4,406,943
Net investment in direct financing leases, less
allowance for impairment in carrying value......... 377,724 626,594
Cash................................................ 23,087 14,025
Receivables......................................... 5,334 10,943
Accrued rental income............................... 166,304 163,773
Other assets........................................ 2,924 2,513
Liabilities......................................... 48,357 27,211
Partners' capital................................... 5,815,106 5,197,580
Revenues............................................ 305,224 368,058
Provision for loss on land and buildings and net
investment in direct financing lease............... -- (441,364)
Net income (Loss)................................... 222,901 (212,388)
</TABLE>
The Partnership recognized income totalling $146,616 and a loss totaling
$148,888 for the six months ended June 30, 1999 and 1998, respectively, of
which income of $72,942 and a loss of $191,062 were recognized for the quarters
ended June 30, 1999 and 1998, respectively, from these joint ventures.
F-145
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
3. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,334,008 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $26,259,630 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-146
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
CNL Income Fund IV, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund IV, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 18, 1999, except for the secondparagraph of Note 12 for which the date
is March 11, 1999 and Note 13 for which the date is June 3, 1999
F-147
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................... $15,486,459 $18,097,997
Net investment in direct financing leases............. 1,231,482 1,269,389
Investment in joint ventures.......................... 2,862,906 2,708,012
Cash and cash equivalents............................. 739,382 876,452
Restricted cash....................................... 537,274 --
Receivables, less allowance for doubtful accounts of
$258,641 and $295,580................................ 24,676 37,669
Prepaid expenses...................................... 9,836 11,115
Lease costs, less accumulated amortization of $21,450
and $17,956.......................................... 18,094 21,588
Accrued rental income................................. 279,724 287,466
Other assets.......................................... -- 200
----------- -----------
$21,189,833 $23,309,888
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,503 $ 8,576
Accrued construction costs payable.................... -- 250,000
Accrued and escrowed real estate taxes payable........ 36,732 65,176
Distributions payable................................. 600,000 690,000
Due to related parties................................ 148,978 93,854
Rents paid in advance and deposits.................... 59,620 49,983
----------- -----------
Total liabilities................................... 849,833 1,157,589
Partners' capital..................................... 20,340,000 22,152,299
----------- -----------
$21,189,833 $23,309,888
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-148
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,104,520 $2,058,703 $2,263,677
Earned income from direct financing
leases................................... 126,993 130,683 134,014
Contingent rental income.................. 83,377 117,031 97,318
Interest and other income................. 60,950 35,221 47,855
---------- ---------- ----------
2,375,840 2,341,638 2,542,864
---------- ---------- ----------
Expenses:
General operating and administrative...... 151,775 149,808 161,714
Professional services..................... 43,609 33,439 29,289
Bad debt expense.......................... -- 12,794 --
Real estate taxes......................... 31,879 65,316 37,589
State and other taxes..................... 15,747 16,476 21,694
Depreciation and amortization............. 428,975 455,895 444,232
Transaction costs........................... 18,286 -- --
---------- ---------- ----------
690,271 733,728 694,518
---------- ---------- ----------
Income Before Equity in Earnings (Losses) of
Joint Ventures, Gain (Loss) on Sale of Land
and Buildings and Provision for Loss on
Land and Building.......................... 1,685,569 1,607,910 1,848,346
Equity in Earnings (Losses) of Joint
Ventures................................... (90,144) 189,747 277,431
Gain (Loss) on Sale of Land and Buildings... 226,024 (6,652) 221,390
Provision for Loss on Land and Building..... -- (70,337) --
---------- ---------- ----------
Net Income.................................. $1,821,449 $1,720,668 $2,347,167
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 12,724 $ 15,697 $ 22,219
Limited partners.......................... 1,808,725 1,704,971 2,324,948
---------- ---------- ----------
$1,821,449 $1,720,668 $2,347,167
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 30.15 $ 28.42 $ 38.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 60,000 60,000 60,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-149
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $241,504 $160,634 $30,000,000 $(19,687,963) $16,013,989 $(3,440,000) $23,288,164
Contributions from
general partners...... 22,300 -- -- -- -- -- 22,300
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 22,219 -- -- 2,324,948 -- 2,347,167
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 263,804 182,853 30,000,000 (22,447,963) 18,338,937 (3,440,000) 22,897,631
Contributions from
general partners...... 294,000 -- -- -- -- -- 294,000
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 15,697 -- -- 1,704,971 -- 1,720,668
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 557,804 198,550 30,000,000 (25,207,963) 20,043,908 (3,440,000) 22,152,299
Distributions to
limited partners ($61
per limited partner
unit)................. -- -- -- (3,633,748) -- -- (3,633,748)
Net income............. -- 12,724 -- -- 1,808,725 -- 1,821,449
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $557,804 $211,274 $30,000,000 $(28,841,711) $21,852,633 $(3,440,000) $20,340,000
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-150
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 2,351,732 $ 2,345,612 $ 2,588,248
Distributions from joint ventures...... 248,360 265,473 305,866
Cash paid for expenses................. (274,436) (211,213) (206,059)
Interest received...................... 36,664 18,100 25,909
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,362,320 2,417,972 2,713,964
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building.............................. 2,526,354 378,149 1,049,550
Additions to land and buildings on
operating leases...................... (275,000) -- (1,035,516)
Investment in joint ventures........... (493,398) -- (437,489)
Decrease (increase) in restricted
cash.................................. (533,598) -- 518,150
Payment of lease costs................. -- (17,384) (2,230)
Other.................................. -- 9,122 --
----------- ----------- -----------
Net cash provided by investing
activities.......................... 1,224,358 369,887 92,465
----------- ----------- -----------
Cash Flows from Financing Activities:
Contributions from general partners.... -- 294,000 22,300
Distributions to limited partners...... (3,723,748) (2,760,000) (2,760,000)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,723,748) (2,466,000) (2,737,700)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (137,070) 321,859 68,729
Cash and Cash Equivalents at Beginning
of Year................................ 876,452 554,593 485,864
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 739,382 $ 876,452 $ 554,593
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,821,449 $ 1,720,668 $ 2,347,167
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 425,481 453,397 442,065
Amortization........................... 3,494 2,498 2,167
Equity in earnings of joint ventures,
net of distributions.................. 338,504 75,726 28,435
Bad debt expense....................... -- 12,794 --
Loss (gain) on sale of land and
buildings............................. (226,024) 6,652 (221,390)
Provision for loss on land and
building.............................. -- 70,337 --
Decrease in receivables................ 8,607 5,422 41,531
Decrease (increase) in prepaid
expenses.............................. 1,279 (180) (1,202)
Decrease in net investment in direct
financing leases...................... 37,907 34,215 30,885
Increase in accrued rental income...... (40,515) (39,669) (21,520)
Increase (decrease) in accounts
payable and accrued expenses.......... (26,960) 31,976 11,162
Increase in due to related parties..... 9,461 26,701 39,987
Increase in rents paid in advance and
deposits.............................. 9,637 17,435 14,677
----------- ----------- -----------
Total adjustments.................... 540,871 697,304 366,797
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,362,320 $ 2,417,972 $ 2,713,964
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Deferred real estate disposition fees
incurred and unpaid at December 31.... $ 45,663 $ -- $ --
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 600,000 $ 690,000 $ 690,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-151
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund IV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-152
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continues to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Holland Joint
Venture, Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint Venture,
Kingsville Real Estate Joint Venture, Warren Joint Venture, and a property in
Clinton, North Carolina, held as tenants-in-common, are accounted for using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating new leases are
amortized over the terms of the new leases using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portion of one of these leases is an operating lease.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments,
F-153
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fully maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two or four
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 7,244,512 $ 8,328,572
Buildings.......................................... 11,986,556 13,684,194
----------- -----------
19,231,068 22,012,766
Less accumulated depreciation...................... (3,744,609) (3,844,432)
----------- -----------
15,486,459 18,168,334
Less allowance for loss on land and building....... -- (70,337)
----------- -----------
$15,486,459 $18,097,997
=========== ===========
</TABLE>
In July 1997, the Partnership entered into new leases for the properties in
Portland and Winchester, Indiana, with a new tenant to operate the properties
as Arby's restaurants. In connection therewith, the Partnership incurred
$125,000 in renovation costs for each property.
In November 1997, the Partnership sold its property in Douglasville, Georgia
to an unrelated third party for $402,000 and received net sales proceeds of
$378,149 (net of $2,546 which represents amounts due to the former tenant for
prorated rent). This property was originally acquired by the Partnership in
December 1994 and had a cost of approximately $363,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold
the property for approximately $16,900 in excess of its original purchase
price. Due to the fact that the Partnership had recognized accrued rental
income since the inception of the lease relating to the straight-lining of
future scheduled rent increases in accordance with generally accepted
accounting principles, the Partnership wrote off the cumulative balance of such
accrued rental income at the time of the sale of this property, resulting in a
loss of $6,652 for financial reporting purposes. Due to the fact that the
straight-lining of future rent increases over the term of the lease is a non-
cash accounting adjustment, the write off of these amounts is a loss for
financial statement purposes only.
In March 1998, the Partnership sold its property in Fort Myers, Florida, to
a third party for $842,100 and received net sales proceeds of $794,690,
resulting in a gain of $225,902 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $598,000 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$196,700 in excess of its original purchase price.
In March 1998, the Partnership sold its property in Union Township, Ohio to
a third party for $680,000 and received net sales proceeds of $674,135,
resulting in a loss of $104,987 for financial reporting purposes.
In connection with the sale of the properties described above, the
Partnership incurred deferred, subordinated, real estate disposition fees of
$45,663 (see Note 10).
In July 1998, the Partnership sold its property in Leesburg, Florida, for
$565,000 and received net sales proceeds of $523,931, resulting in a loss for
financial reporting purposes of $135,509. Due to the fact that at
F-154
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
December 31, 1997, the Partnership had recorded a provision for loss on land
and building in the amount of $70,337 for this property, the Partnership
recognized the remaining loss of $65,172 for financial reporting purposes in
July 1998, relating to the sale.
In September 1998, the Partnership sold its property in Naples, Florida, to
a third party for $563,000 and received net sales proceeds of $533,598,
resulting in a gain of $170,281 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $410,500 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the property for approximately
$123,100 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $40,515, $39,669 and
$21,520, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,975,839
2000............................................................. 1,977,929
2001............................................................. 1,947,479
2002............................................................. 1,951,578
2003............................................................. 1,759,818
Thereafter....................................................... 10,670,163
-----------
$20,282,806
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Minimum lease payments receivable................... $1,660,791 $ 1,825,690
Estimated residual values........................... 527,829 527,829
Less unearned income................................ (957,138) (1,084,130)
---------- -----------
Net investment in direct financing leases........... $1,231,482 $ 1,269,389
========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 164,899
2000.............................................................. 164,899
2001.............................................................. 164,899
2002.............................................................. 164,899
2003.............................................................. 164,899
Thereafter........................................................ 836,296
----------
$1,660,791
==========
</TABLE>
F-155
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future
periods (see Note 3).
5. Investment in Joint Ventures:
As of December 31, 1997, the Partnership had a 51 percent, a 26.6%, a 57
percent, a 96.1% and a 68.87% interest in the profits and losses of Holland
Joint Venture, Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint
Venture and Kingsville Real Estate Joint Venture, respectively, and a 53
percent interest in the profits and losses of a property in Clinton, North
Carolina, held as tenants-in-common with affiliates of the general partners.
The remaining interests in these joint ventures are held by affiliates of
the Partnership which have the same general partners. Holland Joint Venture,
Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint Venture,
Kingsville Real Estate Joint Venture and the Partnership and affiliates, as
tenants-in-common, each own and lease one property to an operator of national
fast-food or family-style restaurants.
In September 1998, the Partnership entered into a joint venture
arrangement, Warren Joint Venture, with an affiliate of the general partners,
to hold one restaurant property. As of December 31, 1998, the Partnership had
acquired a 35.71% interest in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the equity
method since the Partnership shares control with the affiliates.
The following presents the joint ventures' combined, condensed financial
information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss
on land and building............................. $4,406,943 $3,338,372
Net investment in direct financing leases less
allowance for loss on building................... 626,594 842,633
Cash.............................................. 14,025 12,331
Receivables....................................... 10,943 40,456
Accrued rental income............................. 163,773 177,567
Other assets...................................... 2,513 2,029
Liabilities....................................... 27,211 16,283
Partners' capital................................. 5,197,580 4,397,105
Revenues.......................................... 368,058 434,177
Provision for loss on land and buildings and net
investment in direct financing lease............. (441,364) (147,039)
Net income........................................ (212,388) 126,271
</TABLE>
The Partnership recognized a loss totalling $90,144 and income totalling
$189,747 and $277,431 for the years ended December 31, 1998, 1997, and 1996,
respectively, from these joint ventures.
6. Restricted Cash:
As of December 31, 1998, the net sales proceeds of $533,598 from the sale
of the property in Naples, Florida, plus accrued interest of $3,676 were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property on behalf of the Partnership.
F-156
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Receivables:
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Portland and Winchester, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $32,343 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note,
which is uncollateralized, bears interest at a rate of ten percent per annum,
and is being collected in 36 monthly installments. As of December 31, 1998, the
Partnership had collected the full amount of the promissory note.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of property, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property not in liquidation of
the Partnership is, in general, allocated first, on a pro rata basis, to
partners with positive balances in their capital accounts; and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of $3,633,748,
$2,760,000, and $2,760,000, respectively. Distributions for the year ended
December 31, 1998 included $1,233,748 as a result of the distribution of net
sales proceeds from the sale of the properties in Fort Myers, Florida and Union
Township, Ohio. This amount was applied toward the limited partners' 10%
Preferred Return. No distributions have been made to the general partners to
date.
F-157
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,821,449 $1,720,668 $2,347,167
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (8,014) (9,203) (17,764)
Allowance for loss on land and
building............................... -- 70,337 --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 37,907 34,215 30,885
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... (231,919) 44,918 (140,228)
Capitalization of transaction costs for
tax reporting purposes................. 18,286 -- --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of
joint ventures for tax reporting
purposes............................... 319,186 51,115 (25,853)
Allowance for doubtful accounts......... (36,939) 138,647 (9,933)
Accrued rental income................... (40,515) (39,669) (21,520)
Rents paid in advance................... 9,137 7,435 14,677
Other................................... 501 -- --
---------- ---------- ----------
Net income for federal income tax
purposes............................... $1,889,079 $2,018,463 $2,177,431
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director, and vice chairman of the Board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to collectively as the "Affiliate")
performed certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-158
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate 10% Preferred Return, plus their adjusted
capital contributions. For the year ended December 31, 1998, the Partnership
incurred $45,663 in deferred, subordinated, real estate disposition fees as a
result of the sales of properties. No deferred, subordinated real estate
disposition fees were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,365, $81,838 and $85,899 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Due to the Affiliate:
Expenditures incurred on behalf of the Partnership........ $ 53,363 $48,126
Accounting and administrative services.................... 49,952 40,728
Deferred, subordinated real estate disposition fee........ 45,663 --
Other....................................................... -- 5,000
-------- -------
$148,978 $93,854
======== =======
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc..................................... $413,755 $427,238 $425,390
Tampa Foods, L.P.................................. N/A N/A 291,347
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Shoney's......................................... $541,175 $557,303 $557,841
Wendy's Old Fashioned Hamburger Restaurants...... 437,896 432,585 499,305
Denny's.......................................... N/A 345,749 360,080
Taco Bell........................................ N/A 262,909 251,314
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership.
F-159
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
12. Subsequent Events:
In January 1999, the Partnership used the net sales proceeds from the sale
of the property in Naples, Florida to invest in a Property in Zephyrhills,
Florida, with an affiliate of the general partners as tenants-in-common for a
76 percent interest in the property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates. On March 11, 1999, the Partnership entered into
an Agreement and Plan of Merger with CNL American Properties Fund, Inc.
("APF"), pursuant to which the Partnership would be merged with and into a
subsidiary of APF (the "Merger"). As consideration for the Merger, APF has
agreed to issue 2,668,016 shares of its common stock, par value $0.01 per
shares (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the price paid
by APF investors in APF's most recent public offering. In order to assist the
general partners in evaluating the proposed merger consideration, the general
partners retained Valuation Associates, a nationally recognized real estate
appraisal firm, to appraise the Partnership's restaurant property portfolio.
Based on Valuation Associates' appraisal, the Partnership's property portfolio
and other assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $26,259,630 as of December 31, 1998. The APF Shares are
expected to be listed for trading on the New York Stock Exchange concurrently
with the consummation of the Merger, and, therefore, would be freely tradable
at the option of the former limited partners. At a special meeting of the
partners that is expected to be held in the third quarter of 1999, limited
partners holding in excess of 50% of the Partnership's outstanding limited
partnership interests must approve the Merger prior to consummation of the
transaction. The general partners intend to recommend that the limited partners
of the Partnership approve the Merger. In connection with their recommendation,
the general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
13. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,334,008 shares valued at $20.00 per
APF share.
F-160
<PAGE>
CNL INCOME FUND V, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-162
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-163
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-164
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-165
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-166
Report of Independent Certified Public Accountants....................... F-169
Balance Sheets as of December 31, 1998 and 1997.......................... F-170
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-171
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-172
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-173
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-174
</TABLE>
F-161
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,879,306 and
$1,895,755, respectively and allowance for loss on
land and buildings of $653,851 in 1999 and 1998...... $ 9,635,693 $10,660,128
Net investment in direct financing leases............. 1,690,306 1,708,966
Investment in joint ventures.......................... 2,392,506 2,282,012
Mortgage notes receivable, less deferred gain......... 872,380 1,748,060
Cash and cash equivalents............................. 2,393,763 352,648
Receivables, less allowance for doubtful accounts of
$140,973 and $141,505, respectively.................. 36,368 87,490
Prepaid expenses...................................... 7,068 1,872
Accrued rental income................................. 270,021 239,963
Other assets.......................................... 54,346 54,346
----------- -----------
$17,352,451 $17,135,485
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 75,710 $ 7,546
Accrued and escrowed real estate taxes payable........ 20,068 10,361
Distributions payable................................. 500,000 500,000
Due to related parties................................ 284,333 228,448
Rents paid in advance................................. 23,218 6,112
----------- -----------
Total liabilities................................. 903,329 752,467
Commitments and Contingencies (Note 5)
Minority interest..................................... 146,744 155,916
Partners' capital..................................... 16,302,378 16,227,102
----------- -----------
$17,352,451 $17,135,485
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-162
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- ---------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................ $282,637 $285,286 $ 575,685 $ 611,506
Earned income from direct financing
leases............................ 45,717 42,802 91,600 102,343
Interest and other income.......... 43,320 72,498 101,974 164,856
-------- -------- ---------- ----------
371,674 400,586 769,259 878,705
-------- -------- ---------- ----------
Expenses:
General operating and
administrative.................... 34,888 38,763 71,002 77,317
Bad debt expense................... -- 5,882 -- 5,882
Professional services.............. 13,190 6,061 18,582 10,079
Real estate taxes.................. 8,682 9,756 16,487 16,420
State and other taxes.............. 447 1,911 6,404 9,658
Depreciation....................... 60,067 62,771 124,179 129,977
Transaction costs.................. 59,718 -- 91,188 --
-------- -------- ---------- ----------
176,992 125,144 327,842 249,333
======== ======== ========== ==========
Income Before Minority Interest in
Loss of Consolidated Joint Venture,
Equity in Earnings of Unconsolidated
Joint Ventures, Gain on Sale of
Land and Buildings and Provision for
Loss on Land and Building........... 194,682 275,442 441,417 629,372
Minority Interest in Loss of Consoli-
dated Joint Venture................. 4,787 4,033 9,172 9,450
Equity in Earnings of Unconsolidated
Joint Ventures...................... 172,427 36,882 229,265 72,103
Gain on Sale of Land and Buildings... 309 992 395,422 442,605
Provision for Loss on Land and Build-
ing................................. -- (152,633) -- (152,633)
-------- -------- ---------- ----------
Net Income........................... $372,205 $164,716 $1,075,276 $1,000,897
======== ======== ========== ==========
Allocation of Net Income:
General partners................... $ 3,722 $ (734) $ 9,157 $ 6,355
Limited partners................... 368,483 165,450 1,066,119 994,542
-------- -------- ---------- ----------
$372,205 $164,716 $1,075,276 $1,000,897
======== ======== ========== ==========
Net Income Per Limited Partner Unit.. $ 7.37 $ 3.31 $ 21.32 $ 19.89
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........... 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-163
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 503,730 $ 493,982
Net income..................................... 9,157 9,748
----------- -----------
512,887 503,730
----------- -----------
Limited partners:
Beginning balance.............................. 15,723,372 18,026,552
Net income..................................... 1,066,119 1,535,147
Distributions ($20.00 and $76.77 per limited
partner unit, respectively)................... (1,000,000) (3,838,327)
----------- -----------
15,789,491 15,723,372
----------- -----------
Total partners' capital.......................... $16,302,378 $16,227,102
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-164
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........... $ 879,145 $ 812,900
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings........... 1,113,759 2,125,220
Additions to land and building on operating lease.. -- (125,000)
Investment in joint venture........................ -- (437,308)
Collections on mortgage note receivable............ 1,048,211 10,684
----------- -----------
Net cash provided by investing activities......... 2,161,970 1,573,596
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,000,000) (2,913,327)
----------- -----------
Net cash used in financing activities............. (1,000,000) (2,913,327)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... 2,041,115 (526,831)
Cash and Cash Equivalents at Beginning of Period..... 352,648 1,361,290
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 2,393,763 $ 834,459
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period............................ $ -- $ 65,400
=========== ===========
Distributions declared and unpaid at end of period.. $ 500,000 $ 500,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-165
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
V, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 66.5% interest in CNL/Longacre Joint
Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
2. Land and Buildings on Operating Leases:
During the six months ended June 30, 1999, the Partnership sold its
properties in Endicott and Ithaca, New York, to the tenant for a total of
$1,125,000 and received net sales proceeds of $1,113,759 resulting in a total
gain of $213,503 for financial reporting purposes. These properties were
originally acquired by the Partnership in December 1989 and had costs totaling
approximately $942,600, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these properties for a
total of approximately $171,200 in excess of their original purchase prices.
F-166
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
3. Investment in Joint Ventures:
In June 1999, Halls Joint Venture, in which the Partnership owns a 48.9%
interest, sold its property to the tenant, in accordance with the purchase
option under the lease agreement, for $891,915. This resulted in a gain to the
joint venture of approximately $239,300 for financial reporting purposes. The
property was originally contributed to Halls Joint Venture in February 1990 and
had a total cost of approximately $672,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $219,900 in excess of its original purchase price.
The following presents the combined, condensed financial information for all of
the Partnership's investments in joint ventures at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $4,188,675 $4,812,568
Net investment in direct financing lease.......... 813,268 817,525
Cash.............................................. 16,469 17,992
Restricted cash................................... 887,114 --
Receivables....................................... 46 5,168
Prepaid expenses.................................. 498 458
Accrued rental income............................. 76,713 112,279
Liabilities....................................... 44,127 46,398
Partners' capital................................. 5,938,656 5,719,592
Revenues.......................................... 326,204 555,103
Gain on sale of property.......................... 239,336 --
Net income........................................ 513,794 454,922
</TABLE>
The Partnership recognized income totaling $229,265 and $72,103 for the six
months ended June 30, 1999 and 1998, respectively, from these joint venture,
$172,427 and $36,882 of which was earned during the quarters ended June 30,
1999 and 1998, respectively.
4. Mortgage Notes Receivable:
As of December 31, 1998, the Partnership had accepted two promissory notes
in connection with the sale of two of its properties. During the six months
ended June 30, 1999, the Partnership collected the outstanding balance of
$1,043,770 relating to the promissory note accepted in connection with the sale
of the property in St. Cloud, Florida, and in connection therewith, the
Partnership recognized the remaining gain of $181,610 relating to this
property, in accordance with Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate."
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,024,516 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public
F-167
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $20,212,956 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
6. Concentration of Credit Risk:
The following schedule presents total rental, earned, and mortgage interest
income from individual lessees and borrowers, each representing more than ten
percent of the Partnership's total rental, earned, and mortgage interest income
(including the Partnership's share of total rental and earned income from joint
ventures and properties held as tenants-in-common with affiliates), for each of
the six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Golden Corral............................................. $97,756 $97,756
Tony Roma's............................................... 92,190 92,735
Wendy's Old Fashioned Hamburger Restaurants............... N/A 86,336
</TABLE>
The information denoted by N/A indicates that for the applicable period
presented, the chain did not represent more than ten percent of the
Partnership's total rental, earned, and mortgage interest income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains, could
significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-168
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund V, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund V, Ltd. (a Florida
limited partnership) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 18, 1999, except for Note 12 for which the date is March 11, 1999 and
Note 13 for which the date is June 3, 1999
F-169
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings.................................... $10,660,128 $12,421,143
Net investment in direct financing leases.............. 1,708,966 2,277,481
Investment in joint ventures........................... 2,282,012 1,558,709
Mortgage notes receivable, less deferred gain.......... 1,748,060 1,758,167
Cash and cash equivalents.............................. 352,648 1,361,290
Receivables, less allowance for doubtful accounts of
$141,505 and $137,892................................. 87,490 108,261
Prepaid expenses....................................... 1,872 9,307
Accrued rental income.................................. 239,963 169,726
Other assets........................................... 54,346 54,346
----------- -----------
$17,135,485 $19,718,430
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 7,546 $ 24,229
Accrued construction costs payable..................... -- 125,000
Accrued and escrowed real estate taxes payable......... 10,361 93,392
Distributions payable.................................. 500,000 575,000
Due to related parties................................. 228,448 143,867
Rents paid in advance and deposits..................... 6,112 13,479
----------- -----------
Total liabilities.................................. 752,467 974,967
Minority interest...................................... 155,916 222,929
Partners' capital...................................... 16,227,102 18,520,534
----------- -----------
$17,135,485 $19,718,430
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-170
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $1,168,301 $1,343,833 $1,746,021
Earned income from direct financing
leases.................................. 199,002 157,134 185,552
Contingent rental income................. 133,179 233,663 130,167
Interest and other income................ 282,795 302,503 147,804
---------- ---------- ----------
1,783,277 2,037,133 2,209,544
---------- ---------- ----------
Expenses:
General operating and administrative..... 166,878 166,346 178,991
Professional services.................... 20,542 23,172 22,605
Bad debt expense......................... 5,882 9,007 --
Real estate taxes........................ 35,434 39,619 40,711
State and other taxes.................... 9,658 11,897 12,492
Depreciation and amortization............ 267,254 324,431 376,766
Transaction costs........................ 14,644 -- --
---------- ---------- ----------
520,292 574,472 631,565
---------- ---------- ----------
Income Before Minority Interest in Loss of
Consolidated Joint Venture, Equity in
Earnings Of Unconsolidated Joint Ventures,
Gain on Sale of Land and Buildings and
Provision for Loss on Land and Buildings.. 1,262,985 1,462,661 1,577,979
Minority interest in Loss of Consolidated
Joint Venture............................. 67,013 54,622 23,884
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 173,941 56,015 46,452
Gain on Sale of Land and Buildings......... 444,113 409,311 19,369
Provision for Loss on Land and Buildings .. (403,157) (250,694) (239,525)
---------- ---------- ----------
Net Income................................. $1,544,895 $1,731,915 $1,428,159
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 9,748 $ 11,809 $ 12,513
Limited partners......................... 1,535,147 1,720,106 1,415,646
---------- ---------- ----------
$1,544,895 $1,731,915 $1,428,159
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 30.70 $ 34.40 $ 28.31
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-171
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $ 77,500 $126,460 $25,000,000 $(15,168,240) $12,524,040 $(2,865,000) $19,694,760
Contributions from
general partner....... 159,700 -- -- -- -- -- 159,700
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,300,000) -- -- (2,300,000)
Net income............. -- 12,513 -- -- 1,415,646 -- 1,428,159
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 237,200 138,973 25,000,000 (17,468,240) 13,939,686 (2,865,000) 18,982,619
Contributions from
general partner....... 106,000 -- -- -- -- -- 106,000
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,300,000) -- -- (2,300,000)
Net income............. -- 11,809 -- -- 1,720,106 -- 1,731,915
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 343,200 150,782 25,000,000 (19,768,240) 15,659,792 (2,865,000) 18,520,534
Distributions to
limited partners ($77
per limited partner
unit)................. -- -- -- (3,838,327) -- -- (3,838,327)
Net income............. -- 9,748 -- -- 1,535,147 -- 1,544,895
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $343,200 $160,530 $25,000,000 $(23,606,567) $17,194,939 $(2,865,000) $16,227,102
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-172
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 1,490,412 $ 1,771,467 $ 2,083,722
Distributions from unconsolidated joint
ventures.............................. 215,839 53,176 53,782
Cash paid for expenses................. (331,363) (305,341) (161,730)
Interest received...................... 274,847 293,929 127,971
----------- ----------- -----------
Net cash provided by operating
activities........................... 1,649,735 1,813,231 2,103,745
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. 2,125,220 5,271,796 100,000
Additions to land and buildings on
operating leases...................... (125,000) (1,900,790) --
Investment in direct financing leases.. -- (911,072) --
Investment in joint ventures........... (765,201) (1,090,062) --
Collections on mortgage notes
receivable............................ 19,931 9,265 6,712
Other.................................. -- -- (26,287)
----------- ----------- -----------
Net cash provided by investing
activities........................... 1,254,950 1,379,137 80,425
----------- ----------- -----------
Cash Flows from Financing Activities:
Contributions from general partner..... -- 106,000 159,700
Distributions to limited partners...... (3,913,327) (2,300,000) (2,300,000)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,913,327) (2,194,000) (2,140,300)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (1,008,642) 998,368 43,870
Cash and Cash Equivalents at Beginning
of Year................................ 1,361,290 362,922 319,052
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 352,648 $ 1,361,290 $ 362,922
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,544,895 $ 1,731,915 $ 1,428,159
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense....................... 5,882 9,007 --
Depreciation........................... 267,254 324,431 376,766
Minority interest in loss of
consolidated joint venture............ (67,013) (54,622) (23,884)
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 41,898 (2,839) 7,330
Gain on sale of land and buildings..... (444,113) (409,311) (19,369)
Provisions for loss on land and
buildings............................. 403,157 250,694 239,525
Decrease in net investment in direct
financing leases...................... 38,017 42,682 46,387
Decrease (increase) in accrued interest
on mortgage note receivable........... (6,533) 6,788 (9,414)
Decrease (increase) in receivables..... 17,333 (43,006) 10,270
Decrease in prepaid expenses........... 7,435 1,109 1,505
Increase in accrued rental income...... (70,237) (19,527) (27,875)
Increase (decrease) in accounts payable
and accrued expenses.................. (100,554) (12,509) 32,032
Increase (decrease) in due to related
parties............................... 19,181 (13,322) 59,945
Increase (decrease) in rents paid in
advance and deposits.................. (6,867) 1,741 (17,632)
----------- ----------- -----------
Total adjustments..................... 104,840 81,316 675,586
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 1,649,735 $ 1,813,231 $ 2,103,745
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted in connection
with sale of land and buildings....... $ -- $ -- $ 1,057,299
=========== =========== ===========
Deferred real estate disposition fees
incurred and unpaid at end of year.... $ 65,400 $ -- $ 34,500
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 500,000 $ 575,000 $ 575,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-173
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund V, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income are
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-174
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its 66.5%
interest in CNL/Longacre Joint Venture, a Florida general partnership, using
the consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership accounts for its interest in Cocoa Joint Venture, Halls
Joint Venture, RTO Joint Venture and a property in each of Mesa, Arizona and
Vancouver, Washington, held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and properties.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of estimates relate to
the allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases;
F-175
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
however, some leases have been classified as direct financing leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $ 5,352,136 $ 6,069,665
Buildings....................................... 7,857,598 8,546,530
----------- -----------
13,209,734 14,616,195
Less accumulated depreciation................... (1,895,755) (1,944,358)
----------- -----------
11,313,979 12,671,837
Less allowance for loss on land and buildings... (653,851) (250,694)
----------- -----------
$10,660,128 $12,421,143
=========== ===========
</TABLE>
In January 1997, the Partnership sold its property in Franklin, Tennessee,
to the tenant for $980,000 and received net sales proceeds of $960,741. Since
the Partnership had established an allowance for loss on land and building as
of December 31, 1996, no loss was recognized during 1997 as a result of the
sale. The Partnership used $360,000 of the net sales proceeds to pay
liabilities of the Partnership, including quarterly distributions to the
limited partners.
In June 1997, the Partnership entered into an operating agreement for the
property located in South Haven, Michigan, with an operator to operate the
property as an Arby's restaurant. In connection therewith, the Partnership used
approximately $120,400 of the net sales proceeds from the sale of the property
in Franklin, Tennessee, for conversion costs associated with the Arby's
property. The Partnership reinvested the majority of the remaining net sales
proceeds in additional properties.
During 1997, the Partnership sold its properties in Salem, New Hampshire;
Port St. Lucie, Florida; and Tampa, Florida for a total of $3,365,172 and
received net sales proceeds totalling $3,291,566 resulting in a total gain of
$447,521 for financial reporting purposes. These properties were originally
acquired by the Partnership in 1989 and had total costs of approximately
$2,934,400, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the properties for approximately $357,300 in
excess of their original purchase prices. The Partnership reinvested the
majority of net sales proceeds in additional properties.
In November 1997, the Partnership sold its property in Richmond, Indiana, to
a third party for $400,000 and received net sales proceeds of $385,179. As a
result of this transaction, the Partnership recognized a loss of $141,567 for
financial reporting purposes. In December 1997, the Partnership reinvested the
net sales proceeds in a property located in Vancouver, Washington, as tenants-
in-common with affiliates of the general partners (see Note 5).
F-176
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1998, the Partnership sold its properties
in Port Orange, Florida, and Tyler, Texas to the tenants for a total of
$2,180,000 and received net sales proceeds totalling $2,125,220, resulting in a
total gain of $440,822 for financial reporting purposes. These properties were
originally acquired by the Partnership in 1988 and 1989 and had costs totaling
approximately $1,791,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these properties for a
total of approximately $333,900 in excess of their original purchase prices. In
connection with the sale of the properties, the Partnership incurred deferred,
subordinated, real estate disposition fees of $65,400 (see Note 10).
In July 1997, the Partnership entered into a new lease for the property in
Connorsville, Indiana, with a new tenant to operate the property as an Arby's
restaurant. In connection therewith, during 1998, the Partnership paid $125,000
in renovation costs.
In 1997, the Partnership established an allowance for loss on land and
buildings of $250,694, for financial reporting purposes, relating to the
properties in Belding, Michigan and Lebanon, New Hampshire. Due to the fact
that the Partnership has not been able to successfully re-lease these
properties, the Partnership increased the allowance by $155,612 for the
property in Belding, Michigan, and $122,875 for the property in Lebanon, New
Hampshire, owned by the Partnership's consolidated joint venture, CNL/Longacre
Joint Venture at December 31, 1998. In addition, at December 31, 1998, the
Partnership established an allowance for loss on land and building of $124,670
relating to the property located in Daleville, Indiana, due to the fact that
the tenant terminated the lease with the Partnership. The allowances represent
the difference between the net carrying values of the properties at December
31, 1998 and current estimates of net realizable values for these properties.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $70,237, $19,527, and
$27,875, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,087,538
2000........................................................... 1,101,658
2001........................................................... 1,075,591
2002........................................................... 987,031
2003........................................................... 999,957
Thereafter..................................................... 8,250,965
-----------
$13,502,740
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant gross sales.
F-177
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Minimum lease payments receivable.................. $3,260,110 $4,213,033
Estimated residual values.......................... 566,502 806,792
Less unearned income............................... (2,117,646) (2,742,344)
---------- ----------
Net investment in direct financing leases.......... $1,708,966 $2,277,481
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 220,518
2000............................................................ 220,518
2001............................................................ 220,518
2002............................................................ 220,518
2003............................................................ 220,518
Thereafter...................................................... 2,157,520
----------
$3,260,110
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
In May 1997, the Partnership sold its property in Smyrna, Tennessee, to a
third party for $655,000 and received net sales proceeds of $634,310, resulting
in a gain of $101,995 for financial reporting purposes. This property was
originally acquired by the Partnership in March 1989 and had a cost of
approximately $569,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $64,800 in excess of its original purchase price. The Partnership
used approximately $82,500 of the net sales proceeds to pay liabilities of the
Partnership, including quarterly distributions to the limited partners. In
addition, the Partnership reinvested the remaining net sales proceeds in
additional properties as tenants-in-common with affiliates of the general
partners.
In June 1998, the Partnership terminated its lease with the tenant of the
property in Daleville, Indiana. As a result, the Partnership reclassified these
assets from net investment in direct financing lease to land and building on
operating lease. In accordance with Statement of Financial Accounting Standards
#13, "Accounting for Leases," the Partnership recorded the reclassified assets
at the lower of original cost, present fair value, or present carrying value.
No loss on termination of direct financing lease was recorded for financial
reporting purposes.
5. Investment in Joint Ventures:
As of December 31, 1998, the Partnership had a 43 percent and a 48.9%
interest in the profits and losses of Cocoa Joint Venture and Halls Joint
Venture, respectively. The remaining interests in these joint ventures are held
by affiliates of the Partnership which have the same general partners.
F-178
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In October 1997, the Partnership used a portion of the net sales proceeds
from the sale of the Property in Smyrna, Tennessee to acquire a property in
Mesa, Arizona, as tenants-in-common with an affiliate of the general partners.
The Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 42.09% interest in this property.
In addition, in December 1997, the Partnership used some or all of the net
sales proceeds from the sales of the Properties in Franklin, Tennessee;
Richmond, Indiana, and Smyrna, Tennessee to acquire a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 27.78% interest in this property.
In May, 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. Construction was completed and rent commenced in
December 1998. As of December 31, 1998, the Partnership had contributed
$766,746 to the joint venture. The Partnership holds a 53.12% interest in the
profits and losses of the joint venture. The Partnership accounts for its
investment in this joint venture under the equity method since the Partnership
shares control with an affiliate.
Cocoa Joint Venture, Halls Joint Venture, RTO Joint Venture and the
Partnership and affiliates as tenants-in-common in two separate tenancy-in-
common arrangements, each own and lease one property to an operator of national
fast-food or family-style restaurants.
The following presents the combined condensed financial information for all
of the Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $4,812,568 $4,277,972
Net investment in direct financing lease............ 817,525 --
Cash................................................ 17,992 24,994
Receivables......................................... 5,168 4,417
Prepaid expenses.................................... 458 270
Accrued rental income............................... 112,279 68,819
Liabilities......................................... 46,398 1,250
Partners' capital................................... 5,719,592 4,375,222
Revenues............................................ 555,103 151,242
Net income.......................................... 454,922 121,605
</TABLE>
The Partnership recognized income totaling $173,941, $56,015, and $46,452
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Mortgage Notes Receivable:
In connection with the sale in 1995 of its property in Myrtle Beach, South
Carolina, the Partnership accepted a promissory note in the principal sum of
$1,040,000, collateralized by a mortgage on the property. The promissory note
bears interest at 10.25% per annum and is being collected in 59 equal monthly
F-179
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
installments of $9,319, including interest, with a balloon payment of $991,332
due in July 2000. As a result of this sale being accounted for using the
installment sales method for financial reporting purposes as required by
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate," the Partnership recognized a gain of $1,134, $1,024, and $924 for
the years ended December 31, 1998, 1997, and 1996, respectively.
In addition, in connection with the sale in 1996 of its property in St.
Cloud, Florida, the Partnership accepted a promissory note in the principal sum
of $1,057,299, representing the balance of the sales price of $1,050,000 plus
tenant closing costs in the amount of $7,299 that the Partnership financed on
behalf of the tenant. The note is collateralized by a mortgage on the property.
The promissory note bears interest at a rate of 10.75% per annum and was being
collected in 12 monthly installments of interest only, and thereafter in
168 equal monthly installments of principal and interest. As a result of this
sale being accounted for using the installment sales method for financial
reporting purposes as required by Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate," the Partnership recognized a
gain of $2,157, $338, and $18,445 for the years ended December 31, 1998, 1997,
and 1996, respectively.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance................................ $2,049,981 $2,069,912
Accrued interest receivable...................... 17,945 11,412
Less deferred gains on sale of land and build-
ings............................................ (319,866) (323,157)
---------- ----------
$1,748,060 $1,758,167
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1998 and 1997, approximate the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Receivables:
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Connorsville and Richmond, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $35,297 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note is
uncollateralized, bears interest at a rate of ten percent per annum, and is
being collected in 36 monthly installments. Receivables at December 31, 1998
and 1997, included $25,783 and $37,099, respectively of such amounts, including
accrued interest of $1,802 in 1997.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
F-180
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners.
Any gain from the sale of a property not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general, allocated
first, on a pro rata basis, to partners with positive balances in their capital
accounts; and thereafter, 95 percent to the limited partners and five percent
to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,838,327, and during each of the
years ended December 31, 1997 and 1996, the Partnership distributed $2,300,000.
Distributions for 1998 included $1,838,327 as a result of the distribution of
net sales proceeds from the 1997 and 1998 sales of the properties in Tampa and
Port Orange, Florida. This amount was applied toward the limited partners' 10%
Preferred Return. No distributions have been made to the general partners to
date.
F-181
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $1,544,895 $1,731,915 $1,428,159
Depreciation for tax reporting
purposes less than (in excess of)
depreciation for financial
reporting purposes................... 18,802 (23,618) (28,058)
Gain on disposition of land and
buildings for financial reporting
purposes in excess of gain for tax
reporting purposes................... (16,347) (354,648) (1,606)
Allowance for loss on land and
buildings............................ 403,157 250,694 239,525
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 38,017 42,682 46,387
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial
reporting purposes................... 10,795 (1,914) (1,900)
Capitalization of transaction costs
for tax reporting purposes........... 14,644 -- --
Allowance for doubtful accounts....... 3,613 100,149 33,254
Accrued rental income................. (70,237) (19,527) (27,875)
Capitalization of administrative
expenses for tax reporting purposes.. 22,990 -- --
Rents paid in advance................. (6,867) 1,241 (17,632)
Minority interest in temporary
differences of consolidated joint
venture.............................. (84,622) (41,515) (343)
Other................................. 1,705 36,721 --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $1,880,545 $1,722,180 $1,669,911
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services in the
same geographic area. These fees will be incurred and will be payable only
after the limited partners receive their 10% Preferred Return. Due to the fact
that these fees are noncumulative, if the limited partners do not
F-182
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
receive their 10% Preferred Return in any particular year, no management fees
will be due or payable for such year. As a result of such threshold, no
management fees were incurred during the years ended December 1998, 1997, and
1996.
The Affiliate of the Partnership is also entitled to receive a deferred,
subordinated real estate disposition fee, payable upon the sale of one or more
properties based on the lesser of one-half of a competitive real estate
commission or three percent of the sales price if the Affiliate provides a
substantial amount of services in connection with the sale. However, if the net
sales proceeds are reinvested in a replacement property, no such real estate
disposition fees will be incurred until such replacement property is sold and
the net sales proceeds are distributed. The payment of the real estate
disposition fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital contributions.
During the years ended December 31, 1998 and 1996, the Partnership incurred a
deferred, subordinated real estate disposition fee of $65,400 and $34,500,
respectively, as the result of the sale of the properties during 1998 and 1996,
respectively. No deferred, subordinated real estate disposition fee was
incurred for the year ended December 31, 1997 due to the reinvestment of net
sales proceeds in additional properties.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,611, $80,145, and $83,563 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Mesa, Arizona, as tenants-in-common for a purchase price
of $1,084,111 (of which the Partnership contributed $460,911 or 42.23%) from
CNL BB Corp., also an affiliate of the general partners. CNL BB Corp. had
purchased and temporarily held title to this property in order to facilitate
the acquisition of the property by the Partnership. The purchase price paid by
the Partnership represented the Partnership's percent of interest in the costs
incurred by CNL BB Corp. to acquire and carry the property, including closing
costs.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership.... $ 77,907 $ 67,106
Accounting and administrative services................ 50,641 42,261
Deferred, subordinated real estate disposition fee.... 99,900 34,500
-------- --------
$228,448 $143,867
======== ========
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income (including
mortgage interest income) from individual lessees, or affiliated groups of
lessees, each representing more than ten percent of the Partnership's total
rental and earned income (including the Partnership share of total rental and
earned income from unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $195,511 $195,511 $ N/A
Shoney's, Inc.................................. N/A 229,795 241,119
</TABLE>
F-183
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
(including mortgage interest income) from individual restaurant chains, each
representing more than ten percent of the Partnership's total rental and earned
income and mortgage interest income (including the Partnership's share of total
rental and earned income from joint ventures and the properties held as
tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Wendy's Old Fashioned Hamburger Restaurant.... $220,347 $302,253 $293,817
Golden Corral Family Steakhouse............... 195,511 N/A N/A
Denny's....................................... N/A 312,510 310,021
Perkins....................................... N/A 228,492 268,939
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income (including mortgage interest
income).
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains, could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,049,031 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $20,212,956 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,024,516 shares valued at $20.00 per
APF share.
F-184
<PAGE>
CNL INCOME FUND VI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-186
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-187
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-188
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-189
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-190
Report of Independent Certified Public Accountants....................... F-192
Balance Sheets as of December 31, 1998 and 1997.......................... F-193
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-194
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-195
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-196
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-197
</TABLE>
F-185
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $3,069,230 and $3,586,086,
respectively.......................................... $15,258,241 $18,559,844
Net investment in direct financing leases.............. 3,897,669 3,929,152
Investment in joint ventures........................... 5,061,676 5,021,121
Cash and cash equivalents.............................. 1,124,292 1,170,686
Restricted cash........................................ 4,332,095 --
Receivables, less allowance for doubtful accounts of
$281,449 and $323,813, respectively................... 82,799 150,912
Prepaid expenses....................................... 6,172 949
Lease costs, less accumulated amortization of $8,006
and $7,181............................................ 9,694 10,519
Accrued rental income, less allowance for doubtful
accounts of $44,793 and $38,944, respectively......... 442,192 785,982
Other assets........................................... 26,731 26,731
----------- -----------
$30,241,561 $29,655,896
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 87,205 $ 8,173
Accrued and escrowed real estate taxes payable......... 6,796 2,500
Due to related party................................... 26,828 19,403
Distributions payable.................................. 787,500 857,500
Rents paid in advance and deposits..................... 44,054 28,241
----------- -----------
Total liabilities.................................. 952,383 915,817
Commitments and Contingencies (Note 4)
Minority interest...................................... 140,106 144,949
Partners' capital...................................... 29,149,072 28,595,130
----------- -----------
$30,241,561 $29,655,896
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-186
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 595,624 $ 653,877 $1,199,285 $1,288,852
Adjustments to accrued rental
income........................ (2,925) (158,453) (5,849) (161,377)
Earned income from direct
financing leases.............. 124,461 132,575 236,541 256,784
Contingent rental income....... 7,307 2,089 16,482 34,479
Interest and other income...... 23,796 31,006 39,252 67,682
---------- --------- ---------- ----------
748,263 661,094 1,485,711 1,486,420
---------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 37,328 40,577 78,111 86,042
Bad debt expense............... -- 12,854 -- 12,854
Professional services.......... 14,132 10,921 18,842 16,791
State and other taxes.......... 247 487 9,713 10,392
Depreciation and amortization.. 108,393 114,143 222,646 230,053
Transaction costs.............. 77,695 -- 110,820 --
---------- --------- ---------- ----------
237,795 178,982 440,132 356,132
---------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures
and Gain on Sale of
Land and Buildings............. 510,468 482,112 1,045,579 1,130,288
Minority Interest in Income of
Consolidated Joint Venture..... (9,662) (11,659) (12,162) (24,540)
Equity in Earnings of
Unconsolidated Joint Ventures.. 123,447 61,403 247,222 117,899
Gain on Sale of Land and
Buildings...................... 848,303 -- 848,303 345,122
---------- --------- ---------- ----------
Net Income...................... $1,472,556 $ 531,856 $2,128,942 $1,568,769
========== ========= ========== ==========
Allocation of Net Income:
General partners............... $ 13,529 $ 5,318 $ 20,093 $ 13,806
Limited partners............... 1,459,027 526,538 2,108,849 1,554,963
---------- --------- ---------- ----------
$1,472,556 $ 531,856 $2,128,942 $1,568,769
========== ========= ========== ==========
Net Income Per Limited Partner
Unit........................... $ 20.84 $ 7.52 $ 30.13 $ 22.21
========== ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................... 70,000 70,000 70,000 70,000
========== ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-187
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six
Months Ended Year Ended
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 257,690 $ 229,363
Net income......................................... 20,093 28,327
----------- -----------
277,783 257,690
----------- -----------
Limited partners:
Beginning balance.................................. 28,337,440 28,564,886
Net income......................................... 2,108,849 2,992,554
Distributions ($22.50 and $46.00 per limited
partner unit, respectively)....................... (1,575,000) (3,220,000)
----------- -----------
28,871,289 28,337,440
----------- -----------
Total partners' capital.............................. $29,149,072 $28,595,130
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-188
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,663,032 $ 1,655,360
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 4,318,145 2,832,253
Additions to land and buildings on operating
leases.......................................... -- (125,000)
Investment in joint ventures..................... (44,121) (2,740,640)
Increase in restricted cash...................... (4,318,145) (204,074)
Payment of lease costs........................... (3,300) (3,300)
----------- -----------
Net cash provided by (used in) investing
activities.................................... (47,421) (240,761)
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,645,000) (1,575,000)
Distributions to holder of minority interest..... (17,005) (21,020)
----------- -----------
Net cash used in financing activities.......... (1,662,005) (1,596,020)
----------- -----------
Net Decrease in Cash and Cash Equivalents............ (46,394) (181,421)
Cash and Cash Equivalents at Beginning of Period..... 1,170,686 1,614,759
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,124,292 $ 1,433,338
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period............................................ $ 787,500 $ 787,500
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-189
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VI, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its approximate 66 percent interest in the
accounts of Caro Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
2. Land and Buildings on Operating Leases:
In June 1999, the Partnership sold four of its Burger King properties, one
in each of Sevierville, Walker Springs, Broadway and Greeneville, Tennessee, to
the tenant in accordance with the purchase option under the lease agreements,
for a total of approximately $4,354,000 and received net sales proceeds of
$4,318,145 resulting in a total gain of $848,303 for financial reporting
purposes. These properties were originally acquired by the Partnership in
January 1990 and had costs totaling approximately $3,535,700, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold these properties for a total of approximately $782,400 in
excess of their original purchase prices.
3. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $4,318,145 from the sales of
the four Burger King properties, plus accrued interest of $13,950, were being
held in interest-bearing escrow accounts pending the release of funds by the
escrow agent to acquire additional properties on behalf of the Partnership.
4. Commitments and Contingencies:
On March 11, 1999 the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,865,194 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going
F-190
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
concern basis (meaning the Partnership continues unchanged) at $36,721,726 as
of December 31, 1998. Legg Mason Wood Walker, Incorporated has rendered a
fairness opinion that the APF Share consideration, payable by APF, is fair to
the Partnership from a financial point of view. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners
that is expected to be held in the fourth quarter of 1999, limited partners
holding in excess of 50% of the Partnership's outstanding limited partnership
interests must approve the Merger prior to consummation of the transaction. If
the limited partners at the special meeting approve the Merger, APF will own
the properties and other assets of the Partnership. The general partners intend
to recommend that the limited partners of the Partnership approve the Merger.
In connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999 the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-191
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund VI, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund VI, Ltd. ( a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 19, 1999, except for Note 12,
for which the date is March 11, 1999 and
Note 13 for which the date is June 3, 1999
F-192
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $18,559,844 $20,785,684
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 3,929,152 4,708,841
Investment in joint ventures........................... 5,021,121 1,130,139
Cash and cash equivalents.............................. 1,170,686 1,614,759
Restricted cash........................................ -- 709,227
Receivables, less allowance for doubtful accounts of
$323,813 and $363,410................................. 150,912 157,989
Prepaid expenses....................................... 949 4,235
Lease costs, less accumulated amortization of $7,181
and $5,581............................................ 10,519 12,119
Accrued rental income, less allowance for doubtful
accounts of $38,944 and $27,245....................... 785,982 843,345
Other assets........................................... 26,731 26,731
----------- -----------
$29,655,896 $29,993,069
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 8,173 $ 14,138
Accrued construction costs payable..................... -- 125,000
Accrued and escrowed real estate taxes payable......... 2,500 38,025
Due to related parties................................. 19,403 32,019
Distributions payable.................................. 857,500 787,500
Rents paid in advance and deposits..................... 28,241 57,663
----------- -----------
Total liabilities.................................. 915,817 1,054,345
Minority interest...................................... 144,949 144,475
Partners' capital...................................... 28,595,130 28,794,249
----------- -----------
$29,655,896 $29,993,069
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-193
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,520,346 $2,465,817 $2,776,776
Adjustments to accrued rental income.... (167,227) (17,548) (537)
Earned income from direct financing
leases................................. 470,258 449,133 557,426
Contingent rental income................ 156,676 147,437 110,073
Interest and other income............... 110,502 119,961 49,056
---------- ---------- ----------
3,090,555 3,164,800 3,492,794
---------- ---------- ----------
Expenses:
General operating and administrative.... 160,358 156,847 159,388
Professional services................... 32,400 25,861 32,272
Bad debt expense........................ 12,854 131,184 --
Real estate taxes....................... -- 43,676 --
State and other taxes................... 10,392 8,969 7,930
Depreciation and amortization........... 458,558 473,828 483,573
Transaction costs....................... 20,211 -- --
---------- ---------- ----------
694,773 840,365 683,163
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Net Investment in Direct
Financing Leases and Provision for Loss
on Land and Building and Impairment in
Carrying Value of Net Investment in
Direct Financing Lease................... 2,395,782 2,324,435 2,809,631
Minority interest in Income of Consoli-
dated Joint Venture...................... (43,128) 11,275 (24,682)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 323,105 280,331 97,381
Gain (Loss) on Sale of Land and Buildings
and Net Investment in Direct Financing
Leases................................... 345,122 547,027 (1,706)
Provision for Loss on Land and Buildings
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... -- (263,186) (77,023)
---------- ---------- ----------
Net Income................................ $3,020,881 $2,899,882 $2,803,601
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 28,327 $ 25,353 $ 28,337
Limited partners........................ 2,992,554 2,874,529 2,775,264
---------- ---------- ----------
$3,020,881 $2,899,882 $2,803,601
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 42.75 $ 41.06 $ 39.65
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 70,000 70,000 70,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-194
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995...... $1,000 $174,673 $35,000,000 $(19,214,226) $17,514,319 $(4,015,000) $29,460,766
Distributions to
limited partners
($46.00 per limited
partner unit)......... -- -- -- (3,220,000) -- -- (3,220,000)
Net income............. -- 28,337 -- -- 2,775,264 -- 2,803,601
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1996...... 1,000 203,010 35,000,000 (22,434,226) 20,289,583 (4,015,000) 29,044,367
Distributions to
limited partners
($45.00 per limited
partner unit)......... -- -- -- (3,150,000) -- -- (3,150,000)
Net income............. -- 25,353 -- -- 2,874,529 -- 2,899,882
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1997...... 1,000 228,363 35,000,000 (25,584,226) 23,164,112 (4,015,000) 28,794,249
Distributions to
limited partners
($46.00 per limited
partner unit)......... -- -- -- (3,220,000) -- -- (3,220,000)
Net income............. -- 28,327 -- -- 2,992,554 -- 3,020,881
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1998...... $1,000 $256,690 $35,000,000 $(28,804,226) $26,156,666 $(4,015,000) $28,595,130
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-195
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 3,092,644 $ 3,097,751 $ 3,363,188
Distributions from unconsolidated
joint ventures...................... 328,721 144,016 114,163
Cash paid for expenses............... (270,339) (180,530) (203,432)
Interest received.................... 92,634 94,804 36,843
----------- ----------- -----------
Net cash provided by operating
activities........................ 3,243,660 3,156,041 3,310,762
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings........................... 2,832,253 4,003,985 982,980
Additions to land and buildings on
operating leases.................... (125,000) (2,666,258) --
Investment in direct financing
leases.............................. -- (1,057,282) --
Investment in joint ventures......... (3,896,598) (521,867) (146,090)
Return of capital from joint
ventures............................ (84) 524,975 --
Collections on mortgage note
receivable.......................... -- -- 3,033
Decrease (increase) in restricted
cash................................ 697,650 279,367 (977,017)
Payment of lease costs............... (3,300) (3,300) (3,300)
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. (495,079) 559,620 (140,394)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.... (3,150,000) (3,220,000) (3,150,000)
Distributions to holder of minority
interest............................ (42,654) (8,832) (13,437)
----------- ----------- -----------
Net cash used in financing
activities........................ (3,192,654) (3,228,832) (3,163,437)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (444,073) 486,829 6,931
Cash and Cash Equivalents at Beginning
of Year................................ 1,614,759 1,127,930 1,120,999
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,170,686 $ 1,614,759 $ 1,127,930
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,020,881 $ 2,899,882 $ 2,803,601
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense..................... 12,854 131,184 --
Depreciation......................... 456,958 471,938 481,683
Amortization......................... 1,600 1,890 1,890
Minority interest in income of
consolidated joint venture.......... 43,128 (11,275) 24,682
Equity in earnings of unconsolidated
joint ventures, net of
distributions....................... 5,616 (136,315) 16,782
Loss (gain) on sale of land and
building............................ (345,122) (547,027) 1,706
Provision for loss on land and
building and impairment in carrying
value of net investment in direct
financing lease..................... -- 263,186 77,023
Decrease (increase) in receivables... 8,649 17,113 (90,360)
Decrease (increase) in prepaid
expenses............................ 3,286 (3,072) 4,087
Decrease in net investment in direct
financing leases.................... 63,868 67,389 68,177
Decrease (increase) in accrued rental
income.............................. 51,142 (81,244) (103,935)
Increase (decrease) in accounts
payable and accrued expenses........ (37,246) 25,964 2,529
Increase (decrease) in due to related
parties............................. (12,532) 29,470 (3,391)
Increase (decrease) in rents paid in
advance and deposits................ (29,422) 26,958 26,288
----------- ----------- -----------
Total adjustments.................. 222,779 256,159 507,161
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,243,660 $ 3,156,041 $ 3,310,762
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 857,500 $ 787,500 $ 857,500
=========== =========== ===========
</TABLE>
See accompanying notes fo financial statements.
F-196
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and accrued rental
income, and to decrease rental or other income or increase bad debt expense for
the current
F-197
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its approximate
66 percent interest in Caro Joint Venture, a Florida general partnership, using
the consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership's investments in Auburn Joint Venture, Show Low Joint
Venture, Asheville Joint Venture, Warren Joint Venture, and Melbourne Joint
Venture and properties in Clinton, North Carolina, Vancouver, Washington;
Overland Park, Kansas; Memphis, Tennessee and Fort Myers, Florida, each of
which is held as tenants-in-common with affiliates, are accounted for using the
equity method since the Partnership shares control with the affiliates.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees and lease incentive costs incurred in finding
new tenants and negotiating new leases for the Partnership's properties are
amortized over the terms of the new leases using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
F-198
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of some of these leases are operating leases.
Substantially all leases are for 10 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to four successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land.................... $ 8,558,191 $10,046,309
Buildings............... 13,587,739 14,344,114
----------- -----------
22,145,930 24,390,423
Less accumulated
depreciation........... (3,586,086) (3,327,334)
----------- -----------
18,559,844 21,063,089
Less allowance for loss
on land and building... -- (277,405)
----------- -----------
$18,559,844 $20,785,684
=========== ===========
</TABLE>
In February 1997, the Partnership reinvested the net sales proceeds from the
sale of a property in Dallas, Texas, along with additional funds, in a
Bertucci's property in Marietta, Georgia, for a total cost of approximately
$1,112,600.
In July 1997, the Partnership sold the property in Whitehall, Michigan, to a
third party, for $665,000 and received net sales proceeds of $626,907,
resulting in a loss of $79,777 for financial reporting purposes.
In addition, in July 1997, the Partnership sold its property in Naples,
Florida, to a third party, for $1,530,000 and received net sales proceeds of
$1,477,780, resulting in a gain of $186,550 for financial reporting purposes.
This property was originally acquired by the Partnership in December 1989 and
had a cost of approximately $1,083,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the partnership sold the
property for approximately $403,800 in excess of its original purchase price.
In December 1997, the Partnership reinvested the net sales proceeds in an IHOP
property in Elgin, Illinois, for a total cost of approximately $1,484,100.
In July 1997, the Partnership entered into a new lease for the property in
Greensburg, Indiana, with a new tenant to operate the property as an Arby's
restaurant. In connection therewith, the Partnership incurred $125,000 in
renovation costs, which were paid in 1998.
F-199
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In September 1997, the Partnership sold its property in Venice, Florida, to
a third party, for $1,245,000 and received net sales proceeds of $1,201,648,
resulting in a gain of $283,853 for financial reporting purposes. This property
was originally acquired by the Partnership in August 1989 and had a cost of
approximately $1,032,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $174,300 in excess of its original purchase price. In December
1997, the Partnership reinvested the net sales proceeds in an IHOP property in
Manassas, Virginia, for a total cost of approximately $1,126,800.
In 1997, the Partnership recorded a provision for loss on land and building
in the amount of $104,947 for financial reporting purposes for the property in
Liverpool, New York. The terms of this lease were terminated in December 1996.
This allowance represented the difference between (i) the property's carrying
value at December 31, 1997, and (ii) the net realizable value of the property
based on the net sales proceeds of $145,221 received in February 1998 from the
sale of the property. Due to the fact that in 1997 and prior years, the
Partnership had recorded an allowance for loss totalling $181,970 for this
property, no gain or loss was recognized for financial reporting purposes
during 1998 relating to the sale of this Property in February 1998.
During 1997, the Partnership established an allowance for loss on land in
the amount of $95,435 for its property in Melbourne, Florida. The tenant of
this Property vacated the property in October 1997 and ceased making rental
payments. The allowance represents the difference between the property's
carrying value for the land at December 31, 1997, and the net realizable value
of the land based on the net sales proceeds of $552,910 received in February
1998 from the sale of the property. No gain or loss was recognized for
financial reporting purposes relating to the sale of this property in February
1998.
In January 1998, the Partnership sold its property in Deland, Florida, to
the tenant for $1,250,000 and received net sales proceeds of $1,234,122,
resulting in a gain of $345,122 for financial reporting purposes. This property
was originally acquired by the Partnership in October 1989 and had a cost of
approximately $1,000,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $234,100 in excess of its original purchase price. In June 1998,
the Partnership sold its property in Bellevue, Nebraska, and received sales
proceeds of $900,000. Due to the fact that during 1998, the Partnership wrote
off $155,528 in accrued rental income, representing the majority of the accrued
rental income that the Partnership had recognized since the inception of the
lease relating to the straight-lining of future scheduled rent increases in
accordance with generally accepted accounting principles, no gain or loss was
recorded for financial reporting purposes in June 1998 relating to this sale.
This property was originally acquired by the Partnership in December 1989 and
had a cost of approximately $899,500, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $500 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized a loss of $51,142 (net of
$155,528 in write-offs and $11,699 in reserves), and income of $81,244 (net of
$17,548 in reserves) and $103,935 (net of $537 in reserves), respectively, of
such rental income.
F-200
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 2,329,253
2000........................................................... 2,402,277
2001........................................................... 2,451,812
2002........................................................... 2,466,895
2003........................................................... 2,458,306
Thereafter..................................................... 11,370,855
-----------
$23,479,398
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.............. $ 7,212,677 $ 9,313,752
Estimated residual values...................... 1,440,446 1,655,911
Less unearned income........................... (4,723,971) (6,198,018)
----------- -----------
3,929,152 4,771,645
Less allowance for impairment in carrying val-
ue............................................ -- (62,804)
----------- -----------
Net investment in direct financing leases...... $ 3,929,152 $ 4,708,841
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 486,632
2000............................................................ 488,772
2001............................................................ 501,492
2002............................................................ 501,492
2003............................................................ 501,492
Thereafter...................................................... 4,732,797
----------
$7,212,677
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(See Note 3).
In July 1997, the Partnership sold its property in Naples, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual values) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to this
property was reflected in income (Note 3).
F-201
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, in July 1997, the Partnership sold its property in Plattsmouth,
Nebraska, to the tenant, for $700,000 and received net sales proceeds of
$697,650, resulting in a gain of $156,401 for financial reporting purposes.
This property was originally acquired by the Partnership in January 1990 and
had a cost of approximately $561,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $138,400 in excess of its original purchase price.
At December 31, 1997, the Partnership had established an allowance for
impairment in carrying value in the amount of $62,804 for its property in
Melbourne, Florida. The allowance represents the difference between (i) the
carrying value of the net investment in the direct financing lease at December
31, 1997, and (ii) the net realizable value of the net investment in the direct
financing lease based on the net sales proceeds received in February 1998 from
the sale of the property (see Note 3).
In June 1998, the Partnership sold its property in Bellevue, Nebraska, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts (see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 3.9%, a 36 percent, a 14.46%, and an 18 percent
interest in the profits and losses of Auburn Joint Venture, Show Low Joint
Venture, Asheville Joint Venture, and a property in Clinton, North Carolina,
held as tenants-in-common, respectively. The remaining interests in these joint
ventures and the property held as tenants in common are held by affiliates of
the Partnership which have the same general partners.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 36
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a cost of approximately $663,500, excluding acquisition fees
and miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $306,500 in excess of its original purchase price.
In June 1997, Show Low Joint Venture reinvested $782,413 of net sales proceeds
in a property in Greensboro, North Carolina. During 1997, the Partnership
received approximately $70,000 representing a return of capital, for its pro-
rata share of the uninvested net sales proceeds.
In October 1997, the Partnership and an affiliate, as tenants-in-common,
sold the property in Yuma, Arizona, in which the Partnership owned a 51.67%
interest, for a total sales price of $1,010,000 and received net sales proceeds
of $982,025, resulting in a gain, to the tenancy-in-common, of approximately
$128,400 for financial reporting purposes. The property was originally acquired
in July 1994 and had a total cost of approximately $861,700, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
property was sold for approximately $120,300 in excess of its original purchase
price. The Partnership received approximately $455,000 representing a return of
capital for its pro-rata share of the net sales proceeds. In December 1997, the
Partnership reinvested the amounts received as a return of capital from the
sale of the Yuma, Arizona property, in a property in Vancouver, Washington, as
tenants-in-common with affiliates of the general partners. The Partnership
accounts for its investment in the property in Vancouver, Washington, using the
equity method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 23.04% interest in the Vancouver,
Washington, property owned with affiliates as tenants-in-common.
F-202
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In January 1998, the Partnership contributed approximately $558,800 and
$694,800 to acquire a property in Overland Park, Kansas, and a property in
Memphis, Tennessee, respectively, as tenants-in-common with affiliates of the
general partners. As of December 31, 1998, the Partnership had a 34.74% and a
46.2% interest in the property in Overland Park, Kansas and Memphis, Tennessee,
respectively. In June 1998, the Partnership contributed approximately
$1,249,300 to acquire a property in Fort Myers, Florida, as tenants-in-common
with an affiliate of the general partners. As of December 31, 1998, the
Partnership had an 85 percent interest in the property in Fort Myers, Florida.
The Partnership accounts for its investments in these properties using the
equity method since the Partnership shares control with affiliates, and amounts
relating to its investments are included in investment in joint ventures.
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. As of December 31, 1998, the
Partnership had contributed approximately $494,900 to purchase land and pay
construction costs relating to the property owned by the joint venture and has
agreed to contribute an additional $31,300 to fund additional construction
costs to the joint venture. At December 31, 1998, the Partnership had an
approximate 50 percent interest in the profits and losses of the joint venture.
The Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with the affiliate.
In September 1998, the Partnership entered into a joint venture arrangement,
Warren Joint Venture, with an affiliate of the general partners to hold one
restaurant property. As of December 31, 1998, the Partnership had contributed
approximately $898,100 to the joint venture to acquire the restaurant property.
As of December 31, 1998, the Partnership owned a 64.29% interest in the profits
and losses of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with the affiliate.
Auburn Joint Venture, Show Low Joint Venture, Asheville Joint Venture,
Melbourne Joint Venture, Warren Joint Venture, and the Partnership and
affiliates as tenants-in-common in five separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the properties held
as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $ 9,030,392 $4,568,842
Net investment in direct financing leases........ 3,331,869 911,559
Cash............................................. 12,138 7,991
Receivables...................................... 56,360 22,230
Accrued rental income............................ 237,451 160,197
Other assets..................................... 1,190 414
Liabilities...................................... 105,868 7,557
Partners' capital................................ 12,563,532 5,663,676
Revenues......................................... 1,098,957 471,627
Gain on sale of land and building................ -- 488,372
Net income....................................... 959,057 889,883
</TABLE>
The Partnership recognized income totalling $323,105, $280,331, and $97,381
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
F-203
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Restricted Cash:
As of December 31, 1997, net sales proceeds of $697,650 from the sale of the
property in Plattsmouth, Nebraska, plus accrued interest of $11,577, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property. In January 1998, the escrow
agent released these funds to acquire the property in Memphis, Tennessee, with
affiliates of the general partners, as tenants-in-common.
7. Receivables:
In June 1997, the Partnership terminated the lease with the tenant of the
property in Greensburg, Indiana. In connection therewith, the Partnership
accepted a promissory note from this former tenant for $13,077 for amounts
relating to past due real estate taxes the Partnership had incurred as a result
of the former tenant's financial difficulties. The promissory note, which is
uncollateralized, bears interest at a rate of ten percent per annum and is
being collected in 36 monthly installments. Receivables at December 31, 1998
and 1997, included $9,561 and $13,631, respectively, of such amounts, including
accrued interest of $554 in 1997.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996 the Partnership
declared distributions to the limited partners of $3,220,000, $3,150,000 and
$3,220,000, respectively. No distributions have been made to the general
partners to date.
F-204
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,020,881 $2,899,882 $2,803,601
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (65,666) (92,303) (104,412)
Allowance for loss on land and
building.............................. -- 263,186 77,023
Direct financing leases recorded as
operating leases for tax
reporting purposes.................... 63,868 67,392 68,177
Gain and loss on sale of land and
buildings for financial
reporting purposes in excess of gain
and loss on sale for
tax reporting purposes................ (543,697) (335,658) 1,706
Equity in earnings of unconsolidated
joint ventures for financial reporting
purposes in excess of equity
in earnings of unconsolidated joint
ventures for tax reporting purposes... (14,400) (147,256) (49)
Allowance for doubtful accounts........ (39,597) 369,935 (78,517)
Accrued rental income.................. 51,142 (81,244) (103,935)
Rents paid in advance.................. (30,922) 26,458 26,288
Capitalization of transaction costs for
tax reporting purposes................ 20,211 -- --
Minority interest in timing differences
of consolidated joint venture......... 14,513 (30,778) 1,781
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,476,333 $2,939,614 $2,691,663
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures and the property held as
tenants-in-common with an affiliate, but not in excess of competitive fees for
comparable services. These fees are payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
F-205
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the sales proceeds are
reinvested in a replacement property, no such real estate disposition fees
will be incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition fee is
subordinated to receipt by the limited partners of their aggregate 10%
Preferred Return, plus their adjusted capital contributions. No deferred,
subordinated real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-
to-day basis. The Partnership incurred $107,969, $87,877 and $95,420 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such
services.
The due to related parties at December 31, 1998 and 1997, totalled $19,403
and $32,019, respectively.
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $758,646 $751,866 $758,348
IHOP Properties, Inc........................... 454,889 N/A --
Mid-America Corporation........................ 439,519 439,519 439,519
Restaurant Management Services, Inc............ 438,257 478,750 511,040
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $758,646 $751,866 $758,348
IHOP Properties, Inc.......................... 454,889 N/A --
Burger King................................... 453,634 496,487 455,764
Denny's....................................... N/A 317,041 N/A
Hardee's...................................... N/A N/A 410,951
</TABLE>
The information denoted by N/A indicates that for each period presented,
the tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant chains
could significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-206
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,730,388 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $36,721,726 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,865,194 shares valued at $20.00 per
APF share.
F-207
<PAGE>
CNL INCOME FUND VII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-209
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-210
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-211
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-212
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-213
Report of Independent Certified Public Accountants....................... F-215
Balance Sheets as of December 31, 1998 and 1997.......................... F-216
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-217
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-218
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-219
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-220
</TABLE>
F-208
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December
1999 31, 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,473,926 and $2,473,926,
respectively.......................................... $14,127,414 $15,078,507
Net investment in direct financing leases.............. 3,320,665 3,365,392
Investment in joint ventures........................... 3,413,821 3,327,934
Mortgage notes receivable, less deferred gain of
$124,725 and $125,278, respectively................... 1,235,728 1,241,056
Cash and cash equivalents.............................. 906,629 856,825
Restricted cash........................................ 1,063,383 --
Receivables, less allowance for doubtful accounts of
$16,679 and $28,853, respectively..................... 2,499 78,478
Prepaid expenses....................................... 13,021 4,116
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1999 and 1998................... 1,175,747 1,205,528
Other assets........................................... 60,422 60,422
----------- -----------
$25,319,329 $25,218,258
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 89,920 $ 2,885
Escrowed real estate taxes payable..................... 4,249 5,834
Distributions payable.................................. 675,000 675,000
Due to related parties................................. 25,464 25,111
Rents paid in advance and deposits..................... 43,712 49,027
----------- -----------
Total liabilities.................................... 838,345 757,857
Commitments and Contingencies (Note 5)
Minority interest...................................... 146,060 146,605
Partners' capital...................................... 24,334,924 24,313,796
----------- -----------
$25,319,329 $25,218,258
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-209
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases..... $ 490,454 $ 498,467 $ 983,178 $ 991,191
Earned income from
direct financing
leases............... 101,201 103,779 203,077 208,154
Contingent rental
income............... 2,169 2,958 3,679 12,378
Interest and other
income............... 44,581 41,148 84,139 85,138
----------- ----------- ------------ ------------
638,405 646,352 1,274,073 1,296,861
----------- ----------- ------------ ------------
Expenses:
General operating and
administrative....... 28,491 34,550 63,827 67,662
Professional
services............. 7,366 7,313 11,785 12,594
State and other
taxes................ -- 40 13,055 2,728
Depreciation and
amortization......... 74,630 76,089 150,719 152,178
Transaction costs..... 78,624 -- 111,897 --
----------- ----------- ------------ ------------
189,111 117,992 351,283 235,162
----------- ----------- ------------ ------------
Income Before Minority
Interest in Income of
Consolidated Joint
Venture,
Equity in Earnings of
Unconsolidated Joint
Ventures, and Gain on
Sale of Land and
Building............... 449,294 528,360 922,790 1,061,699
Minority Interest in
Income of Consolidated
Joint Venture.......... (4,631) (4,596) (9,280) (9,256)
Equity in Earnings of
Unconsolidated Joint
Ventures............... 195,079 73,260 268,374 151,193
Gain on Sale of Land and
Building............... 188,971 252 189,244 499
----------- ----------- ------------ ------------
Net Income.............. $ 828,713 $ 597,276 $ 1,371,128 $ 1,204,135
=========== =========== ============ ============
Allocation of Net
Income:
General partners...... $ 8,053 $ 5,972 $ 13,477 $ 12,041
Limited partners...... 820,660 591,304 1,357,651 1,192,094
----------- ----------- ------------ ------------
$ 828,713 $ 597,276 $ 1,371,128 $ 1,204,135
=========== =========== ============ ============
Net Income Per Limited
Partner Unit........... $ 0.027 $ 0.020 $ 0.045 $ 0.040
=========== =========== ============ ============
Weighted Average Number
of Limited Partner
Units Outstanding...... 30,000,000 30,000,000 30,000,000 30,000,000
=========== =========== ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-210
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 205,744 $ 181,085
Net income..................................... 13,477 24,659
----------- -----------
219,221 205,744
----------- -----------
Limited partners:
Beginning balance.............................. 24,108,052 24,366,693
Net income..................................... 1,357,651 2,441,359
Distributions ($0.045 and $0.090 per limited
partner unit, respectively)................... (1,350,000) (2,700,000)
----------- -----------
24,115,703 24,108,052
----------- -----------
Total partners' capital.......................... $24,334,924 $24,313,796
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-211
<PAGE>
CLN INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,405,372 $ 1,401,833
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... 1,059,954 --
Increase in restricted cash...................... (1,061,529) --
Collections on mortgage notes receivable......... 5,832 5,267
Other............................................ -- 13,255
----------- -----------
Net cash provided by investing activities...... 4,257 18,522
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,350,000) (1,350,000)
Distributions to holder of minority interest..... (9,825) (9,663)
----------- -----------
Net cash used in financing activities.......... (1,359,825) (1,359,663)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 49,804 60,692
Cash and Cash Equivalents at Beginning of Period..... 856,825 761,317
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 906,629 $ 822,009
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period.......................................... $ 675,000 $ 675,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-212
<PAGE>
CNL INCOME FUND VII, LTD.
(a Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VII, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 83 percent interest in San Antonio #849
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partners' proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
2. Land and Buildings on Operating Leases:
In June 1999, the Partnership sold its property in Maryville, Tennessee to
the tenant in accordance with the purchase option under the lease agreement to
purchase the property, for $1,068,802, and received net sales proceeds of
$1,059,954, resulting in a gain of $188,691 for financial reporting purposes.
This property was originally acquired by the Partnership in 1990 at a cost of
approximately $890,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold this property for a total
of approximately $169,300 in excess of its original purchase price.
3. Investment in Joint Ventures:
In June 1999, Halls Joint Venture, in which the Partnership owns a 51.1%
interest, sold its property to the tenant in accordance with the purchase
option under the lease agreement for $891,915, resulting in a gain to the joint
venture of approximately $239,300 for financial reporting purposes. The
property was originally contributed to Halls Joint Venture in 1990 and had a
total cost of approximately $672,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $219,900 in excess of its original purchase price.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures at:
<TABLE>
<CAPTION>
June 30, December
1999 31, 1998
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $ 9,892,904 $10,612,379
Cash.............................................. 4,133 3,763
Restricted cash................................... 887,114 --
Receivables....................................... 32 21,249
Accrued rental income............................. 129,946 178,775
Other assets...................................... 1,129 1,116
Liabilities....................................... 9,019 8,916
Partners' capital................................. 10,906,239 10,808,366
Revenues.......................................... 630,777 1,324,602
Gain on sale of land and building................. 239,336 --
Net income........................................ 719,130 1,028,391
</TABLE>
F-213
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
The Partnership recognized income totaling $268,374 and $151,193 during the
six months ended June 30, 1999 and 1998, respectively, from these joint
ventures, $195,079 and $73,260 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively.
4. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $1,059,954 from the sale of
the property in Maryville, Tennessee, plus accrued interest of $3,429, were
being held in an interest-bearing escrow account pending the release of funds
by the escrow agent to acquire an additional property.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,601,186 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $31,543,529 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners, and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
During the six months ended June 30, 1999, the Partnership received notice
from a tenant deciding to exercise the purchase option under its lease
agreement relating to the Burger King property in Jefferson City, Tennessee.
The general partners believe that the anticipated sales price for this property
exceeds the Partnership's net carrying value attributable to the property. As
of August 6, 1999, the sales had not occurred.
F-214
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund VII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund VII, Ltd. (a
Florida Limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 25, 1999, except for Note 11 for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-215
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $15,078,507 $15,382,863
Net investment indirect financing leases.............. 3,365,392 3,447,152
Investment in joint ventures.......................... 3,327,934 3,393,932
Mortgage notes receivable, less deferred gain......... 1,241,056 1,250,597
Cash and cash equivalents............................. 856,825 761,317
Receivables, less allowance for doubtful accounts of
$28,853 and $32,959.................................. 78,478 64,092
Prepaid expenses...................................... 4,116 4,755
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1998 and 1997.................. 1,205,528 1,114,632
Other assets.......................................... 60,422 60,422
----------- -----------
$25,218,258 $25,479,762
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 2,885 $ 6,131
Escrowed real estate taxes payable.................... 5,834 7,785
Distributions payable................................. 675,000 675,000
Due to related parties................................ 25,111 34,883
Rents paid in advance and deposits.................... 49,027 60,671
----------- -----------
Total liabilities................................. 757,857 784,470
Minority interest..................................... 146,605 147,514
Partners' capital..................................... 24,313,796 24,547,778
----------- -----------
$25,218,258 $25,479,762
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-216
<PAGE>
CLN INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,976,709 $1,960,724 $1,954,033
Earned income from direct financing
leases................................. 413,848 475,498 505,061
Contingent rental income................ 93,906 51,345 44,973
Interest and other income............... 171,263 183,579 240,079
---------- ---------- ----------
2,655,726 2,671,146 2,744,146
---------- ---------- ----------
Expenses:
General operating and administrative.... 133,915 143,173 159,001
Professional services................... 23,443 23,546 27,640
Real estate taxes....................... -- 2,979 9,010
State and other taxes................... 2,729 4,560 2,448
Depreciation............................ 304,356 304,356 317,957
Transaction costs....................... 18,781 -- --
---------- ---------- ----------
483,224 478,614 516,056
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, and Gain (Loss) on Sale of Land
and Buildings............................ 2,172,502 2,192,532 2,228,090
Minority Interest in Income of
Consolidated Joint Venture............... (18,590) (18,663) (18,691)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 311,081 267,251 157,254
Gain (Loss) on Sale of Land and
Buildings................................ 1,025 164,888 (39,790)
---------- ---------- ----------
Net Income................................ $2,466,018 $2,606,008 $2,326,863
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 24,659 $ 24,300 $ 23,586
Limited partners........................ 2,441,359 2,581,708 2,303,277
---------- ---------- ----------
$2,466,018 $2,606,008 $2,326,863
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.081 $ 0.086 $ 0.077
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 30,000,000 30,000,000 30,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-217
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $132,199 $30,000,000 $(14,777,623) $13,099,331 $(3,440,000) $25,014,907
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,000) -- -- (2,700,000)
Net income............. -- 23,586 -- -- 2,303,277 -- 2,326,863
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 155,785 30,000,000 (17,477,623) 15,402,608 (3,440,000) 24,641,770
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,000) -- -- (2,700,000)
Net income............. -- 24,300 -- -- 2,581,708 -- 2,606,008
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 180,085 30,000,000 (20,177,623) 17,984,316 (3,440,000) 24,547,778
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,000) -- -- (2,700,000)
Net income............. -- 24,659 -- -- 2,441,359 -- 2,466,018
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $204,744 $30,000,000 $(22,877,623) $20,425,675 $(3,440,000) $24,313,796
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-218
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 2,435,937 $ 2,500,189 $ 2,549,406
Distributions from unconsolidated joint
ventures.............................. 376,557 300,696 191,174
Cash paid for expenses................. (187,925) (140,819) (248,523)
Interest received...................... 166,406 180,393 178,812
----------- ----------- -----------
Net cash provided by operating
activities............................ 2,790,975 2,840,459 2,670,869
----------- ----------- -----------
Cash Flows from Investing Activities:
Additions to land and buildings on
operating leases...................... -- -- (1,041,555)
Proceeds from sale of land and
buildings............................. -- 976,334 1,661,943
Investment in joint ventures........... -- (1,650,905) --
Collections on mortgage notes
receivable............................ 10,811 9,766 8,821
Other.................................. 13,221 -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.................. 24,032 (664,805) 629,209
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (2,700,000) (2,700,000) (2,700,000)
Distributions to holder of minority
interest.............................. (19,499) (19,766) (19,723)
----------- ----------- -----------
Net cash used in financing activities.. (2,719,499) (2,719,766) (2,719,723)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 95,508 (544,112) 580,355
Cash and Cash Equivalents at Beginning
of Year................................ 761,317 1,305,429 725,074
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 856,825 $ 761,317 $ 1,305,429
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,466,018 $ 2,606,008 $ 2,326,863
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 304,356 304,356 317,957
Minority interest in income of
consolidated joint venture............ 18,590 18,663 18,691
Loss (gain) on sale of land and
buildings............................. (1,025) (164,888) 39,790
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 65,476 33,445 33,920
Decrease (increase) in receivables..... (27,330) 17,173 (14,827)
Decrease (increase) in prepaid
expenses.............................. 639 (101) 379
Decrease in net investment in direct
financing leases...................... 81,760 76,941 70,329
Increase in accrued rental income...... (90,896) (102,142) (104,639)
Increase (decrease) in accounts payable
and accrued expenses.................. (5,197) 3,222 (40,072)
Increase (decrease) in due to related
parties............................... (9,772) 25,816 (4,244)
Increase (decrease) in rents paid in
advance and deposits.................. (11,644) 21,966 26,722
----------- ----------- -----------
Total adjustments...................... 324,957 234,451 344,006
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,790,975 $ 2,840,459 $ 2,670,869
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 675,000 $ 675,000 $ 675,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-219
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-220
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its 83.3%
interest in San Antonio #849 Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's proportionate
share of the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been eliminated.
The Partnership's investments in Halls Joint Venture, CNL Restaurant
Investments II, Des Moines Real Estate Joint Venture, and CNL Mansfield Joint
Venture, and a property in Smithfield, North Carolina, and a property in Miami,
Florida, for which each of the two properties is held as tenants-in-common with
affiliates, are accounted for using the equity method since the Partnership
shares control with affiliates which have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. The more significant areas requiring the use
of management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
F-221
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are operating
leases. Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. In addition, the tenant generally pays all property
taxes and assessments, fully maintains the interior and exterior of the
building and carries insurance coverage for public liability, property damage,
fire and extended coverage. The lease options generally allow tenants to renew
the leases for two to four successive five-year periods subject to the same
terms and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................. $ 8,430,465 $ 8,430,465
Buildings........................................ 9,121,968 9,121,968
----------- -----------
17,552,433 17,552,433
Less accumulated depreciation.................... (2,473,926) (2,169,570)
----------- -----------
$15,078,507 $15,382,863
=========== ===========
</TABLE>
In May 1997, the Partnership sold its property in Columbus, Indiana, for
$240,000 and received net sales proceeds of $223,589, resulting in a loss of
$19,739 for financial reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $90,896, $102,142 (net of
$11,159 in reserves), and $104,639 (net of $1,631 in reserves), respectively,
of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,891,776
2000........................................................... 1,925,741
2001........................................................... 2,022,708
2002........................................................... 2,034,710
2003........................................................... 1,940,473
Thereafter..................................................... 10,605,505
-----------
$20,420,913
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts
F-222
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
for future contingent rentals which may be received on the leases based on a
percentage of the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $ 5,915,553 $ 6,411,161
Estimated residual values........................ 1,008,935 1,008,935
Less unearned income............................. (3,559,096) (3,972,944)
----------- -----------
Net investment in direct financing leases........ $ 3,365,392 $ 3,447,152
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 495,609
2000............................................................ 495,609
2001............................................................ 496,766
2002............................................................ 496,766
2003............................................................ 496,766
Thereafter...................................................... 3,434,037
----------
$5,915,553
==========
</TABLE>
In October 1997, the Partnership sold its property in Dunnellon, Florida,
for $800,000 and received net sales proceeds (net of $5,055 which represents
amounts due to the former tenant for prepaid rent) of $752,745, resulting in a
gain of $183,701 for financial reporting purposes. This property was originally
acquired by the Partnership in August 1990 and had a cost of approximately
$546,300, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the property for approximately $211,500 in
excess of its original purchase price.
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 51.1% interest, an 18 percent interest and a 4.79%
interest in the profits and losses of Halls Joint Venture, CNL Restaurant
Investments II, and Des Moines Real Estate Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In February 1997, the Partnership entered into a joint venture arrangement,
CNL Mansfield Joint Venture, with an affiliate of the Partnership which has the
same general partners, to hold one restaurant property in Mansfield, Texas. As
of December 31, 1998, the Partnership owned a 79 percent interest,
respectively, in the profits and losses of the joint venture. The Partnership
accounts for its investment in this joint venture under the equity method since
the Partnership shares control with the affiliate.
F-223
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
As of January 1, 1997, the Partnership had a 48.33% interest in a property
in Yuma, Arizona, with an affiliate of the Partnership that has the same
general partners, as tenants-in-common. In October 1997, the Partnership and
the affiliate, as tenants-in-common, sold the property in Yuma, Arizona, for a
total sales price of $1,010,000 and received net sales proceeds of $982,025
resulting in a gain of approximately $128,400 for financial reporting purposes.
The property was originally acquired in July 1994 and had a total cost of
approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the property was sold for approximately
$120,300 in excess of its original purchase price. In December 1997, the
Partnership reinvested its portion of the net sales proceeds from the sale of
the Yuma, Arizona, property, along with funds from the sale of a wholly-owned
Property in Columbus, Indiana, in a property in Miami, Florida, as tenants-in-
common with affiliates of the general partners. The Partnership accounts for
its investment in the property in Miami, Florida, using the equity method since
the Partnership shares control with affiliates, and amounts relating to its
investment are included in investment in joint ventures. As of December 31,
1998, the Partnership owned a 35.64% interest in the Miami, Florida property
owned with affiliates as tenants-in-common.
In December 1997, the Partnership acquired a property in Smithfield, North
Carolina as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 53 percent interest in this
property.
CNL Restaurant Investments II owns and leases six properties to an operator
of national fast-food or family-style restaurants, and Halls Joint Venture, Des
Moines Real Estate Joint Venture, CNL Mansfield Joint Venture, and the
Partnership and affiliates as tenants-in-common in two separate tenancy-in-
common arrangements, each own and lease one property to an operator of national
fast-food or family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the two properties
held as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation....................... $10,612,379 $10,892,405
Cash............................................ 3,763 750
Receivables..................................... 21,249 18,819
Accrued rental income........................... 178,775 147,685
Other assets.................................... 1,116 1,079
Liabilities..................................... 8,916 8,625
Partners' capital............................... 10,808,366 11,052,113
Revenues........................................ 1,324,602 1,012,624
Gain on sale of land and building............... -- 128,371
Net income...................................... 1,028,391 905,117
</TABLE>
The Partnership recognized income totalling $311,081, $267,251, and $157,254
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures and the two properties held as tenants-in-common with
affiliates.
F-224
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Mortgage Notes Receivable:
In connection with the sale of its property in Florence, South Carolina
during 1995, the Partnership accepted a promissory note in the principal sum of
$1,160,000, collateralized by a mortgage on the property. The promissory note
bears interest at a rate of 10.25% per annum and is being collected in 59 equal
monthly installments of $10,395, with a balloon payment of $1,105,715 due in
July 2000.
In addition, the Partnership accepted a promissory note in the principal sum
of $240,000 in connection with the sale of its property in Jacksonville,
Florida in December 1995. The note is collateralized by a mortgage on the
property. The promissory note bears interest at a rate of ten percent per annum
and is being collected in 119 equal monthly installments of $2,106, with a
balloon payment of $218,252 due in December 2005.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance................................. $1,357,877 $1,368,688
Accrued interest receivable....................... 8,457 8,212
Less deferred gain on sale of land and building... (125,278) (126,303)
---------- ----------
$1,241,056 $1,250,597
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1998 and 1997, approximate the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property not in liquidation of
the Partnership is, in general, allocated first, on a pro rata basis, to
partners with positive balances in their capital accounts; and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership,
F-225
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
iii) third, to pay all of the Partnership's liabilities, if any, to the general
and limited partners, iv) fourth, after allocations of net income, gains and/or
losses, to distribute to the partners with positive capital accounts balances,
in proportion to such balances, up to amounts sufficient to reduce such
positive balances to zero, and v) thereafter, any funds remaining shall then be
distributed 95 percent to the limited partners and five percent to the general
partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of $2,700,000. No
distributions have been made to the general partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,466,018 $2,606,008 $2,326,863
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (16,795) (25,552) (24,753)
Gain on sale of land and buildings for
financial reporting purposes in excess
of gain for tax reporting purposes..... (246) (178,348) (163,152)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 81,760 76,941 70,329
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial reporting
purposes............................... 11,026 (55,911) 1,420
Accrued rental income................... (90,896) (102,142) (104,639)
Rents paid in advance................... (12,644) 21,966 26,722
Minority interest in timing differences
of unconsolidated joint venture........ 982 981 981
Allowance for uncollectible accounts.... (4,106) -- --
Capitalization of transaction costs for
tax reporting purposes................. 18,781 -- --
Other................................... -- (10,275) --
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,453,880 $2,333,668 $2,133,771
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the
F-226
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
management fee of one percent of the sum of gross revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
revenues from joint ventures and the properties held as tenants-in-common with
affiliates, but not in excess of competitive fees for comparable services.
These fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fee will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees were incurred for the years ended December 31, 1998,
1997, and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,256, $77,078, and 92,985 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $10,111 $20,321
Accounting and administrative services................. 7,800 7,362
Deferred, subordinated real estate disposition fee..... 7,200 7,200
------- -------
$25,111 $34,883
======= =======
</TABLE>
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures and
the two properties held as tenants-in-common with affiliates), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $732,650 $625,724 $608,852
Restaurant Management Services, Inc............ 448,691 444,069 446,867
Waving Leaves, Inc............................. 300,546 N/A --
Flagstar Enterprises, Inc...................... N/A 307,738 464,042
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including
F-227
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
the Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the two properties held as tenants-in-common
with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $732,650 $625,724 $608,852
Burger King................................... 469,984 466,626 478,901
Hardees....................................... 451,348 447,074 524,625
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,202,371 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $31,543,529 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 1,601,186 shares valued at $20.00 per
APF share.
F-228
<PAGE>
CNL INCOME FUND VIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-230
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-231
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-232
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-233
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999
and 1998................................................................ F-234
Report of Independent Certified Public Accountants....................... F-236
Balance Sheets as of December 31, 1998 and 1997.......................... F-237
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-238
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-239
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-240
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-241
</TABLE>
F-229
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,835,604 and
$1,685,510, respectively............................ $15,619,184 $15,769,278
Net investment in direct financing leases............ 7,721,863 7,802,785
Investment in joint ventures......................... 2,776,099 2,809,759
Mortgage notes receivable............................ 1,507,221 1,811,726
Cash and cash equivalents............................ 1,896,858 1,809,258
Receivables, less allowance for doubtful accounts of
$24,636 in 1998..................................... 5,426 84,265
Prepaid expenses..................................... 14,426 3,959
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1999 and 1998................. 1,976,584 1,927,418
Other assets......................................... 52,671 52,671
----------- -----------
$31,570,332 $32,071,119
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................... $ 96,091 $ 4,258
Escrowed real estate taxes payable................... 21,347 27,838
Distributions payable................................ 787,501 1,137,501
Due to related party................................. 81,968 75,266
Rents paid in advance................................ 60,950 62,349
----------- -----------
Total liabilities.................................. 1,047,857 1,307,212
Commitments and Contingencies (Note 3)
Minority interest.................................... 108,640 108,600
Partners' capital.................................... 30,413,835 30,655,307
----------- -----------
$31,570,332 $32,071,119
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-230
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases...................... $ 492,313 $ 455,192 $ 985,302 $ 910,748
Earned income from direct
financing leases............ 235,628 297,998 472,487 597,440
Contingent rental income..... 13,335 2,547 16,614 21,033
Interest and other income.... 57,044 70,242 111,409 135,326
---------- ---------- ---------- ----------
798,320 825,979 1,585,812 1,664,547
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative.............. 34,860 43,649 72,509 76,092
Professional services........ 8,404 6,857 14,136 12,363
State and other taxes........ 112 103 17,646 5,372
Depreciation................. 75,047 52,243 150,094 104,485
Transaction costs............ 87,527 -- 121,090 --
---------- ---------- ---------- ----------
205,950 102,852 375,475 198,312
---------- ---------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated
Joint Venture and Equity in
Earnings of Unconsolidated
Joint Ventures................ 592,370 723,127 1,210,337 1,466,235
Minority Interest in Income of
Consolidated Joint Venture.... (3,330) (3,307) (6,685) (6,711)
Equity in Earnings of
Unconsolidated Joint
Ventures...................... 69,647 71,149 129,878 139,253
---------- ---------- ---------- ----------
Net Income..................... $ 658,687 $ 790,969 $1,333,530 $1,598,777
========== ========== ========== ==========
Allocation of Net Income:
General partners............. $ 6,587 $ 7,910 $ 13,335 $ 15,988
Limited partners............. 652,100 783,059 1,320,195 1,582,789
---------- ---------- ---------- ----------
$ 658,687 $ 790,969 $1,333,530 $1,598,777
========== ========== ========== ==========
Net Income Per Limited Partner
Unit.......................... $ 0.019 $ 0.022 $ 0.038 $ 0.045
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding................... 35,000,000 35,000,000 35,000,000 35,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-231
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 258,248 $ 226,441
Net income..................................... 13,335 31,807
----------- -----------
271,583 258,248
----------- -----------
Limited partners:
Beginning balance.............................. 30,397,059 30,989,957
Net income..................................... 1,320,195 3,257,105
Distributions ($0.045 and $0.110 per limited
partner unit, respectively)................... (1,575,002) (3,850,003)
----------- -----------
30,142,252 30,397,059
----------- -----------
Total partners' capital.......................... $30,413,835 $30,655,307
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-232
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........ $ 1,717,444 $1,873,504
----------- ----------
Cash Flows from Investing Activities:
Collections on mortgage notes receivable........... 301,803 20,097
----------- ----------
Net cash provided by investing activities........ 301,803 20,097
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,925,002) (1,925,001)
Distributions to holder of minority interest....... (6,645) (6,587)
----------- ----------
Net cash used in financing activities............ (1,931,647) (1,931,588)
----------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... 87,600 (37,987)
Cash and Cash Equivalents at Beginning of Period..... 1,809,258 1,602,236
----------- ----------
Cash and Cash Equivalents at End of Period........... $ 1,896,858 $1,564,249
=========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-233
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VIII, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its approximate 88 percent interest in Woodway
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
2. Mortgage Notes Receivable:
As of December 31, 1998, the Partnership had accepted three promissory notes
in connection with the sale of three of its properties. During the six months
ended June 30, 1999, the maker relating to one of the promissory notes prepaid
principal in the amount of $272,500 which was applied to the outstanding
principal balance.
3. Merger Transaction:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,021,318 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $39,843,631 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve
F-234
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
the Merger. In connection with their recommendation, the general partners will
solicit the consent of the limited partners at the special meeting. If the
limited partners reject the Merger, the Partnership will bear the portion of
the transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, a limited
partner in certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates on June
22, 1999 in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-235
<PAGE>
Report of Independent Certified Public Accountants
To the Partners CNL Income Fund VIII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund VIII, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 4, 1999, except for Note 11
for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-236
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $15,769,278 $13,960,232
Net investment in direct financing leases............. 7,802,785 10,044,975
Investment in joint ventures.......................... 2,809,759 2,877,717
Mortgage notes receivable............................. 1,811,726 1,853,386
Cash and cash equivalents............................. 1,809,258 1,602,236
Receivables, less allowance for doubtful accounts of
$24,636 and $19,228.................................. 84,265 51,393
Prepaid expenses...................................... 3,959 4,357
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1998 and 1997.................. 1,927,418 1,811,329
Other assets.......................................... 52,671 52,671
----------- -----------
$32,071,119 $32,258,296
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,258 $ 8,359
Escrowed real estate taxes payable.................... 27,838 24,459
Distributions payable................................. 1,137,501 787,501
Due to related parties................................ 75,266 59,649
Rents paid in advance and deposits.................... 62,349 53,556
----------- -----------
Total liabilities................................... 1,307,212 933,524
Minority interest..................................... 108,600 108,374
Partners' capital..................................... 30,655,307 31,216,398
----------- -----------
$32,071,119 $32,258,296
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-237
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases... $ 1,897,209 $ 1,804,273 $ 1,867,968
Earned income from direct financing
leases............................... 1,093,839 1,211,369 1,314,090
Contingent rental income.............. 101,911 85,735 31,712
Interest and other income............. 269,744 238,338 127,246
----------- ----------- -----------
3,362,703 3,339,715 3,341,016
----------- ----------- -----------
Expenses:
General operating and administrative.. 146,943 140,586 156,177
Professional services................. 24,837 23,284 27,682
State and other taxes................. 5,372 5,081 4,757
Depreciation.......................... 246,976 208,971 208,971
Transaction costs..................... 21,042 -- --
----------- ----------- -----------
445,170 377,922 397,587
----------- ----------- -----------
Income Before Minority Interest in
Income of Consolidated Joint Venture,
Equity in Earnings of Unconsolidated
Joint Ventures and Gain (Loss) on Sale
of Land and Buildings.................. 2,917,533 2,961,793 2,943,429
Minority Interest in Income of
Consolidated Joint Venture............. (13,518) (13,706) (13,906)
Equity in Earnings of Unconsolidated
Joint Ventures......................... 276,721 293 ,480 266,500
Gain (Loss) on Sale of Land and
Buildings.............................. 108,176 -- (99,031)
----------- ----------- -----------
Net Income.............................. $ 3,288,912 $ 3,241,567 $ 3,096,992
=========== =========== ===========
Allocation of Net Income:
General partners...................... $ 31,807 $ 32,416 $ 31,413
Limited partners...................... 3,257,105 3,209,151 3,065,579
----------- ----------- -----------
$ 3,288,912 $ 3,241,567 $ 3,096,992
=========== =========== ===========
Net Income Per Limited Partner Unit..... $ 0.093 $ 0.092 $ 0.088
=========== =========== ===========
Weighted Average Number of Limited
Partner Units Outstanding.............. 35,000,000 35,000,000 35,000,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-238
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $161,612 $35,000,000 $(15,772,138) $16,064,868 $(4,015,000) $31,440,342
Distributions to
limited partners
($0.098 per limited
partner unit)......... -- -- -- (3,412,500) -- -- (3,412,500)
Net income............. -- 31,413 -- -- 3,065,579 -- 3,096,992
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 193,025 35,000,000 (19,184,638) 19,130,447 (4,015,000) 31,124,834
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (3,150,003) -- -- (3,150,003)
Net income............. -- 32,416 -- -- 3,209,151 -- 3,241,567
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 225,441 35,000,000 (22,334,641) 22,339,598 (4,015,000) 31,216,398
Distributions to
limited partners
($0.110 per limited
partner unit)......... -- -- -- (3,850,003) -- -- (3,850,003)
Net income............. -- 31,807 -- -- 3,257,105 -- 3,288,912
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $257,248 $35,000,000 $(26,184,644) $25,596,703 $(4,015,000) $30,655,307
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-239
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,144,635 $ 3,114,439 $ 3,222,903
Distributions from unconsolidated joint
ventures.............................. 344,643 356,589 323,531
Cash paid for expenses................. (185,270) (163,215) (194,218)
Interest received...................... 258,584 235,243 110,452
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,562,592 3,543,056 3,462,668
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. 116,397 -- --
Additions to land and buildings on
operating leases...................... -- -- (1,135)
Investment in direct financing leases.. -- -- (1,326)
Investment in joint venture............ -- -- (234,059)
Collections on mortgage notes
receivable............................ 41,292 8,799 2,557
Other.................................. 36 -- (34,793)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................. 157,725 8,799 (268,756)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,500,003) (3,412,502) (3,325,000)
Distributions to holder of minority
interest.............................. (13,292) (13,391) (13,503)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,513,295) (3,425,893) (3,338,503)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 207,022 125,962 (144,591)
Cash and Cash Equivalents at Beginning
of Year................................ 1,602,236 1,476,274 1,620,865
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,809,258 $ 1,602,236 $ 1,476,274
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,288,912 $ 3,241,567 $ 3,096,992
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 246,976 208,971 208,971
Minority interest in income of
consolidated joint venture............ 13,518 13,706 13,906
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 67,922 63,109 57,031
Loss (gain) on sale of land and
buildings............................. (108,176) -- 99,031
Decrease (increase) in receivables..... (32,504) (25,641) 429
Decrease (increase) in prepaid
expenses.............................. 398 20 (1,465)
Decrease in net investment in direct
financing leases...................... 177,947 178,250 157,194
Increase in accrued rental income...... (116,089) (128,736) (219,757)
Increase (decrease) in accounts payable
and accrued expenses.................. (722) 9,987 12,203
Increase (decrease) in due to related
parties............................... 15,617 2,769 (4,505)
Increase (decrease) in rents paid in
advance and deposits.................. 8,793 (20,946) 42,638
----------- ----------- -----------
Total adjustments..................... 273,680 301,489 365,676
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,562,592 $ 3,543,056 $ 3,462,668
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings............ $ -- $ -- $ 1,375,000
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 1,137,501 $ 787,501 $ 1,050,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-240
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VIII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-241
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continues to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and the allowance
for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 87.68%
interest in Woodway Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
The Partnership's investments in Asheville Joint Venture, CNL Restaurant
Investments II and Middleburg Joint Venture are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." Some of the leases have been
classified as operating leases and some of the leases have been classified as
direct financing leases. For property leases classified as direct financing
leases, the building portions of the majority of property leases are accounted
for as direct financing leases while the land portions of these leases are
accounted for as operating leases. Substantially all leases are for 15 to 20
years and provide for minimum and contingent rentals. In addition, the tenant
pays all
F-242
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
property taxes and assessments, fully maintains the interior and exterior of
the building and carries insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to four successive five-year periods subject to the
same terms and conditions of the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 9,159,115 $ 9,167,336
Buildings.......................................... 8,295,673 6,231,430
----------- -----------
17,454,788 15,398,766
Less accumulated depreciation...................... (1,685,510) (1,438,534)
----------- -----------
$15,769,278 $13,960,232
=========== ===========
</TABLE>
In July 1998, the Partnership received $116,397 as a settlement from the
Florida Department of Transportation for a right of way taking related to a
parcel of land on its property in Brooksville, Florida. In connection
therewith, the Partnership recognized a gain of $108,176 for financial
reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $116,089, $128,736 (net
$4,501 in reserves), and $219,757, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,889,012
2000............................................................. 1,919,651
2001............................................................. 2,017,044
2002............................................................. 2,065,510
2003............................................................. 2,096,121
Thereafter....................................................... 12,027,545
-----------
$22,014,883
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-243
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Minimum lease payments receivable................. $14,095,756 $ 18,939,788
Estimated residual values......................... 2,457,619 3,040,615
Less unearned income.............................. (8,750,590) (11,935,428)
----------- ------------
Net investment in direct financing leases......... $ 7,802,785 $ 10,044,975
=========== ============
</TABLE>
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified these leases from direct financing leases to
operating leases. In accordance with the Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded each of the
reclassified leases at the lower of original cost, present fair value, or
present carrying value. No losses on the termination of direct financing leases
were recorded for financial reporting purposes.
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,106,822
2000............................................................. 1,106,822
2001............................................................. 1,130,328
2002............................................................. 1,142,042
2003............................................................. 1,142,042
Thereafter....................................................... 8,467,700
-----------
$14,095,756
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
F-244
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
5. Investment in Joint Ventures:
The Partnership has an 85.54%, a 36.8%, and a 12.46% interest in the profits
and losses of Asheville Joint Venture, CNL Restaurant Investments II, and
Middleburg Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
Asheville Joint Venture and Middleburg Joint Venture each own and lease one
property, and CNL Restaurant Investments II owns and leases six properties to
an operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $6,320,059 $6,487,210
Net investment in direct financing lease............ 1,319,045 1,335,223
Cash................................................ 1,176 596
Receivables......................................... 17,395 14,169
Prepaid expenses.................................... 719 1,017
Accrued rental income............................... 162,857 128,993
Liabilities......................................... 580 864
Partners' capital................................... 7,820,671 7,966,344
Revenues............................................ 940,168 1,001,284
Net income.......................................... 762,579 824,576
</TABLE>
The Partnership recognized income totalling $276,721, $293,480, and $266,500
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Mortgage Notes Receivable:
As of December 31, 1995, the Partnership had accepted two promissory notes
in the principal sum totalling $460,000, in connection with the sale of two of
its properties in Jacksonville, Florida. The promissory notes, which are
collateralized by mortgages on the properties, bear interest at a rate of ten
percent per annum, and are being collected in 119 equal monthly installments of
$2,106 and $1,931, with balloon payments of $218,252 and $200,324,
respectively, due in December 2005.
In addition, in connection with the sale in 1996 of its property in Orlando,
Florida, the Partnership accepted a promissory note in the principal sum of
$1,388,568, representing the gross sales price of $1,375,000 plus tenant
closing costs of $13,568 that the Partnership financed on behalf of the tenant.
The promissory note bears interest at a rate of 10.75% per annum, is
collateralized by a mortgage on the property and is being collected in 12
monthly installments of interest only, in 24 monthly installments of $15,413
consisting of principal and interest, and thereafter in 144 monthly
installments of $16,220 consisting of principal and interest.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance..................................... $1,795,920 $1,837,212
Accrued interest receivable........................... 15,806 16,174
---------- ----------
$1,811,726 $1,853,386
========== ==========
</TABLE>
F-245
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The general partners believe that the estimated fair value of mortgage notes
receivable at December 31, 1998 and 1997, approximated the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; thereafter, 95 percent to the limited partners and five
percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,850,003, $3,150,003, and
$3,412,500, respectively. No distributions have been made to the general
partners to date.
F-246
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,288,912 $3,241,567 $3,096,992
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (166,412) (204,419) (219,372)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 177,946 178,250 157,197
Allowance for doubtful accounts........ 5,408 18,954 (23,716)
Accrued rental income.................. (116,089) (133,237) (219,757)
Rents paid in advance.................. 9,293 (21,446) 42,637
Gain or loss on sale of land and
buildings for tax reporting purposes
in excess of gain or loss for
financial reporting purposes.......... 3,170 670 99,031
Capitalized transaction costs for tax
reporting purposes.................... 21,042 -- --
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial reporting
purposes.............................. 15,563 (2,987) 13,320
Minority interest in timing differences
of consolidated joint venture......... 1,443 1,571 1,677
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,240,276 $3,078,923 $2,948,009
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or
F-247
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
three percent of the sales price if the Affiliate provides a substantial amount
of services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. During the year ended December 31,
1996, the Partnership incurred $41,250 in deferred, subordinated real estate
disposition fees as the result of the sale of the property in Orlando, Florida.
No deferred, subordinated real estate disposition fees were incurred for the
years ended December 31, 1998 and 1997.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $96,202, $80,461 and $89,317 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Due to Affiliates:
Accounting and administrative services.................... $20,216 $ 4,599
Deferred, subordinated real estate disposition fee........ 55,050 55,050
------- -------
$75,266 $59,649
======= =======
</TABLE>
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures) for
each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation....................... $728,641 $706,839 $663,889
Restaurant Management Services, Inc. ........... 527,360 531,110 533,990
Carrols Corporation............................. 482,081 523,517 526,034
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc. ............................. N/A N/A 356,720
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from the unconsolidated joint
ventures), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Burger King.................................... $961,542 $1,003,419 $989,480
Golden Corral Family Steakhouse Restaurants.... 750,869 735,949 681,042
Shoney's....................................... 603,304 607,054 609,072
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
F-248
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,042,635 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $39,843,631 as
of December 31, 1998.
The APF Shares are expected to be listed for trading on the New York Stock
Exchange concurrently with the consummation of the Merger, and, therefore,
would be freely tradable at the option of the former limited partners. At a
special meeting of the partners that is expected to be held in the third
quarter of 1999, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. The general partners intend to recommend that
the limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
12. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,021,318 shares valued at $20.00 per
APF share.
F-249
<PAGE>
CNL INCOME FUND IX, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-251
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-252
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-253
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-254
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-255
Report of Independent Certified Public Accountants....................... F-257
Balance Sheets as of December 31, 1998 and 1997.......................... F-258
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-259
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-260
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-261
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-262
</TABLE>
F-250
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,741,537 and
$1,711,187, respectively, and allowance for loss on
building of $249,368 for 1999 and 1998.............. $14,853,524 $15,066,178
Net investment in direct financing leases, less
allowance for impairment in carrying value of
$65,407 for 1998.................................... 5,351,113 5,905,995
Investment in joint ventures......................... 6,387,805 6,473,381
Cash and cash equivalents............................ 1,941,669 1,287,379
Receivables, less allowance for doubtful accounts of
$92,952 and $206,052, respectively ................. 51,574 93,569
Prepaid expenses..................................... 17,002 3,185
Lease costs, less accumulated amortization of $2,327
and $1,577.......................................... 12,673 13,423
Accrued rental income................................ 1,170,144 1,255,968
----------- -----------
$29,785,504 $30,099,078
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................... $ 92,339 $ 1,103
Escrowed real estate taxes payable................... 11,377 9,022
Distributions payable................................ 787,501 787,501
Due to related parties............................... 22,000 24,187
Rents paid in advance and deposits................... 58,337 63,347
----------- -----------
Total liabilities.................................. 971,554 885,160
Commitments and Contingencies (Note 4)
Partners' capital.................................... 28,813,950 29,213,918
----------- -----------
$29,785,504 $30,099,078
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-251
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 346,107 $ 417,741 $ 764,902 $ 894,478
Adjustments to accrued rental
income.......................... -- (267,598) -- (267,598)
Earned income from direct
financing leases................ 240,396 132,106 413,584 342,263
Interest and other income........ 35,410 16,047 58,661 27,668
--------- --------- ---------- ----------
621,913 298,296 1,237,147 996,811
--------- --------- ---------- ----------
Expenses:
General operating and
administrative.................. 42,662 37,701 84,635 71,079
Bad debt expense................. -- 5,133 -- 5,133
Professional services............ 16,879 8,406 25,941 14,742
Real estate taxes ............... 699 -- 8,391 --
State and other taxes............ 125 192 24,884 14,337
Depreciation and amortization.... 80,780 63,245 156,690 126,490
Transaction costs................ 86,351 -- 121,626 --
--------- --------- ---------- ----------
227,496 114,677 422,167 231,781
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures and Gain on Sale of
Land and Building................. 394,417 183,619 814,980 765,030
Equity in Earnings of Joint
Ventures.......................... 148,155 148,860 284,057 276,668
Gain on Sale of Land and Building
.................................. -- -- 75,997 --
--------- --------- ---------- ----------
Net Income......................... $ 542,572 $ 332,479 $1,175,034 $1,041,698
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 5,426 $ 3,325 $ 11,554 $ 10,417
Limited partners................. 537,146 329,154 1,163,480 1,031,281
--------- --------- ---------- ----------
$ 542,572 $ 332,479 $1,175,034 $1,041,698
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.15 $ 0.09 $ 0.33 $ 0.29
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 3,500,000 3,500,000 3,500,000 3,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-252
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 214,763 $ 190,772
Net income..................................... 11,554 23,991
----------- -----------
226,317 214,763
----------- -----------
Limited partners:
Beginning balance.............................. 28,999,155 29,956,452
Net income..................................... 1,163,480 2,262,707
Distributions ($0.45 and $0.92 per limited
partner unit, respectively)................... (1,575,002) (3,220,004)
----------- -----------
28,587,633 28,999,155
----------- -----------
Total partners' capital.......................... $28,813,950 $29,213,918
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-253
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 1,470,503 $1,633,800
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building .......... 2,400,000 --
Additions to land and buildings on operating
leases........................................... (1,641,211) --
----------- ----------
Net cash provided by investing activities....... 758,789 --
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (1,575,002) (1,645,002)
----------- ----------
Net cash used in financing activities........... (1,575,002) (1,645,002)
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.. 654,290 (11,202)
Cash and Cash Equivalents at Beginning of Period...... 1,287,379 1,250,388
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 1,941,669 $1,239,186
=========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of period.. $ 787,501 $ 787,501
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-254
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
IX, Ltd. (the "Partnership") for the year ended December 31, 1998.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications had no
effect on partners' capital or net income.
2. Land and Buildings on Operating Leases:
During February and March 1999, the Partnership sold its properties in
Corpus Christi, Texas and Rochester, New York, respectively, received net sales
proceeds of $1,350,000 and $1,050,000, respectively, resulting in a gain of
$56,369 and $19,628, respectively for financial reporting purposes (see Note
3). These properties were originally acquired by the Partnership in 1991 and
1992 and had a total cost of approximately $2,288,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold
the properties for a total of approximately $111,200 in excess of their
original purchase prices. In March 1999, the Partnership reinvested a portion
of the net sales proceeds it received from these sales, in a Golden Corral
property located in Albany, Georgia, at an approximate cost of $1,641,000.
3. Net Investment in Direct Financing Leases:
At December 31, 1998, the Partnership had recorded an allowance of $65,407
for impairment in the carrying value of the property in Rochester, New York,
due to the tenant filing for bankruptcy. The allowance represented the
difference between the carrying value of the property at December 31, 1998 and
the estimated net realizable value for this property. In March 1999, the
Partnership sold this property and received net sales proceeds of $1,050,000
and recorded a gain of $19,628 for financial reporting purposes, resulting in a
net loss of approximately $45,800. The building portion of this property had
been classified as a direct financing lease. In connection therewith, the gross
investment (minimum lease payments receivable and the estimated residual
value), unearned income and the allowance for impairment in carrying value
relating to the building were removed from the accounts and the gain from the
sale of the property was reflected in income (see Note 2.)
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,850,049 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger
F-255
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
consideration, have been valued by APF at $20.00 per APF Share, the price paid
by APF investors (after an adjustment for a one for two reverse stock split
which occurred on June 3, 1999) in three previous public offerings, the most
recent of which was completed in December 1998. In order to assist the general
partners in evaluating the proposed merger consideration, the general partners
retained Valuation Associates, a nationally recognized real estate appraisal
firm, to appraise the Partnership's restaurant property portfolio. Based on
Valuation Associates' appraisal, the Partnership's property portfolio and other
assets were valued on a going concern basis (meaning the Partnership continues
unchanged) at $36,414,830 as of December 31, 1998. Legg Mason Wood Walker,
Incorporated has rendered a fairness opinion that the APF Share consideration,
payable by APF, is fair to the Partnership from a financial point of view. The
APF Shares are expected to be listed for trading on the New York Stock Exchange
concurrently with the consummation of the Merger, and, therefore, would be
freely tradable at the option of the former limited partners. At a special
meeting of the partners that is expected to be held in the third quarter of
1999, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. If the limited partners at the special meeting
approve the Merger, APF will own the properties and other assets of the
Partnership. The general partners intend to recommend that the limited partners
of the Partnership approve the Merger. In connection with their recommendation,
the general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
On May 11 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners believe
that the lawsuits are without merit and intend to defend vigorously against the
claims.
F-256
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund IX, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund IX, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 2, 1999, except for Note 10
for which the date is March 11, 1999 and
Note 11 for which the date is June 3, 1999
F-257
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.............................................. $15,066,178 $14,163,111
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 5,905,995 7,482,757
Investment in joint ventures........................... 6,473,381 6,619,364
Cash and cash equivalents.............................. 1,287,379 1,250,388
Receivables, less allowance for doubtful accounts of
$206,052 and $108,316................................. 93,569 96,134
Prepaid expenses....................................... 3,185 3,924
Lease costs, less accumulated amortization of $1,577
and $77............................................... 13,423 14,923
Accrued rental income.................................. 1,255,968 1,465,820
----------- -----------
$30,099,078 $31,096,421
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 1,103 $ 4,490
Accrued and escrowed real estate taxes payable......... 9,022 45,591
Distributions payable.................................. 787,501 787,501
Due to related parties................................. 24,187 4,619
Rents paid in advance and deposits..................... 63,347 106,996
----------- -----------
Total liabilities.................................... 885,160 949,197
Partners' capital...................................... 29,213,918 30,147,224
----------- -----------
$30,099,078 $31,096,421
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-258
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,804,248 $1,742,351 $1,854,245
Adjustments to accrued rental income....... (267,600) -- --
Earned income from direct financing
leases.................................... 826,962 830,603 917,074
Contingent rental income................... 79,780 74,867 120,999
Interest and other income.................. 61,129 44,669 51,348
---------- ---------- ----------
2,504,519 2,692,490 2,943,666
---------- ---------- ----------
Expenses:
General operating and administrative....... 142,996 153,175 152,437
Professional services...................... 43,685 24,658 26,610
Bad debt expense........................... 5,133 21,000 --
Real estate taxes.......................... 6,247 30,835 9,906
State and other taxes...................... 14,337 11,126 2,775
Depreciation and amortization.............. 267,773 251,560 252,039
Transaction costs.......................... 19,041 -- --
---------- ---------- ----------
499,212 492,354 443,767
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and Building,
and Provision for Loss on Building and
Impairment in Carrying Value of Net
Investment in Direct Financing Lease........ 2,005,307 2,200,136 2,499,899
Equity in Earnings of Joint Ventures......... 596,166 537,853 460,400
Gain on Sale of Land and Building............ -- 199,643 --
Provision for Loss on Building and Carrying
Value of Net Investment in Direct Financing
Lease....................................... (314,775) -- --
---------- ---------- ----------
Net Income................................... $2,286,698 $2,937,632 $2,960,299
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 23,991 $ 27,380 $ 29,603
Limited partners........................... 2,262,707 2,910,252 2,930,696
---------- ---------- ----------
$2,286,698 $2,937,632 $2,960,299
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.65 $ 0.83 $ 0.84
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 3,500,000 3,500,000 3,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-259
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $132,789 $35,000,000 $(13,505,579) $13,146,091 $(4,190,000) $30,584,301
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,185,004) -- -- (3,185,004)
Net income............. -- 29,603 -- -- 2,930,696 -- 2,960,299
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 162,392 35,000,000 (16,690,583) 16,076,787 (4,190,000) 30,359,596
Distributions to
limited partners
($0.90 per limited
partner unit)......... -- -- -- (3,150,004) -- -- (3,150,004)
Net income............. -- 27,380 -- -- 2,910,252 -- 2,937,632
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 189,772 35,000,000 (19,840,587) 18,987,039 (4,190,000) 30,147,224
Distributions to
limited partners
($0.92 per limited
partner unit)......... -- -- -- (3,220,004) -- -- (3,220,004)
Net income............. -- 23,991 -- -- 2,262,707 -- 2,286,698
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $213,763 $35,000,000 $(23,060,591) $21,249,746 $(4,190,000) $29,213,918
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-260
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 2,695,934 $ 2,666,373 $ 2,900,048
Distributions from joint ventures..... 738,544 676,806 603,833
Cash paid for expenses................ (223,753) (229,884) (186,126)
Interest received..................... 42,665 44,669 38,485
----------- ----------- -----------
Net cash provided by operating
activities.......................... 3,253,390 3,157,964 3,356,240
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................. -- 1,053,571 --
Investment in joint venture........... 3,605 (1,049,762) --
Payment of lease costs................ -- (15,000) --
----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 3,605 (11,191) --
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,220,004) (3,185,003) (3,185,004)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,220,004) (3,185,003) (3,185,004)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 36,991 (38,230) 171,236
Cash and Cash Equivalents at Beginning
of Year............................... 1,250,388 1,288,618 1,117,382
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,287,379 $ 1,250,388 $ 1,288,618
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................ $ 2,286,698 $ 2,937,632 $ 2,960,299
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... 5,133 21,000 --
Depreciation.......................... 266,273 251,483 251,483
Amortization.......................... 1,500 77 556
Equity in earnings of joint ventures,
net of distributions................. 142,378 138,953 143,433
Gain on sale of land and building..... -- (199,643) --
Provision for loss on building and
impairment in carrying value of net
investment in direct financing
lease................................ 314,775 -- --
Decrease (increase) in receivables.... (2,568) (41,878) 87,823
Decrease (increase) in prepaid
expenses............................. 739 (79) (2,913)
Decrease in net investment in direct
financing leases..................... 92,647 121,311 89,696
Decrease (increase) in accrued rental
income............................... 209,852 (70,837) (225,434)
Increase (decrease) in accounts
payable and accrued expenses......... (39,956) (16,524) 12,111
Increase (decrease) in due to related
parties.............................. 19,568 3,214 (4,639)
Increase (decrease) in rents paid in
advance and deposits................. (43,649) 13,255 43,825
----------- ----------- -----------
Total adjustments.................... 966,692 220,332 395,941
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ $ 3,253,390 $ 3,157,964 $ 3,356,240
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Land and building under operating
lease exchanged for land and building
under operating lease................ $ -- $ -- $ 406,768
=========== =========== ===========
Distributions declared and unpaid at
December 31.......................... $ 787,501 $ 787,501 $ 822,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-261
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund IX, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (see
Note 4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-262
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continued to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in three joint
ventures and a property in Englewood, Colorado, for which the property is held
as tenants-in-common with an affiliate, are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease costs--Lease costs associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. The more significant areas requiring the use
of management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
F-263
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while a
majority of the land portion of these leases are operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 8,207,939 $ 8,207,939
Buildings.......................................... 8,818,794 7,452,942
----------- -----------
17,026,733 15,660,881
Less accumulated depreciation...................... (1,711,187) (1,497,770)
----------- -----------
$15,315,546 $14,163,111
Less allowance for loss on building................ (249,368) --
----------- -----------
$15,066,178 $14,163,111
=========== ===========
</TABLE>
In June 1997, the Partnership sold its property in Alpharetta, Georgia, and
received net sales proceeds of $1,053,571, resulting in a gain of $199,643 for
financial reporting purposes. This property was originally acquired by the
Partnership in September 1991 and had a cost of approximately $711,200,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $342,400 in excess of its
original purchase price.
During 1998, the Partnership recorded a provision for loss on building in
the amount of $249,368 for financial reporting purposes relating to the
property in Williamsville, New York. The tenant of this property filed for
bankruptcy during 1998, and rejected the lease. The allowance represents the
difference between the carrying value of the property at December 31, 1998 and
the current estimated net realizable value for this property.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $209,852 (net of $267,600 in
write-offs) and for the years ended December 31, 1997 and 1996, the Partnership
recognized income of $70,837, and $225,434, respectively, of such rental
income.
F-264
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,726,921
2000............................................................. 1,726,921
2001............................................................. 1,763,564
2002............................................................. 1,889,001
2003............................................................. 1,897,501
Thereafter....................................................... 9,771,187
-----------
$18,775,095
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................. $11,521,454 $13,764,606
Estimated residual values......................... 2,091,629 2,495,379
Less unearned income.............................. (7,641,681) (8,777,228)
----------- -----------
5,971,402 7,482,757
Less allowance for impairment in carrying value... (65,407) --
----------- -----------
Net investment in direct financing leases......... $ 5,905,995 $ 7,482,757
=========== ===========
</TABLE>
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified the direct financing leases to operating leases.
In accordance with Statement of Financial Accounting Standards #13, "Accounting
for Leases," the Partnership recorded each of the reclassified leases at the
lower of original cost, present fair value, or present carrying amount. No loss
on termination of direct financing lease was recorded for financial reporting
purposes.
During 1998, the Partnership recorded a provision for loss on investment in
direct financing lease of $65,407 for financial reporting purposes relating to
the Property in Rochester, New York, due to the fact that the tenant filed for
bankruptcy during 1998. The allowance represents the difference between the
carrying value of the Property at December 31, 1998 and the current estimated
net realizable value for this Property.
F-265
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 832,979
2000............................................................. 832,979
2001............................................................. 844,812
2002............................................................. 890,607
2003............................................................. 890,607
Thereafter....................................................... 7,229,470
-----------
$11,521,454
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 45.2%, a 50 percent and a 27.33% interest in the
profits and losses of CNL Restaurant Investments II, CNL Restaurant Investments
III and Ashland Joint Venture, respectively. The remaining interests in these
joint ventures are held by affiliates of the Partnership which have the same
general partners.
In July 1997, the Partnership used the net sales proceeds from the sale of
the property in Alpharetta, Georgia, to acquire a 67 percent interest in an
IHOP property located in Englewood, Colorado, as tenants-in-common with an
affiliate of the general partners. The Partnership accounts for its investment
in this property using the equity method since the Partnership shares control
with an affiliate, and amounts relating to its investment are included in
investment in joint ventures.
CNL Restaurant Investments II and CNL Restaurant Investments III each own
and lease six properties to an operator of national fast-food restaurants and
Ashland Joint Venture owns and leases one property to an operator of national
fast-food restaurants. The Partnership and an affiliate, as tenants in common
own and lease one property to an operator of a national family-style
restaurant. The following presents the joint ventures' combined, condensed
financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $12,253,332 $12,582,754
Net investment in direct financing lease.......... 991,524 1,003,680
Cash.............................................. 1,196 15,124
Receivables....................................... 23,283 35,773
Prepaid expenses.................................. 24,790 23,544
Accrued rental income............................. 36,855 11,620
Liabilities....................................... 1,641 14,280
Partners' capital................................. 13,329,339 13,658,215
Revenues.......................................... 1,576,778 1,506,380
Net income........................................ 1,208,451 1,141,755
</TABLE>
The Partnership recognized income totalling $596,166, $537,853, and $460,400
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
F-266
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their 10% Preferred Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from the sale of a property, not in
liquidation of the Partnership, is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,220,004, $3,150,004, and
$3,185,004, respectively. No distributions have been made to the general
partners to date.
F-267
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,286,698 $2,937,632 $2,960,299
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (97,473) (116,620) (123,734)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 92,647 121,311 89,696
Gain on sale of land and building for
financial reporting purposes in excess
of gain for tax reporting purposes..... -- (195,820) --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
equity in earnings of joint ventures
for financial reporting purposes....... 8,256 36,745 37,469
Capitalization of transaction costs for
tax reporting purposes................. 19,041 -- --
Accrued rental income................... 209,852 (70,837) (225,434)
Rents paid in advance................... (44,149) 13,255 43,825
Allowance for loss on building and
investment in direct financing leases.. 314,775 -- --
Allowance for doubtful accounts......... 97,736 79,333 14,221
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,887,383 $2,804,999 $2,796,342
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-268
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate 10% Preferred Return, plus their adjusted
capital contributions. No deferred, subordinated real estate disposition fees
have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,808, $79,234, and $82,487 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties at December 31, 1998 and 1997, totalled $24,187
and $4,619, respectively.
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Burger King Corporation and BK Acquisition,
Inc........................................... $647,953 $649,445 $623,949
TPI Restaurants, Inc........................... 557,000 556,700 565,351
Carrols Corporation............................ 388,121 440,057 442,286
Flagstar Enterprises, Inc...................... 367,211 436,312 460,762
Golden Corral Corporation...................... 360,555 337,337 N/A
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Burger King............................... $1,143,522 $1,249,715 $1,310,994
Shoney's.................................. 805,729 808,675 889,148
Hardees................................... 438,324 436,312 460,762
Golden Corral Family Steakhouse
Restaurants.............................. 360,555 337,337 N/A
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
F-269
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,700,097 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $36,414,830 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
11. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 1,850,049 shares valued at $20.00 per
APF share.
F-270
<PAGE>
CNL INCOME FUND X, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-272
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-273
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-274
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-275
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-276
Report of Certified Public Independent Accountants....................... F-279
Balance Sheets as of December 31, 1998 and 1997.......................... F-280
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-281
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-282
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-283
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-284
</TABLE>
F-271
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December
1999 31, 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,486,382 and
$1,329,832, respectively and allowance for loss on
land and building of $908,518 in 1999 and 1998....... $17,278,201 $16,685,182
Net investment in direct financing leases, less
allowance for impairment in carrying value of $93,328
in 1998.............................................. 10,041,160 10,713,000
Investment in joint ventures.......................... 4,179,673 3,421,329
Cash and cash equivalents............................. 1,136,363 1,835,972
Restricted cash....................................... -- 361,403
Receivables, less allowance for doubtful accounts of
$113,570 and $236,810, respectively.................. 54,716 81,100
Prepaid expenses...................................... 20,280 5,229
Accrued rental income, less allowance for doubtful
accounts of $281,618 and $269,421, respectively...... 1,388,814 1,342,166
Other assets.......................................... 35,584 35,484
----------- -----------
$34,134,791 $34,480,865
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 95,764 $ 2,403
Accrued and escrowed real estate taxes payable........ 24,270 27,418
Distributions payable................................. 900,001 900,001
Due to related party.................................. 29,076 29,987
Rents paid in advance and deposits.................... 99,859 103,414
----------- -----------
Total liabilities................................... 1,148,970 1,063,223
Commitments and contingencies (Note 5)
Minority interest..................................... 64,425 64,745
Partners' capital..................................... 32,921,396 33,352,897
----------- -----------
$34,134,791 $34,480,865
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-272
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 513,902 $ 453,539 $ 968,457 $ 906,911
Adjustments to accrued rental
income........................ (6,099) (426,116) (12,197) (432,215)
Earned income from direct
financing leases.............. 286,157 264,420 563,015 623,257
Interest and other income...... 17,748 32,294 31,462 58,766
--------- --------- ---------- ----------
811,708 324,137 1,550,737 1,156,719
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 36,293 45,324 86,775 83,561
Bad debt expense............... -- 3,854 -- 5,887
Professional services.......... 19,981 8,160 30,026 13,359
Real estate taxes.............. 5,306 9,574 16,910 9,574
State and other taxes.......... 105 249 14,682 10,520
Depreciation................... 84,256 58,198 156,550 116,396
Transaction costs.............. 90,788 -- 124,449 --
--------- --------- ---------- ----------
236,729 125,359 429,392 239,297
--------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures,
and Gain on Sale of Land and
Buildings....................... 574,979 198,778 1,121,345 917,422
Minority Interest in Income of
Consolidated Joint Venture...... (2,099) (2,069) (3,978) (4,255)
Equity in Earnings of
Unconsolidated Joint Ventures... 95,090 74,135 176,494 137,269
Gain on Sale of Land and
Buildings....................... -- -- 74,640 171,159
--------- --------- ---------- ----------
Net Income....................... $ 667,970 $ 270,844 $1,368,501 $1,221,595
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 6,680 $ 2,708 $ 12,941 $ 10,504
Limited partners............... 661,290 268,136 1,355,560 1,211,091
--------- --------- ---------- ----------
$ 667,970 $ 270,844 $1,368,501 $1,221,595
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.17 $ 0.07 $ 0.34 $ 0.30
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-273
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December
1999 31, 1998
---------------- -----------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 229,725 $ 208,709
Net income..................................... 12,941 21,016
----------- -----------
242,666 229,725
----------- -----------
Limited partners:
Beginning balance.............................. 33,123,172 34,945,334
Net income..................................... 1,355,560 1,857,842
Distributions ($0.45 and $0.92 per limited
partner unit, respectively)................... (1,800,002) (3,680,004)
----------- -----------
32,678,730 33,123,172
----------- -----------
Total partners' capital.......................... $32,921,396 $33,352,897
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-274
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,654,349 $ 1,908,622
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 1,150,000 1,231,106
Additions to land and buildings on operating
leases.......................................... (1,257,217) --
Investment in joint venture...................... (802,431) --
Decrease (increase) in restricted cash........... 359,990 (1,140,970)
----------- -----------
Net cash provided by (used in) investing
activities.................................... (549,658) 90,136
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,800,002) (1,880,002)
Distributions to holder of minority interest..... (4,298) (4,268)
----------- -----------
Net cash used in financing activities.......... (1,804,300) (1,884,270)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (699,609) 114,488
Cash and Cash Equivalents at Beginning of Period..... 1,835,972 1,583,883
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,136,363 $ 1,698,371
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period............................................ $ 900,001 $ 900,001
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-275
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
X, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 88.26% interest in Allegan Real Estate
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications had no
effect on partners' capital or net income.
2. Land and Buildings on Operating Leases:
In March 1999, the Partnership sold its property in Amherst, New York, and
received net sales proceeds of $1,150,000 and recorded a gain of $74,640 for
financial reporting purposes (see Note 3). In March 1999, the Partnership
reinvested the net sales proceeds, plus additional funds, in a Golden Corral
property in Fremont, Nebraska.
3. Net Investment in Direct Financing Leases:
At December 31, 1998, the Partnership had recorded an allowance of $93,328
for the impairment in the carrying value of the Property in Amherst, New York,
due to the tenant filing for bankruptcy. The allowance represented the
difference between the carrying value of the property at December 31, 1998 and
the estimated net realizable value for this property. In March 1999, the
Partnership sold this property, received net sales proceeds of $1,150,000 and
recorded a gain of $74,640 for financial reporting purposes, resulting in an
aggregate net loss of approximately $18,700. The building portion of this
property had been classified as a direct financing lease. In connection
therewith, the gross investment (minimum lease payments receivable and the
estimated residual value), unearned income and the allowance for impairment in
carrying value relating to the building were removed from the accounts and the
gain from the sale of the property was reflected in income (see Note 2).
4. Investment in Joint Ventures:
In January 1999, the Partnership entered into a joint venture arrangement,
Ocean Shores Joint Venture, with CNL Income Fund XVII, Ltd., an affiliate of
the general partners, to own and lease one restaurant property. The Partnership
contributed approximately $802,400 to the joint venture and as of June 30,
1999,
F-276
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
owned a 69.06% interest in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the equity
method since the Partnership shares control with an affiliate.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures and properties held as
tenants-in-common at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $ 9,575,806 $ 9,340,944
Net investment in direct financing leases........ 1,462,165 657,426
Cash............................................. 3,753 2,935
Receivables...................................... 32 7,597
Prepaid expenses................................. 12,018 24,337
Accrued rental income............................ 37,436 19,880
Liabilities...................................... 1,478 3,119
Partners' capital................................ 11,089,732 10,050,000
Revenues......................................... 615,270 1,115,856
Net income....................................... 468,911 843,914
</TABLE>
The Partnership recognized income totalling $176,494 and $137,269 for the
six months ended June 30, 1999 and 1998, respectively, from these joint
ventures, $95,090 and $74,135 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,121,622 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $41,779,262 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of
F-277
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
the transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-278
<PAGE>
Report of Independent Certified Public Accountants
To the Partners CNL Income Fund X, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund X, Ltd. (a Florida
limited partnership) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 30, 1999, except for the second paragraph of Note 11 which the date is
March 11, 1999 and Note 12 for which the date is June 3, 1999
F-279
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $16,685,182 $15,709,899
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 10,713,000 13,460,125
Investment in joint ventures........................... 3,421,329 3,505,326
Cash and cash equivalents.............................. 1,835,972 1,583,883
Restricted cash........................................ 361,403 92,236
Receivables, less allowance for doubtful accounts of
$236,810 and $137,856................................. 81,100 123,903
Prepaid expenses....................................... 5,229 5,877
Accrued rental income, less allowance for doubtful
accounts of $269,421 and $117,593..................... 1,342,166 1,775,374
Other assets........................................... 35,484 33,104
----------- -----------
$34,480,865 $36,289,727
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,403 $ 6,033
Accrued and escrowed real estate taxes payable......... 27,418 27,784
Distributions payable.................................. 900,001 900,001
Due to related parties................................. 29,987 4,946
Rents paid in advance and deposits..................... 103,414 132,419
----------- -----------
Total liabilities.................................... 1,063,223 1,071,183
Minority interest...................................... 64,745 64,501
Partners' capital...................................... 33,352,897 35,154,043
----------- -----------
$34,480,865 $36,289,727
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-280
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $ 1,886,761 $1,896,607 $1,921,562
Adjustments to accrued rental income.... (457,567) (28,812) (88,781)
Earned income from direct financing
leases................................. 1,281,596 1,534,525 1,648,358
Contingent rental income................ 67,511 51,678 45,126
Interest and other income............... 108,481 88,853 75,896
----------- ---------- ----------
2,886,782 3,542,851 3,602,161
----------- ---------- ----------
Expenses:
General operating and administrative.... 163,189 153,672 166,049
Bad debt expense........................ 5,887 -- --
Professional services................... 44,309 26,890 33,692
Real estate taxes....................... 199 9,703 --
State and other taxes................... 10,520 9,372 2,357
Depreciation and amortization........... 259,866 214,468 207,959
Transaction costs....................... 23,779 -- --
----------- ---------- ----------
507,749 414,105 410,057
----------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, Gain on Sale of Land and
Building and Provision for Loss on Land,
Building, and Impairment in Carrying
Value of Net Investment in Direct
Financing Lease.......................... 2,379,033 3,128,746 3,192,104
Minority Interest in Income of
Consolidated Joint Venture............... (9,302) (8,522) (8,663)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 292,013 278,919 278,371
Gain on Sale of Land and Building......... 218,960 132,238 --
Provision for Loss on Land, Building, and
Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (1,001,846) -- --
----------- ---------- ----------
Net Income................................ $ 1,878,858 $3,531,381 $3,461,812
=========== ========== ==========
Allocation of Net Income:
General partners........................ $ 21,016 $ 33,991 $ 34,618
Limited partners........................ 1,857,842 3,497,390 3,427,194
----------- ---------- ----------
$ 1,878,858 $3,531,381 $3,461,812
=========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.46 $ 0.87 $ 0.86
=========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 4,000,000 4,000,000 4,000,000
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-281
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $139,100 $40,000,000 $(13,723,133) $13,773,889 $(4,790,000) $35,400,856
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,640,003) -- -- (3,640,003)
Net income............. -- 34,618 -- -- 3,427,194 -- 3,461,812
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 173,718 40,000,000 (17,363,136) 17,201,083 (4,790,000) 35,222,665
Distributions to
limited partners
($0.90 per limited
partner unit)......... -- -- -- (3,600,003) -- -- (3,600,003)
Net income............. -- 33,991 -- -- 3,497,390 -- 3,531,381
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 207,709 40,000,000 (20,963,139) 20,698,473 (4,790,000) 35,154,043
Distributions to
limited partners
($0.92 per limited
partner unit)......... -- -- -- (3,680,004) -- -- (3,680,004)
Net income............. -- 21,016 -- -- 1,857,842 -- 1,878,858
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $228,725 $40,000,000 $(24,643,143) $22,556,315 $(4,790,000) $33,352,897
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-282
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $3,382,562 $3,380,391 $3,491,064
Distributions from unconsolidated joint
ventures................................. 373,004 353,207 354,648
Cash paid for expenses.................... (221,284) (190,902) (211,345)
Interest received......................... 70,156 53,721 61,435
---------- ---------- ----------
Net cash provided by operating
activities.............................. 3,604,438 3,596,417 3,695,802
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building... 1,591,794 1,363,805 --
Additions to land and buildings on
operating leases......................... (1,020,329) (1,277,308) (978)
Investment in direct financing leases..... -- -- (1,542)
Investment in joint venture............... -- (130,404) (108,952)
Increase in restricted cash............... (237,758) (89,702) --
Other..................................... 3,006 -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. 336,713 (133,609) (111,472)
---------- ---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners......... (3,680,004) (3,640,002) (3,640,003)
Distributions to holder of minority
interest................................. (9,058) (8,406) (7,697)
---------- ---------- ----------
Net cash used in financing activities.... (3,689,062) (3,648,408) (3,647,700)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 252,089 (185,600) (63,370)
Cash and Cash Equivalents at Beginning of
Year...................................... 1,583,883 1,769,483 1,832,853
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,835,972 $1,583,883 $1,769,483
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,878,858 $3,531,381 $3,461,812
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Bad debt expense.......................... 5,887 -- --
Depreciation.............................. 259,866 214,468 206,497
Amortization.............................. -- -- 1,462
Minority interest in income of
consolidated joint venture............... 9,302 8,522 8,663
Equity in earnings of unconsolidated joint
ventures, net of distributions........... 80,991 74,288 75,898
Gain on sale of land and building......... (218,960) (132,238) --
Provision for loss on land, building, and
impairment in carrying value of net
investment in direct financing lease..... 1,001,846 -- --
Decrease (increase) in receivables........ 8,312 (71,222) 46,834
Decrease (increase) in prepaid expenses... 648 (374) (3,852)
Decrease in net investment in direct
financing leases......................... 219,237 211,942 160,007
Decrease (increase) in accrued rental
income................................... 300,791 (201,022) (315,029)
Increase in other assets.................. (2,380) -- --
Increase (decrease) in accounts payable
and accrued expenses..................... (3,996) (14,156) 14,318
Increase (decrease) in due to related
parties.................................. 25,041 3,337 (5,395)
Increase (decrease) in rents paid in
advance and deposits..................... 38,995 (28,509) 44,587
---------- ---------- ----------
Total adjustments........................ 1,725,580 65,036 233,990
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,604,438 $3,596,417 $3,695,802
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31.............................. $ 900,001 $ 900,001 $ 940,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-283
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund X, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs. If an impairment is indicated, the
assets are adjusted to their fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-284
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continued to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 88.26%
interest in Allegan Real Estate Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's proportionate
share of the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been eliminated.
The Partnership's investments in CNL Restaurant Investments III, Williston
Real Estate Joint Venture and Ashland Joint Venture, and the property in
Clinton, North Carolina, and the property in Miami, Florida, for which each
property is held as tenants-in-common with affiliates, are accounted for using
the equity method since the Partnership shares control with affiliates which
have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing
F-285
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
leases, the building portions of the property leases are accounted for as
direct financing leases while the land portions of the majority of these leases
are operating leases. Substantially all leases are for 15 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant pays all
property taxes and assessments, fully maintains the interior and exterior of
the building and carries insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to five successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 9,741,686 $ 9,947,295
Buildings.......................................... 8,588,903 6,875,851
Construction in process............................ 592,943 --
----------- -----------
18,923,532 16,823,146
Less accumulated depreciation...................... (1,329,832) (1,113,247)
----------- -----------
17,593,700 15,709,899
Less allowance for loss on land and building....... (908,518) --
----------- -----------
$16,685,182 $15,709,899
=========== ===========
</TABLE>
During 1997, the Partnership sold its property in Fremont, California, to
the franchisor, for $1,420,000 and received net sales proceeds of $1,363,805,
resulting in a gain of $132,238 for financial reporting purposes. This property
was originally acquired by the Partnership in March 1992 and had a cost of
approximately $1,116,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $249,700 in excess of its original purchase price. In October
1997, the Partnership reinvested approximately $1,277,300 in a Boston Market
property located in Homewood, Alabama.
In March 1998, a vacant parcel of land relating to the property in Austin,
Texas, was sold to a third party who had previously subleased the land from the
Partnership's lessee. In connection therewith, the Partnership received net
sales proceeds of $68,434 ($68,000 of which had been received and recorded as a
deposit in 1995), resulting in a gain of $7,810 for financial reporting
purposes.
During 1998, the Partnership sold two properties for a total of $1,612,000
and received net sales proceeds totalling $1,591,360, resulting in a total gain
of $211,150 for financial reporting purposes. These properties were originally
acquired by the Partnership in 1991 and 1992 and had total costs of
approximately $1,271,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the properties for
approximately $320,000 in excess of their original purchase prices. In November
1998, the Partnership reinvested the majority of the net sales proceeds from
the sale of its property in Sacramento, California in a Jack in the Box
property in San Marcos, Texas.
During the year ended December 31, 1998, the Partnership recorded a
provision for loss on land and building totalling $908,518 for financial
reporting purposes relating to the Properties in Lancaster, New York, Amherst,
New York and Homewood, Alabama, respectively. The tenants of these Properties
filed for
F-286
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
bankruptcy during 1998, and rejected the leases related to two of these
Properties. The allowance represents the difference between the carrying value
of the Properties at December 31, 1998 and the estimated net realizable value
for these Properties.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $300,791 (net of $151,828 in
reserves and $305,739 in write-offs) and for the years ended December 31, 1997
and 1996, the Partnership recognized income of $201,022 and $315,029,
respectively, (net of reserves of $28,812 and $88,781, respectively).
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,725,916
2000............................................................. 1,737,475
2001............................................................. 1,781,312
2002............................................................. 1,896,469
2003............................................................. 1,908,568
Thereafter....................................................... 13,254,521
-----------
$22,304,261
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales. These amounts do not include minimum lease payments
that will become due when the property under development is completed.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Minimum lease payments receivable.............. $ 18,740,085 $ 25,273,063
Estimated residual values...................... 3,553,036 4,225,008
Less unearned income........................... (11,486,793) (16,037,946)
------------ ------------
10,806,328 13,460,125
Less allowance for impairment in carrying
value......................................... (93,328) --
------------ ------------
Net investment in direct financing leases...... $ 10,713,000 $ 13,460,125
============ ============
</TABLE>
During 1997, the Partnership sold its property in Fremont, California, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payment receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to the land
portion of the property was reflected in income (Note 3).
F-287
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During 1998, the Partnership sold a property, for which the building portion
had been classified as a direct financing lease. In connection therewith, the
gross investment (minimum lease payments receivable and the estimated residual
value) and unearned income relating to the building were removed from the
accounts and the gain from the sale of the property was reflected in income
(see Note 3).
During 1998, three of the Partnership's leases were amended and one of the
Partnership's leases that was classified as a direct financing lease was
rejected in connection with the tenant filing for bankruptcy. As a result, the
Partnership reclassified the two of the three amended leases and the rejected
lease from direct financing leases to operating leases. In accordance with the
Statement of Financial Accounting Standards #13, "Accounting for Leases," the
Partnership recorded the reclassified leases at the lower of original costs,
present fair value, or present carrying amount. No losses on the termination of
direct financing leases were recorded for financial reporting purposes.
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,389,897
2000............................................................. 1,391,381
2001............................................................. 1,398,824
2002............................................................. 1,429,020
2003............................................................. 1,440,530
Thereafter....................................................... 11,690,433
-----------
$18,740,085
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 50 percent, a 10.51%, a 40.95%, and a 13% interest in
the profits and losses of CNL Restaurant Investments III, Ashland Joint
Venture, Williston Real Estate Joint Venture and a property in Clinton, North
Carolina, held as tenants-in-common with affiliates of the general partners.
The remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In December 1997, the Partnership acquired and leased a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 6.69% interest in this property.
CNL Restaurant Investments III owns and leases six properties to an operator
of national fast-food restaurants. Ashland Joint Venture, Williston Real Estate
Joint Venture and the Partnership and affiliates as tenants-in-common in two
separate tenancy-in-common arrangements, each own and lease one property to an
F-288
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $ 9,340,944 $ 9,573,341
Net investment in direct financing lease.......... 657,426 661,991
Cash.............................................. 2,935 8,197
Receivables....................................... 7,597 26,766
Prepaid expenses.................................. 24,337 22,852
Accrued rental income............................. 19,880 --
Liabilities....................................... 3,119 7,415
Partners' capital................................. 10,050,000 10,285,732
Revenues.......................................... 1,115,856 930,470
Net income........................................ 843,914 695,878
</TABLE>
The Partnership recognized income totalling $292,013, $278,919, and $278,371
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
As of December 31, 1997, net sales proceeds of $89,702 from the sale of the
property in Fremont, California, plus accrued interest of $2,534, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property. The funds were released by the
escrow agent in 1998 and were used to acquire an additional property. (See Note
3).
As of December 31, 1998, the net sales proceeds of $359,990 from the sale of
a property, plus accrued interest of $1,413 were being held in an interest-
bearing escrow account pending the release of funds by the escrow agent to
acquire an additional property.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
F-289
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,680,004, $3,600,003, and
$3,640,003, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,878,858 $3,531,381 $3,461,812
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (228,986) (289,098) (298,518)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 219,237 211,942 160,007
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of equity in
earnings of unconsolidated joint
ventures for financial
reporting purposes.................... 12,612 15,294 10,839
Gain on sale of land and building for
financial reporting purposes less than
(in excess of) gain for tax
reporting purposes.................... 65,474 (42,996) --
Allowance for loss on land and
building.............................. 1,001,846 -- --
Allowance for doubtful accounts........ 98,954 133,428 --
Accrued rental income.................. 300,791 (201,022) (315,029)
Rents paid in advance.................. 38,995 (22,593) 45,447
Minority interest in timing differences
of consolidated joint venture......... 413 1,461 2,184
Capitalization of transaction costs for
tax reporting purposes................ 23,779 -- --
Other.................................. -- -- (7,738)
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,411,973 $3,337,797 $3,059,004
========== ========== ==========
</TABLE>
F-290
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. In addition, the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $105,445, $87,967, and $94,496 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership acquired a property for a purchase price of
$1,277,300 from CNL BB Corp., an affiliate of the general partners. CNL BB
Corp. had purchased and temporarily held title to this property in order to
facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $29,987
and $4,946, respectively.
F-291
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from unconsolidated
joint ventures and the properties held as tenants-in-common with affiliates),
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $578,430 $548,399 $568,164
Foodmaker, Inc................................... 436,577 646,477 684,277
Flagstar Enterprises, Inc. (and Denny's Inc.
during the years ended December 31, 1997 and
1996)........................................... N/A 602,913 668,919
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Burger King...................................... $758,178 $777,378 $714,792
Golden Corral Family Steakhouse Restaurants...... 578,430 548,399 568,164
Shoney's......................................... 440,333 441,052 439,330
Jack in the Box.................................. 436,577 646,477 684,277
Hardees.......................................... 400,716 403,882 468,037
Perkins.......................................... N/A N/A 393,046
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Events:
In January 1999, the Partnership used the net proceeds from the sales of
properties during 1998 and 1997 to enter into a joint venture arrangement,
Ocean Shores Joint Venture, with an affiliate of the general partners, to hold
one restaurant property. The Partnership contributed approximately $802,400 to
acquire the restaurant property. The Partnership owns a 69.06% interest in the
profits and losses of the joint venture. The Partnership will account for its
investment in this joint venture under the equity method since the Partnership
will share control with an affiliate.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,243,243 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's
F-292
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
most recent public offering. In order to assist the general partners in
evaluating the proposed merger consideration, the general partners retained
Valuation Associates, a nationally recognized real estate appraisal firm, to
appraise the Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other assets
were valued on a going concern basis (meaning the Partnership continues
unchanged) at $41,779,262 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners
that is expected to be held in the third quarter of 1999, limited partners
holding in excess of 50% of the Partnership's outstanding limited partnership
interests must approve the Merger prior to consummation of the transaction. The
general partners intend to recommend that the limited partners of the
Partnership approve the Merger. In connection with their recommendation, the
general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
12. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,121,622 shares valued at $20.00 per
APF share.
F-293
<PAGE>
CNL INCOME FUND XI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998...... F-295
Condensed Statements of Income for the Quarters and Six Months Ended
June 30, 1999 and 1998................................................. F-296
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998 ..................... F-297
Condensed Statements of Cash Flows for the Six Months Ended June 30,
1999 and 1998.......................................................... F-298
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998 .......................................... F-299
Report of Independent Certified Public Accountants...................... F-301
Balance Sheets as of December 31, 1998 and 1997......................... F-302
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-303
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-304
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-305
Notes to Financial Statements for the Years Ended December 31, 1998,
1997 and 1996.......................................................... F-306
</TABLE>
F-294
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,803,077 and
$2,589,785, respectively............................. $21,808,299 $21,683,785
Net investment in direct financing leases............. 7,428,455 6,786,286
Investment in joint ventures.......................... 2,772,561 2,521,613
Cash and cash equivalents............................. 1,804,990 1,559,240
Restricted cash....................................... -- 1,640,936
Receivables, less allowance for doubtful accounts of
$562 and $5,820, respectively........................ 82,368 132,311
Prepaid expenses...................................... 13,864 12,335
Accrued rental income................................. 1,711,758 1,645,062
Other assets.......................................... 122,024 122,024
----------- -----------
$35,744,319 $36,103,592
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 89,097 $ 14,461
Accrued and escrowed real estate taxes payable........ 15,677 15,138
Distributions payable................................. 875,006 995,006
Due to related party.................................. 24,887 25,446
Rents paid in advance and deposits.................... 51,158 92,069
----------- -----------
Total liabilities................................... 1,055,825 1,142,120
Commitments and Contingencies (Note 4)
Minority interest..................................... 504,504 503,860
Partners' capital..................................... 34,183,990 34,457,612
----------- -----------
$35,744,319 $36,103,592
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-295
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases....................... $ 646,271 $ 675,491 $1,289,771 $1,350,982
Earned income from direct
financing leases............. 239,569 206,345 475,098 413,405
Contingent rental income...... 34,651 42,996 54,893 62,764
Interest and other income..... 21,121 85,643 42,055 98,048
--------- ---------- ---------- ----------
941,612 1,010,475 1,861,817 1,925,199
--------- ---------- ---------- ----------
Expenses:
General operating and
administrative............... 29,589 44,999 71,949 74,457
Professional services......... 11,634 9,241 22,472 14,193
Management fees to related
party........................ 9,724 9,710 19,200 19,052
State and other taxes......... 157 1,036 28,346 24,370
Depreciation and
amortization................. 106,646 114,665 213,292 229,330
Transaction costs............. 85,130 -- 120,097 --
--------- ---------- ---------- ----------
242,880 179,651 475,356 361,402
--------- ---------- ---------- ----------
Income Before Minority Interests
in Income of Consolidated Joint
Ventures and Equity in Earnings
of Unconsolidated Joint
Ventures....................... 698,732 830,824 1,386,461 1,563,797
Minority Interests in Income of
Consolidated Joint Ventures.... (16,797) (16,906) (33,206) (33,924)
Equity in Earnings of
Unconsolidated Joint Ventures.. 65,134 57,604 123,135 97,605
--------- ---------- ---------- ----------
Net Income...................... $ 747,069 $ 871,522 $1,476,390 $1,627,478
========= ========== ========== ==========
Allocation of Net Income:
General partners.............. $ 7,471 $ 8,715 $ 14,764 $ 16,275
Limited partners.............. 739,598 862,807 1,461,626 1,611,203
--------- ---------- ---------- ----------
$ 747,069 $ 871,522 $1,476,390 $1,627,478
========= ========== ========== ==========
Net Income Per Limited Partner
Unit........................... $ 0.18 $ 0.22 $ 0.37 $ 0.40
========= ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-296
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 211,047 $ 176,232
Net income..................................... 14,764 34,815
----------- -----------
225,811 211,047
----------- -----------
Limited partners:
Beginning balance.............................. 34,246,565 34,132,000
Net income..................................... 1,461,626 3,774,589
Distributions ($0.44 and $0.92 per limited
partner unit, respectively)................... (1,750,012) (3,660,024)
----------- -----------
33,958,179 34,246,565
----------- -----------
Total partners' capital.......................... $34,183,990 $34,457,612
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-297
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,797,730 $ 2,038,262
----------- -----------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases.......................................... (337,806) --
Investment in direct financing leases............ (694,610) --
Investment in joint venture...................... (247,286) --
Decrease in restricted cash...................... 1,630,296 --
----------- -----------
Net cash provided by investing activities...... 350,594 --
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,870,012) (1,790,012)
Distributions to holders of minority interests... (32,562) (34,830)
----------- -----------
Net cash used in financing activities.......... (1,902,574) (1,824,842)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 245,750 213,420
Cash and Cash Equivalents at Beginning of Period..... 1,559,240 1,272,386
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,804,990 $ 1,485,806
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period.......................................... $ 875,006 $ 875,006
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-298
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XI, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 85 percent interest in Denver Joint Venture
and its 77.33% interest in CNL/Airport Joint Venture using the consolidation
method. Minority interests represent the minority joint venture partners'
proportionate share of the equity in the Partnership's consolidated joint
ventures. All significant intercompany accounts and transactions have been
eliminated.
2. Land and Buildings on Operating Leases:
In January 1999, the Partnership reinvested a portion of the net sales
proceeds it received from the 1998 sale of the property in Nashua, New
Hampshire in a Burger King property located in Yelm, Washington, at an
approximate cost of $1,032,400. In accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases," the land portion of this
property was classified as an operating lease while the building portion was
classified as a capital lease.
3. Investment in Joint Ventures:
In February 1999, the Partnership reinvested a portion of the remaining net
sales proceeds it received from the 1998 sale of the property in Nashua, New
Hampshire in a joint venture arrangement, Portsmouth Joint Venture, with CNL
Income Fund XVIII, Ltd., an affiliate of the general partners, to purchase and
hold one restaurant property. As of June 30, 1999, the Partnership had
contributed approximately $247,000 to the joint venture and owned a 42.8%
interest in the profits and losses of this joint venture. The Partnership
accounts for its investment in this joint venture under the equity method since
the Partnership shares control with this affiliate.
The following presents the combined, condensed financial information for the
joint ventures and the property held as tenants-in-common with an affiliate at:
F-299
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $3,639,814 $3,427,681
Net investment in direct financing lease.......... 322,625 --
Cash.............................................. 2,009 1,109
Receivables....................................... 32,541 --
Prepaid expenses.................................. 3,246 8,290
Accrued rental income............................. 149,398 130,585
Partners' capital................................. 4,149,633 3,567,665
Revenues.......................................... 232,703 399,305
Net income........................................ 181,750 300,036
</TABLE>
The Partnership recognized income totalling $123,135 and $97,605 for the six
months ended June 30, 1999 and 1998, respectively, from these joint ventures,
$65,134 and $57,604 of which was earned during the quarters ended June 30, 1999
and 1998, respectively.
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,197,098 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $43,333,961 of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-300
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XI, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XI, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except
for the second paragraph of Note 11
for which the date is March 11, 1999 and Note 12
for which the date is June 3, 1999
F-301
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $21,683,785 $23,561,017
Net investment in direct financing leases............. 6,786,286 6,611,661
Investment in joint ventures.......................... 2,521,613 2,567,786
Cash and cash equivalents............................. 1,559,240 1,272,386
Restricted cash....................................... 1,640,936 --
Receivables, less allowance for doubtful accounts
$5,820 in 1998....................................... 132,311 119,575
Prepaid expenses...................................... 12,335 13,363
Accrued rental income................................. 1,645,062 1,517,726
Other assets.......................................... 122,024 122,024
----------- -----------
$36,103,592 $35,785,538
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 14,461 $ 6,508
Accrued and escrowed real estate taxes payable........ 15,138 19,410
Distributions payable................................. 995,006 875,006
Due to related parties................................ 25,446 6,648
Rents paid in advance and deposits.................... 92,069 68,333
----------- -----------
Total liabilities................................... 1,142,120 975,905
Minority interests.................................... 503,860 501,401
Partners' capital..................................... 34,457,612 34,308,232
----------- -----------
$36,103,592 $35,785,538
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-302
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,644,418 $2,702,558 $2,765,327
Earned income from direct financing
leases.................................. 893,187 841,426 850,650
Contingent rental income................. 243,115 225,888 251,312
Interest and other income................ 139,707 62,440 61,403
---------- ---------- ----------
3,920,427 3,832,312 3,928,692
---------- ---------- ----------
Expenses:
General operating and administrative..... 154,434 148,380 164,642
Professional services.................... 34,140 32,077 30,984
Management fees to related parties....... 39,393 37,974 37,293
Real estate taxes........................ 2,858 -- --
State and other taxes.................... 24,262 25,779 14,650
Depreciation and amortization............ 443,936 459,249 478,198
Transaction costs........................ 20,888 -- --
---------- ---------- ----------
719,911 703,459 725,767
---------- ---------- ----------
Income Before Minority Interests in Income
of Consolidated Joint Ventures, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Buildings.... 3,200,516 3,128,853 3,202,925
Minority Interests in Income of
Consolidated Joint Ventures............... (68,474) (69,877) (70,116)
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 215,501 236,103 118,211
Gain on Sale of Land and Buildings......... 461,861 -- 213,685
---------- ---------- ----------
Net Income................................. $3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 34,815 $ 32,951 $ 33,356
Limited partners......................... 3,774,589 3,262,128 3,431,349
---------- ---------- ----------
$3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.94 $ 0.82 $ 0.86
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-303
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $108,925 $40,000,000 $(11,515,062) $10,783,633 $(4,790,000) $34,588,496
Distributions to
limited partners
($0.89 per limited
partners unit)........ -- -- -- (3,540,024) -- -- (3,540,024)
Net income............. -- 33,356 -- -- 3,431,349 -- 3,464,705
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 142,281 40,000,000 (15,055,086) 14,214,982 (4,790,000) 34,513,177
Distributions to
limited partners
($0.88 per limited
partners unit)........ -- -- -- (3,500,024) -- -- (3,500,024)
Net income............. -- 32,951 -- -- 3,262,128 -- 3,295,079
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 175,232 40,000,000 (18,555,110) 17,477,110 (4,790,000) 34,308,232
Distributions to
limited partners
($0.92 per limited
partners unit)........ -- -- -- (3,660,024) -- -- (3,660,024)
Net income............. -- 34,815 -- -- 3,774,589 -- 3,809,404
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $210,047 $40,000,000 $(22,215,134) $21,251,699 $(4,790,000) $34,457,612
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-304
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $3,826,352 $3,585,979 $3,657,138
Distributions from unconsolidated joint
ventures................................. 262,843 250,497 148,375
Cash paid for expenses.................... (247,138) (237,312) (251,408)
Interest received......................... 52,005 43,632 47,609
---------- ---------- ----------
Net cash provided by operating
activities.............................. 3,894,062 3,642,796 3,601,714
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings.. 1,630,296 -- 1,044,750
Investment in joint ventures.............. (1,169) (1,044,750) --
Decrease (increase) in restricted cash.... (1,630,296) 1,044,750 (1,044,750)
---------- ---------- ----------
Net cash used in investing activities.... (1,169) -- --
---------- ---------- ----------
Cash Flows From Financing Activities:
Distributions to limited partners......... (3,540,024) (3,540,024) (3,540,024)
Distributions to holders of minority
interests................................ (66,015) (56,246) (58,718)
---------- ---------- ----------
Net cash used in financing activities.... (3,606,039) (3,596,270) (3,598,742)
---------- ---------- ----------
Net Increase in Cash and Cash Equivalents.. 286,854 46,526 2,972
Cash and Cash Equivalents at Beginning of
Year...................................... 1,272,386 1,225,860 1,222,888
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,559,240 $1,272,386 $1,225,860
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $3,809,404 $3,295,079 $3,464,705
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 443,936 458,660 476,198
Amortization.............................. -- 589 2,000
Gain on sale of land and buildings........ (461,861) -- (213,685)
Minority interests in income of
consolidated joint ventures.............. 68,474 69,877 70,116
Equity in earnings of unconsolidated joint
ventures, net of distributions........... 47,342 14,394 30,164
Decrease (increase) in receivables........ (23,376) (23,957) 25,855
Decrease (increase) in prepaid expenses... 1,028 (136) 151
Decrease in net investment in direct
financing leases......................... 90,236 74,706 62,366
Increase in accrued rental income......... (127,336) (260,223) (296,439)
Increase in accounts payable and accrued
expenses................................. 3,681 2,143 4,280
Increase (decrease) in due to related
parties.................................. 18,798 4,527 (4,386)
Increase (decrease) in rents paid in
advance and deposits..................... 23,736 7,137 (19,611)
---------- ---------- ----------
Total adjustments........................ 84,658 347,717 137,009
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,894,062 $3,642,796 $3,601,714
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Land and building under operating lease
exchanged for land and building
under operating lease.................... $ 718,930 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 995,006 $ 875,006 $ 915,006
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-305
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to the fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and
F-306
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
accrued rental income, and to decrease rental or other income or increase bad
debt expense for the current period, although the Partnership continues to
pursue collection of such amounts. If amounts are subsequently determined to be
uncollectible, the corresponding receivable and allowance for doubtful accounts
are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 85 percent
interest in Denver Joint Venture and its 77.33% interest in CNL/Airport Joint
Venture using the consolidation method. Minority interests represent the
minority joint venture partners' proportionate share of equity in the
Partnership's consolidated joint ventures. All significant intercompany
accounts and transactions have been eliminated.
The Partnership's investments in Ashland Joint Venture and Des Moines Real
Estate Joint Venture, and a property in Corpus Christi, Texas, for which the
property is held as tenants-in-common, are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
General Partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant use of management estimates relate to the
allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases are classified as operating leases
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of
F-307
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
the majority of these leases are operating leases. Substantially all leases are
for 14 to 20 years and provide for minimum and contingent rentals. In addition,
the tenant pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage for public
liability, property damage, fire and extended coverage. The lease options
generally allow tenants to renew the leases for two to five successive five-
year periods subject to the same terms and conditions as the initial lease.
Most leases also allow the tenant to purchase the property at fair market value
after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $11,607,426 $12,269,964
Buildings....................................... 12,666,144 13,746,182
----------- -----------
24,273,570 26,016,146
Less accumulated depreciation................... (2,589,785) (2,455,129)
----------- -----------
$21,683,785 $23,561,017
=========== ===========
</TABLE>
In September 1998, the tenant of the property in Columbus, Ohio, exercised
its option under the terms of its lease agreement, to exchange one existing
property with a replacement property. In conjunction therewith, the Partnership
exchanged the Burger King property in Columbus, Ohio, for a Burger King
property in Danbury, Connecticut. The lease for the property in Columbus, Ohio,
was amended to allow the property in Danbury, Connecticut to continue under the
terms of the original lease. All closing costs were paid by the tenant. The
Partnership accounted for this as a nonmonetary exchange of similar assets and
recorded the acquisition of the property in Danbury, Connecticut at the net
book value of the property in Columbus, Ohio. No gain or loss was recognized
due to this being accounted for as a nonmonetary exchange of similar assets.
In October 1998, the Partnership sold its property in Nashua, New Hampshire,
to a third party for $1,748,000, and received net sales proceeds of $1,630,296,
resulting in a gain of $461,861 for financial reporting purposes. This property
was originally acquired by the Partnership in 1992 at a cost of approximately
$1,302,400, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold this property for a total of approximately
$327,900 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $127,336, $260,233 and
$296,439, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,426,198
2000.......................................................... 2,426,198
2001.......................................................... 2,435,203
2002.......................................................... 2,486,388
2003.......................................................... 2,644,398
Thereafter.................................................... 16,656,009
-----------
$29,074,394
===========
</TABLE>
F-308
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $13,985,977 $13,834,907
Estimated residual values....................... 2,210,329 2,144,114
Less unearned income............................ (9,410,020) (9,367,360)
----------- -----------
Net investment in direct financing leases....... $ 6,786,286 $ 6,611,661
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 988,575
2000.......................................................... 988,575
2001.......................................................... 988,575
2002.......................................................... 999,775
2003.......................................................... 1,019,879
Thereafter.................................................... 9,000,598
-----------
$13,985,977
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 62.16% and a 76.6% interest in the profits and losses
of Ashland Joint Venture and Des Moines Real Estate Joint Venture,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
In January 1997, the Partnership acquired a 72.58% interest in a Black-eyed
Pea property in Corpus Christi, Texas, as tenants-in-common with an affiliate
of the general partners. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate, and amounts relating to its investment are included in investment in
joint ventures.
F-309
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Ashland Joint Venture, Des Moines Real Estate Joint Venture and the
Partnership and affiliate, as tenants-in-common, each own and lease one
property to an operator of national fast-food restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $3,427,681 $3,511,507
Cash................................................ 1,109 621
Receivables......................................... -- 21,638
Prepaid expenses.................................... 8,290 6,939
Accrued rental income............................... 130,585 99,429
Liabilities......................................... -- 466
Partners' capital................................... 3,567,665 3,639,668
Revenues............................................ 399,305 430,923
Net income.......................................... 300,036 334,962
</TABLE>
The Partnership recognized income totalling $215,501, $236,103, and $118,211
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
As of December 31, 1998, the net sales proceeds of $1,630,296 from the sale
of the property in Nashua, New Hampshire, plus accrued interest of $10,640,
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional property (See Note 11).
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their Limited
Partners' 10% Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership,
F-310
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
iii) third, to pay all of the Partnership's liabilities, if any, to the general
and limited partners, iv) fourth, after allocations of net income, gains and/or
losses, to distribute to the partners with positive capital accounts balances,
in proportion to such balances, up to amounts sufficient to reduce such
positive balances to zero, and v) thereafter, any funds remaining shall then be
distributed 95 percent to the limited partners and five percent to the general
partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,660,024, $3,500,024 and
$3,540,024, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................. $3,809,404 $3,295,079 $3,464,705
Depreciation for tax reporting purposes
less than (in excess of) depreciation for
financial reporting purposes............. 2,899 (43,077) (39,035)
Gain on sale of land and building for
financial reporting purposes in excess of
gain for tax reporting purposes.......... (461,861) -- (213,685)
Direct financing leases recorded as
operating leases for tax reporting
purposes................................. 90,236 74,706 62,366
Equity in earnings of unconsolidated joint
ventures for financial reporting purposes
in excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes....................... (5,906) (13,296) (606)
Capitalization of transaction costs for
tax reporting purposes................... 20,888 -- --
Accrued rental income..................... (127,336) (260,223) (296,439)
Rents paid in advance..................... 23,236 22,436 (19,611)
Allowance for doubtful accounts........... 5,820 (14,746) (8,114)
Minority interests in timing differences
of consolidated joint ventures........... (44,316) 14,430 15,933
---------- ---------- ----------
Net income for federal income tax
purposes................................. $3,313,064 $3,075,309 $2,965,514
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint
F-311
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
ventures. The management fee, which will not exceed fees which are competitive
for similar services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliate. The
Partnership incurred management fees of $39,393, $37,974, and $37,293 for the
years ended December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $101,423, $88,667, and $95,845 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership and an affiliate of the general partners
acquired a property as tenants-in-common for a purchase price of $1,441,057 (of
which the Partnership contributed $1,044,750 or 72.50%) from CNL BB Corp., an
affiliate of the general partners. CNL BB Corp. had purchased and temporarily
held title to this property in order to facilitate the acquisition of the
property by the Partnership and the affiliate. The purchase price paid by the
Partnership and the affiliate represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,446
and $6,648, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of rental and earned income from the unconsolidated joint ventures and the
property held as tenants-in-common with an affiliate of the general partners),
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Foodmaker, Inc...................................... $768,032 $768,032 $768,032
Burger King Corporation and BK Acquisition, Inc..... 695,427 733,620 712,334
Golden Corral Corporation........................... 564,104 538,871 538,355
DenAmerica Corporation.............................. 536,779 489,623 N/A
Advantica Restaurant Group, Inc. (Denny's, Inc. and
Quincy's Restaurants, Inc., during the year ended
December 31, 1998)................................. 473,726 N/A N/A
Flagstar Enterprises, Inc. (and Denny's, Inc. and
Quincy's Restaurants, Inc. during the years ended
December 31, 1997 and 1996)........................ N/A 780,502 774,347
</TABLE>
F-312
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from the unconsolidated joint ventures
and the property held as tenants-in-common with an affiliate of the general
partners), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Burger King................................... $1,144,250 $1,198,027 $1,271,606
Denny's....................................... 898,908 854,141 747,341
Jack in the Box............................... 768,032 768,032 768,032
Golden Corral Family Steakhouse Restaurants... 564,103 538,871 538,355
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the Properties in a timely manner.
11. Subsequent Events:
In January 1999, the Partnership reinvested a portion of the net sales
proceeds it received from the sale of the property in Nashua, New Hampshire, in
a Burger King property located in Yelm, Washington, at an approximate cost of
$1,034,000. In connection therewith, the Partnership entered into a long term,
triple-net lease with terms substantially the same as its other leases.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,394,196 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $43,333,961 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,197,098 shares valued at $20.00 per
APF share.
F-313
<PAGE>
CNL INCOME FUND XII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-315
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-316
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-317
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-318
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-319
Report of Independent Certified Public Accountants....................... F-321
Balance Sheets as of December 31, 1998 and 1997.......................... F-322
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-323
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-324
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-325
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-326
</TABLE>
F-314
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,952,802 and
$1,795,099, respectively, and allowance for loss on
building of $206,535 in 1998......................... $20,087,965 $20,703,333
Net investment in direct financing leases............. 12,378,531 12,471,978
Investment in joint ventures.......................... 2,722,141 2,522,004
Mortgage note receivable.............................. 54,294 --
Cash and cash equivalents............................. 2,484,668 2,362,980
Receivables, less allowance for doubtful accounts of
$3,620 and $214,633, respectively.................... 79,416 16,862
Prepaid expenses...................................... 17,622 7,038
Lease costs, less accumulated amortization of $4,252
and $3,256, respectively............................. 25,301 26,297
Accrued rental income, less allowance for doubtful
accounts
of $6,323 in 1999 and 1998........................... 2,624,549 2,524,406
----------- -----------
$40,474,487 $40,634,898
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 99,964 $ 21,195
Accrued and escrowed real estate taxes payable........ 20,302 10,137
Distributions payable................................. 956,252 1,091,252
Due to related party.................................. 28,712 24,025
Rents paid in advance and deposits.................... 36,808 97,448
----------- -----------
Total liabilities................................... 1,142,038 1,244,057
Commitments and Contingencies (Note 5)
Partners' capital..................................... 39,332,449 39,390,841
----------- -----------
$40,474,487 $40,634,898
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-315
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 629,748 $ 658,592 $1,234,632 $1,285,138
Adjustments to accrued rental
income........................ -- (224,867) -- (224,867)
Earned income from direct fi-
nancing leases................ 376,240 390,877 748,574 798,551
Contingent rental income....... 2,311 6,295 4,682 13,717
Interest and other income...... 25,180 29,430 44,935 44,682
---------- ---------- ---------- ----------
1,029,479 860,327 2,032,823 1,917,221
---------- ---------- ---------- ----------
Expenses:
General operating and adminis-
trative....................... 31,597 31,541 78,881 66,006
Professional services.......... 11,435 -- 22,576 12,986
Bad debt expense............... -- 75,699 -- 84,667
Management fees to related par-
ty............................ 10,925 10,971 21,455 21,551
Real estate taxes.............. 1,371 1,152 3,496 1,152
State and other taxes.......... -- 405 20,764 17,653
Depreciation and amortization.. 84,071 80,078 168,777 160,072
Transaction costs.............. 92,263 -- 127,682 --
---------- ---------- ---------- ----------
231,662 199,846 443,631 364,087
---------- ---------- ---------- ----------
Income Before Equity in Earnings
(Loss) of Joint Ventures and
Gain on Sale of Land and
Building........................ 797,817 660,481 1,589,192 1,553,134
Equity in Earnings (Loss) of
Joint Ventures.................. 119,068 (43,758) 190,206 21,892
Gain on Sale of Land and Build-
ing............................. 74,714 -- 74,714 --
---------- ---------- ---------- ----------
Net Income....................... $ 991,599 $ 616,723 $1,854,112 $1,575,026
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 9,270 $ 6,167 $ 17,895 $ 15,750
Limited partners............... 982,329 610,556 1,836,217 1,559,276
---------- ---------- ---------- ----------
$ 991,599 $ 616,723 $1,854,112 $1,575,026
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.22 $ 0.14 $ 0.41 $ 0.35
========== ========== ========== ==========
Weighted Average Number of Lim-
ited Partner Units Outstanding.. 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-316
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 223,305 $ 192,411
Net income..................................... 17,895 30,894
----------- -----------
241,200 223,305
----------- -----------
Limited partners:
Beginning balance.............................. 39,167,536 40,224,901
Net income..................................... 1,836,217 2,902,643
Distributions ($0.43 and $0.88 per limited
partner unit, respectively)................... (1,912,504) (3,960,008)
----------- -----------
39,091,249 39,167,536
----------- -----------
Total partners' capital...................... $39,332,449 $39,390,841
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-317
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,837,011 $ 2,183,206
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... 467,300 --
Investment in joint venture...................... (135,825) --
Collections on mortgage note receivable.......... 706 --
Payment of lease costs........................... -- (3,500)
----------- -----------
Net cash provided by (used in) investing activ-
ities......................................... 332,181 (3,500)
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (2,047,504) (1,912,504)
----------- -----------
Net cash used in financing activities.......... (2,047,504) (1,912,504)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 121,688 267,202
Cash and Cash Equivalents at Beginning of Period..... 2,362,980 1,706,415
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 2,484,668 $ 1,973,617
----------- -----------
Supplemental Schedule of Non-Cash Financing Activi-
ties:
Mortgage note accepted in exchange for sale of land
and building...................................... $ 55,000 $ --
=========== ===========
Distributions declared and unpaid at end of peri-
od................................................ $ 956,252 $ 956,252
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-318
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter ended June 30, 1999, may not be indicative of
the results that may be expected for the year ending December 31, 1999. Amounts
as of December 31, 1998, included in the financial statements, have been
derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XII, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Buildings on Operating Leases:
At December 31, 1998, the Partnership had recorded an allowance for loss on
building of $206,535 relating to the property in Morganton, North Carolina, due
to the tenant filing for bankruptcy. The allowance represented the difference
between the carrying value of the property at December 31, 1998 and the
estimated net realizable value for this property. In May 1999, the Partnership
sold this property to an unrelated third party for $550,000, received $467,300
in cash and accepted the remaining net sales proceeds in the form of a
promissory note (See Note 3), resulting in a gain of $74,714 for financial
reporting purposes. This gain, when netted against the allowance recorded at
December 31, 1998, resulted in a total net loss of approximately $131,800.
3. Mortgage Note Receivable:
In connection with the sale of the property in Morganton, North Carolina, in
May 1999, the Partnership accepted a promissory note in the principal sum of
$55,000 collateralized by a mortgage on the property. The promissory note bears
interest at a rate of 10.25% per annum and is being collected in 60 monthly
installments of principal and interest.
4. Concentration of Credit Risk:
The following schedule presents total rental and earned income (including
mortgage interest income) from individual restaurant chains, each representing
more than ten percent of the Partnership's total rental and earned income
(including the Partnership's share of rental and earned income from joint
ventures) for each of the six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Jack in the Box............................................ $512,334 $511,296
Denny's.................................................... 403,411 377,287
Hardee's................................................... 388,484 392,060
Golden Corral.............................................. 243,680 N/A
Long John Silver's......................................... 236,194 335,117
</TABLE>
The information denoted by N/A indicates that for the applicable period
presented, the chain did not represent more than ten percent of the
Partnership's total rental and earned income.
F-319
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and
rejected the leases relating to three of its eight Properties and ceased making
rental payments to the Partnership. In December 1998 and May 1999, the
Partnership sold two of the vacant properties. In July 1999, the Partnership
entered into a new lease with a new tenant for the remaining vacant property
for which rental payments are expected to commence in the third quarter of
1999. While Long John Silver's, Inc. has not rejected or affirmed the remaining
five leases, there can be no assurance that some or all of the leases will not
be rejected in the future. The lost revenues that would result in the event the
remaining five leases are rejected could have an adverse effect on the results
of operations of the Partnership, if the Partnership is not able to re-lease
these properties in a timely manner.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these restaurant chains could significantly impact
the results of operations of the Partnership, if the Partnership is not able to
re-lease the properties in a timely manner.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,384,248 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $46,951,127 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transactions costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-320
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XII, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 27, 1999, except for Note 11
for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-321
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------- -------
1998 1997
----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on building.............................. $20,703,333 $20,820,279
Net investment in direct financing leases...... 12,471,978 13,656,265
Investment in joint ventures................... 2,522,004 2,517,421
Cash and cash equivalents...................... 2,362,980 1,706,415
Receivables, less allowance for doubtful
accounts of $214,633 and $7,482............... 16,862 202,472
Prepaid expenses............................... 7,038 7,216
Lease costs, less accumulated amortization of
$3,256 and $1,307............................. 26,297 24,746
Accrued rental income, less allowance for
doubtful accounts of $6,323 in 1998........... 2,524,406 2,496,176
----------- -----------
$40,634,898 $41,430,990
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable............................... $ 21,195 $ 10,558
Accrued and escrowed real estate taxes
payable....................................... 10,137 3,244
Distributions payable.......................... 1,091,252 956,252
Due to related parties......................... 24,025 6,887
Rents paid in advance and deposits............. 97,448 36,737
Total liabilities............................ 1,244,057 1,013,678
Partners' capital.............................. 39,390,841 40,417,312
----------- -----------
$40,634,898 $41,430,990
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-322
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,515,351 $2,455,312 $2,473,574
Adjustments to accrued rental income..... (224,867) -- --
Earned income from direct financing
leases.................................. 1,571,906 1,647,530 1,692,066
Contingent rental income................. 23,433 54,330 67,652
Interest and other income................ 70,227 87,719 119,267
---------- ---------- ----------
3,956,050 4,244,891 4,352,559
---------- ---------- ----------
Expenses:
General operating and administrative..... 148,427 162,593 173,614
Professional services.................... 32,758 28,665 39,121
Bad debt expense......................... 188,990 -- --
Management fees to related parties....... 41,537 40,218 40,244
Real estate taxes........................ 8,989 -- 7,891
State and other taxes.................... 17,653 18,496 18,471
Depreciation and amortization............ 344,110 320,030 315,319
Transaction costs........................ 24,282 -- --
---------- ---------- ----------
806,746 570,002 594,660
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Loss on Sale of Land and
Buildings, and Provision for Loss on
Building.................................. 3,149,304 3,674,889 3,757,899
Equity in Earnings of Joint Ventures....... 95,142 277,325 200,499
Loss on Sale of Land and Buildings......... (104,374) -- (15,355)
Provision for Loss on Building............. (206,535) -- --
---------- ---------- ----------
Net Income................................. $2,933,537 $3,952,214 $3,943,043
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 30,894 $ 39,522 $ 39,533
Limited partners......................... 2,902,643 3,912,692 3,903,510
---------- ---------- ----------
$2,933,537 $3,952,214 $3,943,043
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.65 $ 0.87 $ 0.87
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-323
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $112,356 $45,000,000 $(10,690,019) $11,123,278 $(5,374,544) $40,172,071
Distributions to
limited partners
($0.85 per limited
partner unit)......... -- -- -- (3,825,008) -- -- (3,825,008)
Net income............. -- 39,533 -- -- 3,903,510 -- 3,943,043
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 151,889 45,000,000 (14,515,027) 15,026,788 (5,374,544) 40,290,106
Distributions to
limited partners
($0.85 per limited
partner unit)......... -- -- -- (3,825,008) -- -- (3,825,008)
Net income............. -- 39,522 -- -- 3,912,692 -- 3,952,214
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 191,411 45,000,000 (18,340,035) 18,939,480 (5,374,544) 40,417,312
Distributions to
limited partners
($0.88 per limited
partner unit)......... -- -- -- (3,960,008) -- -- (3,960,008)
Net income............. -- 30,894 -- -- 2,902,643 -- 2,933,537
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $222,305 $45,000,000 $(22,300,043) $21,842,123 $(5,374,544) $39,390,841
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-324
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 4,094,016 $ 3,736,731 $ 3,951,047
Distributions from joint ventures..... 205,815 256,653 190,596
Cash paid for expenses................ (243,316) (252,145) (278,240)
Interest received..................... 60,265 65,749 88,286
----------- ----------- -----------
Net cash provided by operating ac-
tivities........................... 4,116,780 3,806,988 3,951,689
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and build-
ing.................................. 483,549 -- 1,640,000
Additions to land and buildings on op-
erating leases....................... -- (55,000) --
Investment in joint ventures.......... (115,256) -- (1,645,024)
Collections on loan to tenant of joint
venture.............................. -- 4,886 7,741
Payment of lease costs................ (3,500) (26,052) --
----------- ----------- -----------
Net cash provided by (used in) in-
vesting activities................. 364,793 (76,166) 2,717
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net cash used in financing activi-
ties............................... (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 656,565 (94,186) 84,398
Cash and Cash Equivalents at Beginning
of Year................................ 1,706,415 1,800,601 1,716,203
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 2,362,980 $ 1,706,415 $ 1,800,601
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,933,537 $ 3,952,214 $ 3,943,043
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... 188,990 -- --
Depreciation.......................... 342,161 317,189 313,319
Amortization.......................... 1,949 2,841 2,000
Equity in earnings of joint venture,
net of distributions................. 110,673 (20,672) (9,903)
Loss on sale of land and buildings.... 104,374 -- 15,355
Provision for loss on building........ 206,535 -- --
Decrease in net investment in direct
financing leases..................... 164,614 132,771 121,597
Decrease (increase) in receivables.... (3,380) (4,450) 48,671
Decrease (increase) in prepaid ex-
penses............................... 178 (430) (4,862)
Increase in accrued rental income..... (28,230) (533,121) (518,502)
Increase (decrease) in accounts pay-
able and accrued expenses............ 17,530 (10,207) 8,745
Increase (decrease) in due to related
parties.............................. 17,138 3,906 (4,269)
Increase (decrease) in rents paid in
advance and deposits................. 60,711 (33,053) 36,495
----------- ----------- -----------
Total adjustments................... 1,183,243 (145,226) 8,646
----------- ----------- -----------
Net Cash Provided by Operating Activi-
ties................................... $ 4,116,780 $ 3,806,988 $ 3,951,689
=========== =========== ===========
Supplemental Schedule of Non-Cash Fi-
nancing Activities:
Distributions declared and unpaid at De-
cember 31.............................. $ 1,091,252 $ 956,252 $ 956,252
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-325
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators or franchisees of national and regional fast-food
and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
values. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-326
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership's investments in Des Moines
Real Estate Joint Venture, Williston Real Estate Joint Venture, Kingsville Real
Estate Joint Venture, Middleburg Joint Venture and Columbus Joint Venture are
accounted for using the equity method since the Partnership shares control with
affiliates which have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. Substantially all
leases are for 14 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments,
F-327
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fully maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to four
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $12,584,387 $12,837,754
Buildings.......................................... 10,120,580 9,443,412
----------- -----------
22,704,967 22,281,166
Less accumulated depreciation...................... (1,795,099) (1,460,887)
----------- -----------
20,909,868 20,820,279
Less allowance for loss on building................ (206,535) --
----------- -----------
$20,703,333 $20,820,279
=========== ===========
</TABLE>
In March 1997, the Partnership entered into a new lease for the property in
Tempe, Arizona. In connection therewith, the Partnership incurred $55,000 in
renovation costs which were completed in May 1997.
In December 1998, the Partnership sold its property in Monroe, North
Carolina, and received net sales proceeds of $483,549, resulting in a loss of
$104,374 for financial reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997 and 1996, the Partnership recognized $28,230 (net of $6,323 in
reserves and $224,867 in write-offs), $533,121, and $518,502, respectively, of
such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 2,212,548
2000............................................................. 2,214,984
2001............................................................. 2,224,926
2002............................................................. 2,244,948
2003............................................................. 2,521,540
Thereafter....................................................... 21,695,400
-----------
$33,114,346
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-328
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1998, the Partnership established an
allowance for loss on building of $206,535, relating to the Long John Silver's
property in Morganton, North Carolina. The tenant of this property filed for
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
property at December 31, 1998, and the current estimated net realizable value
for this property.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $24,790,776 $28,413,665
Estimated residual values.......................... 3,924,188 4,190,941
Less unearned income............................... (16,242,986) (18,948,341)
----------- -----------
Net investment in direct financing leases.......... $12,471,978 $13,656,265
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,678,170
2000............................................................. 1,678,170
2001............................................................. 1,678,170
2002............................................................. 1,678,170
2003............................................................. 1,731,030
Thereafter....................................................... 16,347,066
-----------
$24,790,776
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
During the year ended December 31, 1998, three of the Partnership's leases
with Long John Silver's, Inc. were rejected in connection with the tenant
filing for bankruptcy. As a result, the Partnership reclassified these assets
from net investment in direct financing leases to land and buildings on
operating leases. In accordance with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying value. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
5. Investment in Joint Ventures:
As of December 31, 1998, the Partnership had a 59.05%, an 18.61%, a 31.13%,
and an 87.54% interest in the profits and losses of Williston Real Estate Joint
Venture, Des Moines Real Estate Joint Venture, Kingsville Real Estate Joint
Venture, and Middleburg Joint Venture, respectively. The remaining interests in
these joint ventures are held by affiliates of the Partnership which have the
same general partners.
In August 1998, the Partnership entered into a joint venture agreement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant property. As of December 31, 1998, the
F-329
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Partnership contributed amounts to purchase land and pay construction costs
relating to the joint venture. The Partnership has agreed to contribute
additional amounts to the joint venture for construction costs. As of December
31, 1998 the Partnership owned a 27.72% interest in the profits and losses of
this joint venture. When funding is complete, the Partnership expects to have
an approximate 28 percent interest in the profits and losses of the joint
venture. The Partnership accounts for its investment in this joint venture
under the equity method since the Partnership shares control with affiliates.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture, Middleburg Joint Venture, and Columbus
Joint Venture each own and lease one property to an operator of national fast-
food or family-style restaurants. The following presents the joint ventures'
combined, condensed financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land................................................ $2,498,504 $1,768,636
Net investment in direct financing leases, less
allowance for impairment in carrying value.......... 2,219,798 2,446,688
Cash................................................. 5,671 6,893
Receivables.......................................... -- 13,843
Accrued rental income................................ 166,447 157,252
Other assets......................................... 283 443
Liabilities.......................................... 483,138 7,673
Partners' capital.................................... 4,407,565 4,386,082
Revenues............................................. 337,881 481,085
Provision for loss on land and direct financing
lease............................................... (316,113) --
Net income (loss).................................... (38,867) 446,047
</TABLE>
The Partnership recognized income totalling $95,142, $277,325, and $200,499
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Receivables:
During 1993, the Partnership loaned $208,855 to the tenant of the property
owned by Kingsville Real Estate Joint Venture in connection with the purchase
of equipment for the restaurant property. The loan, which bore interest at a
rate of ten percent, was payable over 84 months and was collateralized by the
restaurant equipment. Receivables at December 31, 1997, included $188,642
relating to this loan, including accrued interest of $7,488. During the year
ended December 31, 1998, the Partnership established an allowance for
doubtful accounts of $205,965, which represented the entire amount outstanding
under the loan plus accrued interest, due to the uncertainty of collectibility
of this note. No amounts relating to this loan are included in receivables at
December 31, 1998.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to
F-330
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
receipt by the limited partners of an aggregate, ten percent, cumulative,
noncompounded annual return on their invested capital contributions (the
"Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their Limited
Partners' 10% Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,960,008, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $3,825,008. No distributions have been made to the
general partners to date.
F-331
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,933,537 $3,952,214 $3,943,043
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (224,652) (249,366) (259,752)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 164,614 132,771 121,597
Provision for loss on building.......... 206,535 -- --
Loss on sale of land and buildings for
tax reporting purposes less than (in
excess of) loss for financial reporting
purposes............................... 25,699 -- (26,151)
Capitalization of transaction costs for
tax reporting purposes................. 24,282 -- --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
(less than) equity in earnings of joint
ventures for financial reporting
purposes............................... 138,311 (51,481) (46,345)
Allowance for doubtful accounts......... 207,151 (15,913) (16,396)
Accrued rental income................... (28,230) (533,121) (518,502)
Rents paid in advance................... 60,711 (39,303) 36,495
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,507,958 $3,195,801 $3,233,989
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Affiliate. The Partnership incurred
management fees of $41,537, $40,218, and $40,244 for the years ended December
31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition
F-332
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fees will be incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition fee is
subordinated to receipt by the limited partners of their aggregate 10%
Preferred Return, plus their adjusted capital contributions. No deferred,
subordinated real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $107,911, $92,866, and $97,722 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties at December 31, 1998 and 1997, totalled $24,025
and $6,887, respectively.
10. Concentration of Credit Risk:
The following schedule presents rental and earned income from individual
lessees, or affiliated groups of lessees, each representing more than ten
percent of the Partnership's total rental and earned income (including the
Partnership's share of rental and earned income from joint ventures) for each
of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Foodmaker, Inc............................ $1,023,630 $1,024,667 $1,024,667
Flagstar Enterprises, Inc. (and Denny's
Inc. and Quincy's Restaurants, Inc. for
the years ended December 31, 1997 and
1996).................................... 784,922 1,216,908 1,224,953
Long John Silver's, Inc................... 508,351 647,829 649,992
Advantica Restaurant Group, Inc. (and
Denny's, Inc. and Quincy's Restaurants,
Inc. for the year ended December 31,
1998).................................... 424,742 N/A N/A
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Jack in the Box............................. $1,023,630 $1,024,667 $1,024,667
Hardee's.................................... 784,922 787,260 791,998
Denny's..................................... 782,486 807,547 818,672
Long John Silver's.......................... 574,044 713,522 715,685
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or group of affiliated tenants and the chain did not represent more than
ten percent of the Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
F-333
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and
rejected the leases relating to three of its eight leases and ceased making
rental payments to the Partnership. In December 1998, the Partnership sold one
of the vacant properties and intends to reinvest the net sales proceeds from
the sale of this
property in an additional property. The Partnership will not recognize rental
and earned income from these two remaining properties until new tenants for
these properties are located or until the properties are sold and the proceeds
from such sales are reinvested in additional properties. While Long John
Silver's, Inc. has not rejected or affirmed the remaining five leases, there
can be no assurance that some or all of the leases will not be rejected in the
future. The lost revenues resulting from the two remaining vacant properties,
as described above, and the possible rejection of the remaining five leases
could have an adverse effect on the results of operations of the Partnership,
if the Partnership is not able to re-lease these properties in a timely manner.
The general partners are currently seeking either new tenants or purchasers for
the two remaining vacant properties.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,768,496 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $46,951,127 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,384,248 shares valued at $20.00 per
APF share.
F-334
<PAGE>
CNL INCOME FUND XIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-336
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-337
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-338
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-339
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-340
Report of Independent Certified Public Accountants....................... F-342
Balance Sheets as of December 31, 1998 and 1997.......................... F-343
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-344
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-345
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-346
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-347
</TABLE>
F-335
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,299,486 and
$2,107,624, respectively, and allowance for loss on
building of $297,885 in 1999 and 1998................ $22,393,406 $22,945,358
Net investment in direct financing leases............. 7,508,202 6,951,890
Investment in joint ventures.......................... 2,447,615 2,451,336
Cash and cash equivalents............................. 682,240 766,859
Receivables, less allowance for doubtful accounts of
$1,734 and $532, respectively........................ 78,930 121,119
Prepaid expenses...................................... 16,322 8,453
Lease costs, less accumulated amortization of $887 in
1999................................................. 34,863 17,875
Accrued rental income................................. 1,532,130 1,424,603
----------- -----------
$34,693,708 $34,687,493
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 88,908 $ 4,068
Accrued construction costs payable.................... 600,000 --
Accrued and escrowed real estate taxes payable........ 8,229 6,923
Distributions payable................................. 850,002 850,002
Due to related parties................................ 48,066 22,529
Rents paid in advance and deposits.................... 34,318 54,568
----------- -----------
Total liabilities................................. 1,629,523 938,090
Commitments and Contingencies (Note 3)
Partners' capital..................................... 33,064,185 33,749,403
----------- -----------
$34,693,708 $34,687,493
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-336
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 600,198 $ 613,911 $1,196,643 $1,232,426
Adjustments to accrued rental
income........................ -- (311,118) -- (311,118)
Earned income from direct fi-
nancing leases................ 196,996 198,185 389,946 415,220
Contingent rental income....... 69,638 75,085 110,243 141,008
Interest and other income...... 6,225 12,991 12,993 33,186
--------- --------- ---------- ----------
873,057 589,054 1,709,825 1,510,722
--------- --------- ---------- ----------
Expenses:
General operating and adminis-
trative....................... 33,055 40,490 74,574 70,584
Professional services.......... 8,954 6,230 20,993 14,635
Bad debt expense............... 615 -- 615 --
Management fees to related par-
ty............................ 9,181 8,821 17,777 17,774
Real estate taxes.............. 4,979 2,888 13,319 2,888
State and other taxes.......... -- 231 21,476 16,184
Depreciation and amortization.. 96,830 97,995 200,671 196,413
Transaction costs.............. 80,702 -- 113,883 --
--------- --------- ---------- ----------
234,316 156,655 463,308 318,478
--------- --------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures and Loss on
Demolition of Building.......... 638,741 432,399 1,246,517 1,192,244
Equity in Earnings of Joint Ven-
tures........................... 60,327 57,175 120,554 121,482
Loss on Demolition of Building... (352,285) -- (352,285) --
--------- --------- ---------- ----------
Net Income....................... $ 346,783 $ 489,574 $1,014,786 $1,313,726
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 5,348 $ 4,895 $ 12,028 $ 13,137
Limited partners............... 341,435 484,679 1,002,758 1,300,589
--------- --------- ---------- ----------
$ 346,783 $ 489,574 $1,014,786 $1,313,726
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.09 $ 0.12 $ 0.25 $ 0.33
========= ========= ========== ==========
Weighted Average Number of Lim-
ited Partner Units Outstanding.. 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-337
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 163,874 $ 137,207
Net income..................................... 12,028 26,667
----------- -----------
175,902 163,874
----------- -----------
Limited partners:
Beginning balance.............................. 33,585,529 34,516,349
Net income..................................... 1,002,758 2,469,188
Distributions ($0.43 and $0.85 per limited
partner unit, respectively)................... (1,700,004) (3,400,008)
----------- -----------
32,888,283 33,585,529
----------- -----------
Total partners' capital.......................... $33,064,185 $33,749,403
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-338
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities......... $ 1,633,260 $ 1,733,901
----------- -----------
Cash Flows from Investing Activities:
Payment of lease costs.......................... (17,875) --
----------- -----------
Net cash used in investing activities......... (17,875) --
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners............... (1,700,004) (1,700,004)
----------- -----------
Net cash used in financing activities......... (1,700,004) (1,700,004)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equiva-
lents.............................................. (84,619) 33,897
Cash and Cash Equivalents at Beginning of Period.... 766,859 907,980
----------- -----------
Cash and Cash Equivalents at End of Period.......... $ 682,240 $ 941,877
=========== ===========
Supplemental Schedule of Non-Cash Investing and Non-
Cash Financing Activities:
Construction costs incurred and unpaid at end of
period........................................... $ 600,000 $ --
Distributions declared and unpaid at end of quar-
ter.............................................. $ 850,002 $ 850,002
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-339
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XIII, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Buildings:
In November 1998, the Partnership entered into a new lease for the property
in Tampa, Florida with a new tenant to operate the property as a Steak-N-Shake
restaurant. In connection with the new lease agreement, during the six months
ended June 30, 1999, the building located on the Partnership's property was
demolished. As a result, the undepreciated cost of the building of $352,285 was
charged to net income for financial reporting purposes.
3. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,943,093 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $38,283,180 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the Properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
F-340
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
In May 1999, the Partnership entered into a new lease for the property in
Philadelphia, Pennsylvania, with a new tenant to operate the property as an
Arby's restaurant. In connection therewith, the Partnership agreed to pay up to
$433,000 in renovation costs, none of which have been incurred as of June 30,
1999.
4. Subsequent Event:
In July 1999, the Partnership sold its property in Houston, Texas, to a
third party for $1,073,887 and received net sales proceeds of $1,063,318,
resulting in a gain of $176,159 for financial reporting purposes.
F-341
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XIII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XIII, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except for Note 11
for which the date is March 11, 1999 and Note 12 for which the date is June
3, 1999
F-342
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.......................................... $22,945,358 $22,788,618
Net investment in direct financing leases.......... 6,951,890 7,910,470
Investment in joint ventures....................... 2,451,336 2,457,810
Cash and cash equivalents.......................... 766,859 907,980
Receivables, less allowance for doubtful accounts
of $532 in 1998................................... 121,119 23,946
Prepaid expenses................................... 8,453 10,368
Lease costs........................................ 17,875 --
Organization costs, less accumulated amortization
of $10,000 and $9,422............................. -- 578
Accrued rental income.............................. 1,424,603 1,423,820
----------- -----------
$34,687,493 $35,523,590
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable................................... $ 4,068 $ 7,671
Accrued and escrowed real estate taxes payable..... 6,923 --
Distributions payable.............................. 850,002 850,002
Due to related parties............................. 22,529 6,791
Rents paid in advance and deposits................. 54,568 5,570
Total liabilities.............................. 938,090 870,034
Commitment (Note 10)
Partners' capital.................................. 33,749,403 34,653,556
----------- -----------
$34,687,493 $35,523,590
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-343
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,404,934 $2,371,062 $2,477,156
Adjustments to accrued rental income...... (307,405) -- --
Earned income from direct financing
leases................................... 764,962 976,547 899,130
Contingent rental income.................. 326,906 287,751 299,495
Interest and other income................. 49,321 46,693 59,319
---------- ---------- ----------
3,238,718 3,682,053 3,735,100
---------- ---------- ----------
Expenses:
General operating and administrative...... 150,239 152,918 156,466
Bad debt expense.......................... -- 123,071 --
Professional services..................... 26,869 25,595 33,746
Management fees to related party.......... 35,257 34,321 35,675
Real estate taxes......................... 13,989 -- 10,680
State and other taxes..................... 16,172 18,301 16,793
Depreciation and amortization............. 422,653 394,099 393,434
Transaction costs......................... 23,291 -- --
---------- ---------- ----------
688,470 748,305 646,794
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land,
Buildings and Investment in Direct
Financing Lease, and Provision for Loss on
Building................................... 2,550,248 2,933,748 3,088,306
Equity in Earnings of Joint Ventures........ 243,492 150,417 60,654
Gain (Loss) on Sale of Land, Buildings and
Investment in Direct Financing Lease....... -- (48,538) 82,855
Provision for Loss on Building.............. (297,885) -- --
---------- ---------- ----------
Net Income.................................. $2,495,855 $3,035,627 $3,231,815
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 26,667 $ 30,690 $ 31,490
Limited partners.......................... 2,469,188 3,004,937 3,200,325
---------- ---------- ----------
$2,495,855 $3,035,627 $3,231,815
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.62 $ 0.75 $ 0.80
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-344
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------------- ----------------------------------------------------
Accumu- Accumu-
lated lated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- -------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 74,027 $40,000,000 $ (7,528,384) $ 7,304,656 $(4,665,169) $35,186,130
Distribution to limited
partners ($0.85 per
limited partner
unit)................. -- -- -- (3,400,008) -- -- (3,400,008)
Net income............. -- 31,490 -- -- 3,200,325 -- 3,231,815
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 105,517 40,000,000 (10,928,392) 10,504,981 (4,665,169) 35,017,937
Distribution to limited
partners ($0.85 per
limited partner
unit)................. -- -- -- (3,400,008) -- -- (3,400,008)
Net income............. -- 30,690 -- -- 3,004,937 -- 3,035,627
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 136,207 40,000,000 (14,328,400) 13,509,918 (4,665,169) 34,653,556
Distribution to limited
partners ($0.85 per
limited partner
unit)................. -- -- -- (3,400,008) -- -- (3,400,008)
Net income............. -- 26,667 -- -- 2,469,188 -- 2,495,855
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $162,874 $40,000,000 $(17,728,408) $15,979,106 $(4,665,169) $33,749,403
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-345
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 3,235,985 $ 3,329,633 $ 3,476,985
Distributions from joint ventures..... 250,270 151,322 93,700
Cash paid for expenses................ (245,273) (236,793) (251,454)
Interest received..................... 36,319 29,395 48,350
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,277,301 3,273,557 3,367,581
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................. -- 932,849 550,000
Advances to tenant.................... -- (196,980) --
Repayment of advances................. -- 127,843 --
Investment in joint ventures.......... (539) (1,482,849) --
Payment of lease costs................ (17,875) -- --
Decrease (increase) in restricted
cash................................. -- 550,000 (550,000)
----------- ----------- -----------
Net cash used in investing
activities......................... (18,414) (69,137) --
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,400,008) (3,400,008) (3,400,008)
----------- ----------- -----------
Net cash used in financing
activities......................... (3,400,008) (3,400,008) (3,400,008)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents............................ (141,121) (195,588) (32,427)
Cash and Cash Equivalents at Beginning
of Year................................ 907,980 1,103,568 1,135,995
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 766,859 $ 907,980 $ 1,103,568
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,495,855 $ 3,035,627 $ 3,231,815
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense.................... -- 123,071 --
Depreciation........................ 421,840 391,434 391,434
Amortization........................ 637 2,665 2,000
Equity in earnings of joint
ventures, net of distributions..... 6,954 905 33,046
Loss (gain) on sale of land and
building........................... -- 48,538 (82,855)
Provision for loss on building...... 297,885 -- --
Decrease (increase) in receivables.. (97,173) 23,845 (28,034)
Decrease in net investment in direct
financing leases................... 82,115 84,646 80,214
Increase (decrease) in prepaid
expenses........................... 1,915 (1,225) (5,005)
Increase in accrued rental income... (783) (378,850) (313,540)
Increase (decrease) in accounts
payable and accrued expenses....... 3,320 (12,761) 12,137
Increase (decrease) in due to
related parties.................... 15,738 4,197 (4,773)
Increase (decrease) in rents paid in
advance and deposits............... 48,998 (48,535) 51,142
----------- ----------- -----------
Total adjustments................. 781,446 237,930 135,766
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,277,301 $ 3,273,557 $ 3,367,581
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 850,002 $ 850,002 $ 850,002
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-346
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XIII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and
F-347
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
accrued rental income, and to decrease rental or other income for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its interest in
Attalla Joint Venture and Salem Joint Venture, and a property in Arvada,
Colorado, a property in Akron, Ohio, and a property in Miami, Florida, for
which each property is held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the term of the new lease using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." Some of the leases are classified
as operating leases
F-348
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of the majority of these leases are operating leases. Substantially
all leases are for 15 to 20 years and provide for minimum and contingent
rentals. In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to five
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $12,742,897 $12,742,897
Buildings....................................... 12,607,970 11,743,041
----------- -----------
25,350,867 24,485,938
Less accumulated depreciation................... (2,107,624) (1,697,320)
----------- -----------
23,243,243 22,788,618
----------- -----------
Less allowance for loss on building............. (297,885) --
----------- -----------
$22,945,358 $22,788,618
=========== ===========
</TABLE>
In October 1997, the Partnership sold its property in Orlando, Florida, to a
third party for $953,371 and received net sales proceeds of $932,849, resulting
in a loss of $48,538 for financial reporting purposes. In December 1997, the
Partnership reinvested the net sales proceeds in a property located in Miami,
Florida, as tenants-in-common, with affiliates of the general partners (see
Note 5).
At December 31, 1998, the Partnership established an allowance for loss on
building of $297,885, relating to one property in Philadelphia, Pennsylvania.
The tenant of this property filed for bankruptcy and ceased payment of rents
under the terms of its lease agreement. The allowance represents the difference
between the carrying value of the property at December 31, 1998, and the
current estimate of net realizable value for this property.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $783 (net
of $307,405 in write-offs), $378,850, and $313,540, respectively, of such
rental income.
F-349
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,188,225
2000.......................................................... 2,179,331
2001.......................................................... 2,190,526
2002.......................................................... 2,220,532
2003.......................................................... 2,257,154
Thereafter.................................................... 20,981,325
-----------
$32,017,093
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $13,789,643 $15,747,868
Estimated residual values....................... 2,344,575 2,582,058
Less unearned income............................ (9,182,328) (10,419,456)
----------- -----------
Net investment in direct financing leases....... $ 6,951,890 $ 7,910,470
=========== ===========
</TABLE>
In October 1997, the Partnership sold its property in Orlando, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payment receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts and the loss from the sale relating to the land
portion of the property and the net investment in direct financing lease was
reflected in income (Note 3).
In June 1998, three of the Partnership's leases with Long John Silver's,
Inc., were rejected in connection with the tenant filing for bankruptcy. As a
result, the Partnership reclassified these assets from net investment in direct
financing leases to land and buildings on operating leases. In accordance with
Statement of Financial Accounting Standards #13, "Accounting for Leases," the
Partnership recorded the reclassified assets at the lower of original cost,
present fair value, or present carrying value. No loss on termination of direct
financing leases was recorded for financial reporting purposes.
F-350
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 857,997
2000.......................................................... 857,997
2001.......................................................... 870,737
2002.......................................................... 888,571
2003.......................................................... 889,113
Thereafter.................................................... 9,425,228
-----------
$13,789,643
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 50 percent and a 27.8% interest in the profits and
losses of Attalla Joint Venture and Salem Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
The Partnership also owns a property in Arvada, Colorado, as tenants-in-
common with an affiliate of the general partners. The Partnership accounts for
its investment in this property using the equity method since the Partnership
shares control with an affiliate. As of December 31, 1998, the Partnership
owned a 66.13% interest in this property.
In January 1997, the Partnership used the net sales proceeds from the 1996
sale of the property in Richmond, Virginia, to acquire a property in Akron,
Ohio, as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 63.09% interest in this property.
In addition, in December 1997, the Partnership acquired a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 47.83% interest in this property.
F-351
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Attalla Joint Venture and Salem Joint Venture and the Partnership and
affiliates, as tenants-in-common in three separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food or family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the properties held
as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $4,174,420 $4,256,861
Net investment in direct financing leases........ 360,790 364,479
Cash............................................. 19,083 18,729
Receivables...................................... 546 --
Prepaid expenses................................. 454 380
Accrued rental income............................ 182,217 106,653
Liabilities...................................... 16,028 15,653
Partners' capital................................ 4,721,482 4,731,449
Revenues......................................... 569,719 347,971
Net income....................................... 476,700 285,922
</TABLE>
The Partnership recognized income totalling $243,492, $150,417, and $60,654
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties, not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their Limited Partners' 10% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from the sale of a property, not in
liquidation of the Partnership, is in general, allocated in the same manner as
net sales proceeds will be distributable. Any loss from the sale of a property
is, in general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts
F-352
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
balances, in proportion to such balances, up to amounts sufficient to reduce
such positive balances to zero, and v) thereafter, any funds remaining shall
then be distributed 95 percent to the limited partners and five percent to the
general partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of $3,400,008. No
distributions have been made to the general partners to date.
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,495,855 $3,035,627 $3,231,815
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (59,127) (100,696) (103,634)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 82,115 84,646 80,214
Capitalization of transaction costs for
tax reporting purposes................. 23,291 -- --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
(less than) equity in earnings of joint
ventures for financial reporting
purposes............................... (27,118) (19,727) 6,819
Gain on sale of property for financial
reporting purposes, deferred for tax
reporting purposes..................... -- -- (82,855)
Loss on sale of property for financial
reporting purposes in excess of loss
for tax reporting purposes............. -- 38,823 --
Allowance for loss on building.......... 297,885 -- --
Allowance for doubtful accounts......... 532 (150,734) 102,198
Accrued rental income................... (783) (378,850) (313,540)
Rents paid in advance................... 38,165 (48,535) 51,142
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,850,815 $2,460,554 $2,972,159
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures and the property held as
tenants-in-common with an affiliate. The management fee, which will not
F-353
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
exceed fees which are competitive for similar services in the same geographic
area, may or may not be taken, in whole or in part as to any year, in the sole
discretion of the Affiliate. All or any portion of the management fee not taken
as to any fiscal year shall be deferred without interest and may be taken in
such other fiscal year as the Affiliates shall determine. The Partnership
incurred management fees of $35,257, $34,321, and $35,675 for the years ended
December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. For the years ended December 31, 1998, 1997, and 1996, the expenses
incurred for these services were $98,719, $87,322, and $91,272, respectively.
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Akron, Ohio, as tenants-in-common for a purchase price
of $872,625 (of which the Partnership contributed $550,000 or 63.03%) from CNL
BB Corp., also an affiliate of the general partners. CNL BB Corp. had purchased
and temporarily held title to this property in order to facilitate the
acquisition of the property by the Partnership and the affiliate, as tenants-
in-common. The purchase price paid by the Partnership and the affiliate
represented the costs incurred by CNL BB Corp. to acquire and carry the
property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $22,529,
and $6,791, respectively.
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc..................... $649,525 $744,199 $765,109
Long John Silver's, Inc. ..................... 571,066 759,064 764,565
Golden Corral Corporation..................... 542,900 536,886 539,568
Foodmaker, Inc. .............................. 458,690 450,816 450,393
Checkers Drive-In Restaurants, Inc............ N/A N/A 412,422
</TABLE>
F-354
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates) for each of the years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Hardee's...................................... $649,525 $649,762 $670,249
Long John Silver's............................ 571,066 759,064 764,565
Golden Corral Family Steakhouse Restaurants... 542,900 536,886 539,568
Burger King................................... 497,670 484,111 431,280
Jack in the Box............................... 458,690 450,816 450,393
Checkers Drive-In Restaurants................. N/A N/A 412,422
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
In June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected the
leases relating to three of the eight Properties it leased and ceased making
rental payments to the Partnership. During 1998, the Partnership entered into a
new lease for two of the three properties with new tenants. The general
partners are currently seeking either a new tenant or a purchaser for the
remaining property. The Partnership will not recognize rental and earned income
from this property until a new tenant is located or until the property is sold
and the proceeds from such sale is reinvested in an additional property. While
Long John Silver's, Inc. has not rejected or affirmed the remaining five
leases, there can be no assurance that some or all of the leases will not be
rejected in the future. The lost revenues resulting from the vacant property,
and the possible rejection of the remaining five leases could have an adverse
effect on the results of operations of the Partnership if the Partnership is
unable to re-lease these properties in a timely manner.
10. Commitment:
In November 1998, the Partnership entered into a new lease for the property
in Tampa, Florida, with a new tenant to operate the property as a Steak-N-Shake
restaurant. In connection therewith, the Partnership agreed to pay up to
$600,000 in renovation costs, none of which were incurred as of the year ended
December 31, 1998.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,886,185 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger
F-355
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $38,283,180 as of December 31,
1998. The APF Shares are expected to be listed for trading on the New York
Stock Exchange concurrently with the consummation of the Merger, and,
therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 1,943,093 shares valued at $20.00 per
APF share.
F-356
<PAGE>
CNL INCOME FUND XIV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-358
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-359
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-360
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-361
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-362
Report of Independent Certified Public Accountants....................... F-364
Balance Sheets as of December 31, 1998 and 1997.......................... F-365
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-366
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-367
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-368
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-369
</TABLE>
F-357
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building............................................. $24,871,707 $26,509,264
Net investment in direct financing leases............. 7,813,800 7,300,102
Investment in joint ventures.......................... 3,850,463 3,813,175
Cash and cash equivalents............................. 1,458,499 949,056
Receivables, less allowance for doubtful accounts of
$1,105 in 1999 and 1998.............................. 56,816 62,824
Prepaid expenses...................................... 18,407 8,389
Lease costs, less accumulated amortization of $1,898
in 1999.............................................. 31,102 --
Accrued rental income, less allowance for doubtful
accounts of $12,622 in 1999 and 1998................. 2,068,192 1,895,349
----------- -----------
$40,168,986 $40,538,159
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 88,637 $ 2,577
Accrued and escrowed real estate taxes payable........ 5,152 18,198
Distributions payable................................. 928,130 928,130
Due to related party.................................. 47,290 25,432
Rents paid in advance and deposits.................... 68,013 88,098
----------- -----------
Total liabilities................................... 1,137,222 1,062,435
Commitments and Contingencies (Note 3)
Partners' capital..................................... 39,031,764 39,475,724
----------- -----------
$40,168,986 $40,538,159
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-358
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 730,510 $ 707,601 $1,437,315 $1,424,878
Adjustments to accrued
rental income.............. -- (262,969) -- (262,969)
Earned income from direct
financing leases........... 222,341 218,056 421,507 460,275
Interest and other income... 6,960 25,483 17,480 46,462
---------- ---------- ---------- ----------
959,811 688,171 1,876,302 1,668,646
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative............. 32,840 42,628 81,183 78,931
Professional services....... 9,792 10,695 17,576 16,877
Management fees to related
party...................... 9,928 9,280 19,472 18,786
Real estate taxes........... 457 1,276 5,331 4,726
State and other taxes....... 334 40 30,688 21,036
Depreciation and
amortization............... 94,346 85,053 198,272 170,106
Transaction costs........... 85,038 -- 118,213 --
---------- ---------- ---------- ----------
232,735 148,972 470,735 310,462
---------- ---------- ---------- ----------
Income Before Equity in
Earnings of Joint Ventures,
Gain (Loss) on Sale of Land
and Buildings and Provision
for Loss on Building......... 727,076 539,199 1,405,567 1,358,184
Equity in Earnings of Joint
Ventures..................... 95,136 82,126 188,822 164,631
Gain (Loss) on Sale of Land
and Buildings................ (60,882) 41,408 (60,882) 112,206
Provision for Loss on
Building..................... (60,325) -- (121,207) --
---------- ---------- ---------- ----------
Net Income.................... $ 701,005 $ 662,733 $1,412,300 $1,635,021
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 7,695 $ 6,214 $ 15,163 $15,228
Limited partners............ 693,310 656,519 1,397,137 1,619,793
---------- ---------- ---------- ----------
$ 701,005 $ 662,733 $1,412,300 $1,635,021
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.15 $ 0.15 $ 0.31 $ 0.36
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-359
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 177,733 $ 146,640
Net income..................................... 15,163 31,093
----------- -----------
192,896 177,733
----------- -----------
Limited partners:
Beginning balance.............................. 39,297,991 39,842,517
Net income..................................... 1,397,137 3,167,994
Distributions ($0.41 and $0.83 per limited
partner unit, respectively)................... (1,856,260) (3,712,520)
----------- -----------
38,838,868 39,297,991
----------- -----------
Total partners' capital...................... $39,031,764 $39,475,724
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-360
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,746,523 $ 1,845,728
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 696,300 1,250,140
Investment in joint ventures..................... (44,120) (310,097)
Increase in restricted cash...................... -- (193,654)
Payment of lease costs........................... (33,000) --
----------- -----------
Net cash provided by investing activities...... 619,180 746,389
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,856,260) (1,856,260)
----------- -----------
Net cash used in financing activities.......... (1,856,260) (1,856,260)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 509,443 735,857
Cash and Cash Equivalents at Beginning of Period..... 949,056 1,285,777
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,458,499 $ 2,021,634
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period.......................................... $ 928,130 $ 928,130
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-361
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XIV, Ltd. (the "Partnership") for the year ended December 31, 1998.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications had no
effect on partners' capital or net income.
2. Land and Building on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land........................................... $15,900,097 $16,195,936
Buildings...................................... 10,966,349 12,024,577
----------- -----------
26,866,446 28,220,513
Less accumulated depreciation.................. (1,836,377) (1,674,094)
----------- -----------
25,030,069 26,546,419
Less allowance for loss on building............ (158,362) (37,155)
----------- -----------
$24,871,707 $26,509,264
=========== ===========
</TABLE>
As of December 31, 1998, the Partnership recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating to
the Long John Silver's property in Shelby, North Carolina. The tenant of this
property filed for bankruptcy and ceased payment of rents under the terms of
its lease agreement. The allowance represented the difference between the
carrying value of the property at December 31, 1998 and the estimated net
realizable value for the property. During the six months ended June 30, 1999,
the Partnership increased the allowance by $121,207 to a total of $158,362. The
adjusted allowance represented the difference between the carrying value of the
property at June 30, 1999 and the estimated net sales proceeds from the sale of
the property based on a sales contract with an unrelated third party.
In May 1999, the Partnership sold its property in Stockbridge, Georgia to a
third party for $700,000, and received net sales proceeds of $696,300,
resulting in a loss of $60,882 for financial reporting purposes.
F-362
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
3. Commitments and Contingencies
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,156,521 shares of
its
common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split effective June 3, 1999) in three previous
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $42,435,559 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
In May 1999, the Partnership entered into an agreement with an unrelated
third party to sell the Long John Silver's property in Shelby, North Carolina.
At June 30, 1999, the Partnership established a provision for loss on building
related to the anticipated sale of this property (see Note 2). As of August 9,
1999, the sale had not occurred.
F-363
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XIV, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XIV, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 22, 1999, except for Note 11
for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-364
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.............................................. $26,509,264 $25,217,725
Net investment in direct financing leases.............. 7,300,102 9,041,485
Investment in joint ventures........................... 3,813,175 3,271,739
Cash and cash equivalents.............................. 949,056 1,285,777
Restricted cash........................................ -- 318,592
Receivables, less allowance for doubtful accounts of
$1,105 in 1998........................................ 62,824 19,912
Prepaid expenses....................................... 8,389 7,915
Organization costs, less accumulated amortization of
$10,000 and $8,599.................................... -- 1,401
Accrued rental income less allowance for doubtful
accounts of $12,622 and $6,295........................ 1,895,349 1,820,078
----------- -----------
$40,538,159 $40,984,624
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,577 $ 10,258
Accrued and escrowed real estate taxes payable......... 18,198 19,570
Distributions payable.................................. 928,130 928,130
Due to related parties................................. 25,432 7,853
Rents paid in advance and deposits..................... 88,098 29,656
----------- -----------
Total liabilities.................................. 1,062,435 995,467
Partners' capital...................................... 39,475,724 39,989,157
----------- -----------
$40,538,159 $40,984,624
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-365
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,792,931 $2,872,283 $2,953,895
Adjustments to accrued rental income....... (277,319) -- --
Earned income from direct financing
leases.................................... 844,343 1,017,627 1,026,616
Contingent rental income................... 63,776 21,617 7,014
Interest and other income.................. 90,425 47,287 56,377
---------- ---------- ----------
3,514,156 3,958,814 4,043,902
---------- ---------- ----------
Expenses:
General operating and administrative....... 168,184 154,654 162,163
Professional services...................... 34,309 29,746 24,138
Bad debt expense........................... -- 10,500 --
Management fees to related parties......... 37,430 38,626 38,785
Real estate taxes.......................... 17,435 7,192 3,426
State and other taxes...................... 22,498 21,874 18,109
Loss on termination of direct financing
lease..................................... 21,873 -- --
Depreciation and amortization.............. 380,814 340,161 340,089
Transaction costs.......................... 25,231 -- --
---------- ---------- ----------
707,774 602,753 586,710
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Land and Building from
Right of Way Taking, Gain on Sale of Land
and Building, and Provision for Loss on
Building................................... 2,806,382 3,356,061 3,457,192
Equity in Earnings of Joint Ventures........ 317,654 309,879 459,137
Gain on Land and Building from Right of Way
Taking..................................... 41,408 -- --
Gain on Sale of Land and Building........... 70,798 -- --
Provision for Loss on Building.............. (37,155) -- --
---------- ---------- ----------
Net Income.................................. $3,199,087 $3,665,940 $3,916,329
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 31,093 $ 36,659 $ 39,163
Limited partners........................... 3,167,994 3,629,281 3,877,166
---------- ---------- ----------
$3,199,087 $3,665,940 $3,916,329
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.70 $ 0.81 $ 0 .86
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-366
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 69,818 $45,000,000 $ (6,710,883) $ 6,855,940 $(5,383,945) $39,831,930
Distributions to
limited
partners ($0.83 per
limited partner
unit)................. -- -- -- (3,712,522) -- -- (3,712,522)
Net income............. -- 39,163 -- -- 3,877,166 -- 3,916,329
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 108,981 45,000,000 (10,423,405) 10,733,106 (5,383,945) 40,035,737
Distributions to
limited
partners ($0.83 per
limited partner
unit)................. -- -- -- (3,712,520) -- -- (3,712,520)
Net income............. -- 36,659 -- -- 3,629,281 -- 3,665,940
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 145,640 45,000,000 (14,135,925) 14,362,387 (5,383,945) 39,989,157
Distributions to
limited
partners ($0.83 per
limited partner
unit)................. -- -- -- (3,712,520) -- -- (3,712,520)
Net income............. -- 31,093 -- -- 3,167,994 -- 3,199,087
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $176,733 $45,000,000 $(17,848,445) $17,530,381 $(5,383,945) $39,475,724
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-367
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,391,042 $ 3,501,064 $ 3,572,793
Distributions from joint ventures...... 343,684 308,220 340,299
Cash paid for expenses................. (293,428) (243,326) (250,885)
Interest received...................... 73,246 40,232 44,089
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,514,544 3,606,190 3,706,296
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building.............................. 1,606,702 -- --
Proceeds received from right of way
taking................................ 41,408 318,592 --
Additions to land and buildings on
operating leases...................... (605,712) -- --
Investment in direct financing
leases................................ (931,237) -- --
Investment in joint ventures........... (568,498) (121,855) (7,500)
Return of capital from joint venture... -- 51,950 --
Decrease (increase) in restricted
cash.................................. 318,592 (318,592) --
----------- ----------- -----------
Net cash used in investing
activities........................... (138,745) (69,905) (7,500)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,712,520) (3,712,520) (3,712,522)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,712,520) (3,712,520) (3,712,522)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents........................... (336,721) (176,235) (13,726)
Cash and Cash Equivalents at Beginning
of Year............................... 1,285,777 1,462,012 1,475,738
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 949,056 $ 1,285,777 $ 1,462,012
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 3,199,087 $ 3,665,940 $ 3,916,329
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Bad debt expense...................... -- 10,500 --
Loss on termination of direct
financing lease...................... 21,873 -- --
Depreciation.......................... 378,381 337,180 337,181
Amortization.......................... 2,433 2,981 2,908
Equity in earnings of joint ventures,
net of distributions................. 26,030 (1,659) (118,889)
Gain on land and building from right
of way taking........................ (41,408) -- --
Gain on sale of land and building..... (70,798) -- --
Provision for loss on building........ 37,155 -- --
Decrease in net investment in direct
financing leases..................... 82,359 83,787 74,798
Increase in receivables............... (38,232) (6,935) (13,946)
Decrease (increase) in prepaid
expenses............................. (474) 328 (4,802)
Increase in accrued rental income..... (148,845) (471,287) (491,221)
Increase (decrease) in accounts
payable and accrued expenses......... (9,038) 12,017 (8,408)
Increase (decrease) in due to related
parties.............................. 17,579 6,202 (5,218)
Increase (decrease) in rents paid in
advance and deposits................. 58,442 (32,864) 17,564
----------- ----------- -----------
Total adjustments.................... 315,457 (59,750) (210,033)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,514,544 $ 3,606,190 $ 3,706,296
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 928,130 $ 928,130 $ 928,130
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-368
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XIV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write downs.
F-369
<PAGE>
CNL INCOME FUND XIV , LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its interests in
Attalla Joint Venture, Wood-Ridge Real Estate Joint Venture, Salem Joint
Venture, Melbourne Joint Venture, and CNL Kingston Joint Venture using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institution with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases
F-370
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. Substantially all
leases are for 15 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to five
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $16,195,936 $16,425,914
Buildings....................................... 12,024,577 10,087,524
----------- -----------
28,220,513 26,513,438
Less accumulated depreciation................... (1,674,094) (1,295,713)
----------- -----------
26,546,419 25,217,725
Less allowance for loss on building............. (37,155) --
----------- -----------
$26,509,264 $25,217,725
=========== ===========
</TABLE>
During the year ended December 31, 1998, the Partnership sold its property
in Madison, Alabama and two properties in Richmond, Virginia, to third parties
for a total of $1,667,462 and received net sales proceeds of $1,606,702,
resulting in a total gain of $70,798 for financial reporting purposes. These
properties were originally acquired by the Partnership in 1993 and 1994, and
had costs totalling approximately $1,393,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold these
properties for a total of approximately $213,300 in excess of their original
purchase prices.
In addition, in April 1998, the Partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was taken through a
right of way taking in December 31, 1997. The Partnership had received
preliminary sales proceeds of $318,592 as of December 31, 1997. Upon agreement
of the final sales price of $360,000, and receipt of the remaining sales
proceeds of $41,408, the Partnership recognized a gain of $41,408 for financial
reporting purposes. This property was originally acquired by the Partnership in
1994 and had a cost of approximately $276,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold this
property for a total of approximately $83,600 in excess of its original
purchase price.
In October 1998, the Partnership reinvested approximately $1,537,000 of the
net sales proceeds it received from the sales of the properties in Richmond,
Virginia and the right of way taking of the property in Riviera Beach, Florida,
and a portion of the net sales proceeds it received from the sale of the
property in Madison, Alabama, in a property located in Fayetteville, North
Carolina.
At December 31, 1998, the Partnership recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating to
a Long John Silver's Property. The tenant of this Property filed for
F-371
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
Property at December 31, 1998 and the estimated net realizable value for the
Property.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $148,845
(net of $6,327 in reserves and $277,319 in write-offs), $471,287 (net of $6,295
in reserves), and $491,221, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,486,272
2000.......................................................... 2,538,562
2001.......................................................... 2,557,759
2002.......................................................... 2,615,117
2003.......................................................... 2,632,784
Thereafter.................................................... 27,438,256
-----------
$40,268,750
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Minimum lease payments receivable.............. $14,282,003 $ 18,621,827
Estimated residual values...................... 2,373,313 2,842,002
Less unearned income........................... (9,355,214) (12,422,344)
----------- ------------
Net investment in direct financing leases...... $ 7,300,102 $ 9,041,485
=========== ============
</TABLE>
F-372
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 898,054
2000.......................................................... 899,947
2001.......................................................... 902,770
2002.......................................................... 911,239
2003.......................................................... 914,901
Thereafter.................................................... 9,755,092
-----------
$14,282,003
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
In January 1998, the Partnership sold its property in Madison, Alabama, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and the estimated residual value) and unearned income relating to the building
were removed from the accounts (see Note 3).
In June 1998, four of the Partnership's leases with Long John Silver's, Inc.
were rejected in connection with the tenant filing for bankruptcy. As a result,
the Partnership reclassified these assets from net investment in direct
financing leases to land and buildings on operating leases. In accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," in
June 1998, the Partnership recorded the reclassified assets at the lower of
original cost, present fair value, or present carrying amount, which resulted
in a loss on termination of direct financing lease of $21,873 for financial
reporting purposes.
5. Investment in Joint Ventures:
The Partnership owns a 50 percent, a 72.2% and a 50 percent interest in the
profits and losses of Attalla Joint Venture, Salem Joint Venture and Wood-Ridge
Real Estate Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
In January 1997, Wood-Ridge Real Estate Joint Venture reinvested $502,598 of
the remaining net sales proceeds, from the 1996 sales of two properties, in a
Taco Bell property in Anniston, Alabama. During the year ended December 31,
1997, the Partnership and the other joint venture partner had each received
approximately $52,000, representing a return of capital, for the remaining
uninvested net sales proceeds. As of December 31, 1998, the Partnership owned a
50 percent interest in the profits and losses of this joint venture.
In September 1997, the Partnership entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. In connection therewith, the
Partnership contributed amounts to CNL Kingston Joint Venture to fund
construction costs relating to the property owned by the joint venture. As of
December 31, 1998, the Partnership owned a 39.94% interest in the profits and
losses of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with an affiliate.
F-373
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property, at a total cost of $1,052,552.
During 1998, the Partnership contributed amounts to purchase land and pay for
construction costs relating to the joint venture and has agreed to contribute
additional amounts in 1999 for additional construction costs. As of December
31, 1998, the Partnership owned a 50 percent interest in the profits and losses
of this joint venture. When funding is complete, the Partnership expects to
have an approximate 50 percent interest in the profits and losses of the joint
venture. The Partnership accounts for its investment in this joint venture
under the equity method since the Partnership shares control with an affiliate.
As of December 31, 1998, Attalla Joint Venture, Salem Joint Venture, CNL
Kingston Joint Venture, and Melbourne Joint Venture each owned and leased one
property, and Wood-Ridge Real Estate Joint Venture owned and leased six
properties, to operators of fast-food or family-style restaurants. The
following presents the joint ventures' condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,913,765 $6,008,240
Net investment in direct financing lease......... 360,790 364,479
Cash............................................. 87,922 13,842
Receivables...................................... 47,545 2,571
Accrued rental income............................ 194,526 150,621
Other assets..................................... 1,055 1,257
Liabilities...................................... 171,590 231,061
Partners' capital................................ 7,434,013 6,309,949
Revenues......................................... 750,147 712,004
Net income....................................... 615,127 588,835
</TABLE>
The Partnership recognized income totalling $317,654, $309,879, and $459,137
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
In December 1997, the Partnership received preliminary sales proceeds of
$318,592 for the property in Riviera Beach, Florida which was taken through a
right of way taking. In October 1998, the Partnership reinvested these proceeds
in a property in Fayetteville, North Carolina (see Note 3).
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sales of properties not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
F-374
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
their Limited Partners' 10% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from a sale of a property not in
liquidation of the Partnership is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
in general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts, and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a sale of properties, in liquidation of
the Partnership will be used in the following order: i) first to pay and
discharge all of the Partnership's liabilities to creditors, ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, iii) third, to pay
all of the Partnership's liabilities, if any, to the general and limited
partners, iv) fourth, after allocations of net income, gains and/or losses, to
the partners with positive capital account balances, in proportion to such
balances, up to amounts sufficient to reduce such positive balances to zero,
and v) thereafter, any funds remaining shall then be distributed 95 percent to
the limited partners and five percent to the general partners.
During each of the years ended December 31, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,712,520 and during the
year ended December 31, 1996, the Partnership declared distributions to the
limited partners of $3,712,522. No distributions have been made to the general
partners to date.
F-375
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $3,199,087 $3,665,940 $3,916,329
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes.... (77,202) (130,766) (130,766)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 82,359 83,787 74,798
Gain on sale of land and building for
tax reporting purposes in excess of
gain for financial reporting
purposes............................ 94,442 -- --
Gain on land and building from right
of way taking deferred for tax
reporting purposes.................. (41,408) -- --
Allowance for loss on building....... 37,155 -- --
Equity in earnings of joint ventures
for financial reporting purposes
less than (in excess of) equity in
earnings of joint ventures for tax
reporting purposes.................. 35,645 3,109 (174,253)
Capitalization of transaction costs
for tax reporting purposes.......... 25,231 -- --
Allowance for doubtful accounts...... 1,105 -- --
Accrued rental income................ (148,845) (471,287) (491,221)
Loss on lease termination of direct
financing lease..................... 21,873 -- --
Rents paid in advance................ 53,442 (32,864) 17,564
Other................................ 1,034 (21,988) 23,878
---------- ---------- ----------
Net income for federal income tax
purposes............................ $3,283,918 $3,095,931 $3,236,329
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of directors of CNL Fund
Advisors, Inc. During the years ended December 31, 1998, 1997, and 1996, CNL
Fund Advisors, Inc. (hereinafter referred to as the "Affiliate") performed
certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the
F-376
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Affiliate. All or any portion of the management fee not taken as to any fiscal
year shall be deferred without interest and may be taken in such other fiscal
year as the Affiliates shall determine. The Partnership incurred management
fees of $37,430, $38,626, and $38,785 for the years ended December 31, 1998,
1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties, based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate Limited Partners' 10%
Return plus their invested capital contributions. No deferred, subordinated
real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $110,618, $89,910, and $96,082 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1998, the Partnership acquired a property for a purchase price of
approximately $1,537,000 from CNL First Corp., an affiliate of the general
partners. CNL First Corp. had purchased and temporarily held title to this
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by CNL First Corp. to acquire and carry the property, including
closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,432
and $7,853, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from joint ventures)
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's, Inc. ..................... $634,121 $850,159 $853,992
Checkers Drive-In Restaurants, Inc. .......... 628,816 724,612 732,941
Foodmaker, Inc. .............................. 574,481 562,725 556,100
Golden Corral Corporation..................... 534,624 520,911 476,350
Flagstar Enterprises, Inc. ................... 427,801 483,606 498,655
Denny's, Inc. ................................ N/A 379,767 380,939
</TABLE>
F-377
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $634,121 $850,159 $853,992
Checkers Drive-in Restaurants................. 628,816 724,612 732,941
Denny's....................................... 625,101 618,154 615,021
Jack in the Box............................... 574,481 562,725 556,100
Golden Corral Family Steakhouse Restaurants... 534,624 520,911 476,350
Hardee's...................................... 427,801 483,606 498,655
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or group of affiliated tenants and the chains did not represent more
than ten percent of the Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any lessee or restaurant chain contributing more than ten
percent of the Partnership's revenues could significantly impact the results of
operations of the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
In June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected the
leases relating to four of its nine leases and ceased making rental payments to
the Partnership on the rejected leases. The Partnership will not recognize any
rental and earned income from these Properties until new tenants for these
Properties are located, or until the Properties are sold and the proceeds from
such sales are reinvested in additional Properties. While Long John Silver's,
Inc. has not rejected or affirmed the remaining five leases, there can be no
assurance that some or all of these leases will not be rejected in the future.
The lost revenues resulting from the four leases that were rejected, as
described above, and the possible rejection of the remaining five leases could
have an adverse effect on the results of operations of the Partnership if the
Partnership is not able to re-lease these properties in a timely manner. The
Partnership entered into new leases, each with a new tenant, for two of the
four rejected leases.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,313,041 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $42,435,559 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is
F-378
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
expected to be held in the third quarter of 1999, limited partners holding in
excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. The general
partners intend to recommend that the limited partners of the Partnership
approve the Merger. In connection with their recommendation, the general
partners will solicit the consent of the limited partners at the special
meeting. If the limited partners reject the Merger, the Partnership will bear
the portion of the transaction costs based upon the percentage of "For" votes
and the general partners will bear the portion of such transaction costs based
upon the percentage of "Against" votes and abstentions.
12. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,156,521 shares valued at $20.00 per
APF share.
F-379
<PAGE>
CNL INCOME FUND XV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-381
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-382
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-383
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-384
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-385
Report of Independent Certified Public Accountants....................... F-387
Balance Sheets as of December 31, 1998 and 1997.......................... F-388
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-389
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-390
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-391
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-392
</TABLE>
F-380
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,230,329 and
$1,080,652, respectively and allowance for loss on
land and building of $413,353 and $280,907,
respectively......................................... $22,891,786 $23,173,909
Net investment in direct financing leases............. 7,548,173 7,589,694
Investment in joint ventures.......................... 2,726,054 2,743,450
Cash and cash equivalents............................. 1,083,203 1,214,444
Receivables, less allowance for doubtful accounts of
$849 in 1999 and 1998................................ 43,835 62,465
Prepaid expenses...................................... 19,252 9,627
Organization costs, less accumulated amortization of
$10,000 and $9,549, respectively..................... -- 451
Accrued rental income................................. 1,740,806 1,565,014
----------- -----------
$36,053,109 $36,359,054
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 81,072 $ 592
Accrued and escrowed real estate taxes payable........ 29,799 16,019
Distributions payable................................. 800,000 800,000
Due to related party.................................. 36,701 23,337
Rents paid in advance and deposits.................... 37,764 53,206
----------- -----------
Total liabilities................................... 985,336 893,154
Commitments and Contingencies (Note 3)................
Partners' capital..................................... 35,067,773 35,465,900
----------- -----------
$36,053,109 $36,359,054
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-381
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 594,419 $ 618,834 $1,188,465 $1,250,545
Adjustments to accrued rental
income........................ -- (265,192) -- (265,192)
Earned income from direct
financing leases.............. 209,566 243,835 419,728 507,064
Interest and other income...... 9,010 19,451 20,114 39,637
--------- --------- ---------- ----------
812,995 616,928 1,628,307 1,532,054
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 34,365 35,368 74,682 66,963
Professional services.......... 13,617 8,708 22,221 13,509
Management fees to related
party......................... 8,093 8,525 16,144 17,295
Real estate taxes.............. 8,030 2,646 16,720 2,646
State and other taxes.......... 9,114 7,620 30,305 27,763
Depreciation and amortization.. 75,048 62,100 150,547 124,200
Transaction costs.............. 74,477 -- 107,297 --
--------- --------- ---------- ----------
222,744 124,967 417,916 252,376
--------- --------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures and Provision
for Loss on Building............ 590,251 491,961 1,210,391 1,279,678
Equity in Earnings of Joint
Ventures........................ 62,027 60,549 123,928 120,294
Provision for Loss on Building... (132,446) -- (132,446) --
--------- --------- ---------- ----------
Net Income....................... $ 519,832 $ 552,510 $1,201,873 $1,399,972
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 5,996 $ 5,525 $ 12,817 $ 14,000
Limited partners............... 513,836 546,985 1,189,056 1,385,972
--------- --------- ---------- ----------
$ 519,832 $ 552,510 $1,201,873 $1,399,972
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.13 $ 0.14 $ 0.30 $ 0.35
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-382
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 145,629 $ 117,411
Net income..................................... 12,817 28,218
----------- -----------
158,446 145,629
----------- -----------
Limited partners:
Beginning balance.............................. 35,320,271 36,105,992
Net income..................................... 1,189,056 2,614,279
Distributions ($0.40 and $0.85 per limited
partner unit, respectively)................... (1,600,000) (3,400,000)
----------- -----------
34,909,327 35,320,271
----------- -----------
Total partners' capital.......................... $35,067,773 $35,465,900
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-383
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities......... $ 1,468,759 $ 1,710,905
----------- -----------
Cash Flows from Investing Activities:
Investment in joint venture....................... -- (207,986)
----------- -----------
Net Cash used in investing activities........... -- (207,986)
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (1,600,000) (1,800,000)
----------- -----------
Net cash used in financing activities........... (1,600,000) (1,800,000)
----------- -----------
Net Decrease in Cash and Cash Equivalents........... (131,241) (297,081)
Cash and Cash Equivalents at Beginning of Period.... 1,214,444 1,614,708
----------- -----------
Cash and Cash Equivalents at End of Period.......... $ 1,083,203 $ 1,317,627
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
Period........................................... $ 800,000 $ 800,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-384
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XV, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Building on Operating Leases
At June 30, 1999, the Partnership recorded a provision for loss on building
in the amount of $132,446 for financial reporting purposes relating the Long
John Silver's property in Gastonia, North Carolina. The tenant of this property
filed for bankruptcy and ceased payment of rents under the terms of its lease
agreement. The allowance represents the difference between the carrying value
of the property at June 30, 1999 and the estimated net sales proceeds from the
sale of the property based on a purchase and sales contract with an unrelated
third party (see Note 4).
3. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,866,951 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $36,726,950 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of
F-385
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
the transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
In June 1999, the Partnership entered into an agreement with an unrelated
third party to sell the Long John Silver's property in Gastonia, North
Carolina. At June 30, 1999, the Partnership established a provision for loss on
building related to the anticipated sale of this property (see Note 2). As of
August 6, 1999, the sale had not occurred.
F-386
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XV, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XV, Ltd. (a
Florida Limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 27, 1999, except for
the second paragraph of
Note 10, for which the date
is March 11, 1999 and Note
11 for which the date is
June 3, 1999
F-387
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $23,173,909 $22,145,138
Net investment in direct financing leases.............. 7,589,694 9,264,307
Investment in joint ventures........................... 2,743,450 2,561,816
Cash and cash equivalents.............................. 1,214,444 1,614,708
Receivables, less allowance for doubtful accounts of
$849 in 1998.......................................... 62,465 26,888
Prepaid expenses....................................... 9,627 7,633
Organization costs, less accumulated amortization of
$9,549 and $7,548..................................... 451 2,452
Accrued rental income.................................. 1,565,014 1,422,781
----------- -----------
$36,359,054 $37,045,723
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 592 $ 6,991
Accrued and escrowed real estate taxes payable......... 16,019 6,158
Distributions payable.................................. 800,000 800,000
Due to related parties................................. 23,337 4,311
Rents paid in advance.................................. 53,206 4,860
----------- -----------
Total liabilities.................................... 893,154 822,320
Partners' capital...................................... 35,465,900 36,223,403
----------- -----------
$36,359,054 $37,045,723
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-388
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,443,550 $2,527,261 $2,527,261
Adjustments to accrued rental income....... (250,631) -- --
Earned income from direct financing
leases.................................... 937,286 1,059,530 1,069,205
Contingent rental income................... 41,463 25,791 23,318
Interest and other income.................. 62,819 56,183 55,964
---------- ---------- ----------
3,234,487 3,668,765 3,675,748
---------- ---------- ----------
Expenses:
General operating and administrative....... 137,794 135,714 149,388
Professional services...................... 26,208 24,526 19,881
Management fees to related parties......... 33,990 35,321 35,126
Real estate taxes.......................... 16,797 -- --
State and other taxes...................... 27,763 29,200 30,924
Depreciation and amortization.............. 281,888 248,348 248,232
Transaction costs.......................... 23,196 -- --
---------- ---------- ----------
547,636 473,109 483,551
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Provision for Loss on Land and
Buildings................................... 2,686,851 3,195,656 3,192,197
Equity in Earnings of Joint Ventures......... 236,553 239,249 392,862
Provision for Loss on Land and Buildings..... (280,907) -- --
---------- ---------- ----------
Net Income................................... $2,642,497 $3,434,905 $3,585,059
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 28,218 $ 34,349 $ 35,851
Limited partners........................... 2,614,279 3,400,556 3,549,208
---------- ---------- ----------
$2,642,497 $3,434,905 $3,585,059
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.65 $ 0.85 $ 0.89
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-389
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 46,211 $40,000,000 $ (4,085,947) $ 4,512,175 $(4,790,000) $35,683,439
Distributions to
limited partners
($0.82 per
limited partner
unit)................. -- -- -- (3,280,000) -- -- (3,280,000)
Net income............. -- 35,851 -- -- 3,549,208 -- 3,585,059
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 82,062 40,000,000 (7,365,947) 8,061,383 (4,790,000) 35,988,498
Distributions to
limited partners
($0.80 per
limited partner
unit)................. -- -- -- (3,200,000) -- -- (3,200,000)
Net income............. -- 34,349 -- -- 3,400,556 -- 3,434,905
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 116,411 40,000,000 (10,565,947) 11,461,939 (4,790,000) 36,223,403
Distributions to
limited partners
($0.85 per
limited partner
unit)................. -- -- -- (3,400,000) -- -- (3,400,000)
Net income............. -- 28,218 -- -- 2,614,279 -- 2,642,497
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $144,629 $40,000,000 $(13,965,947) $14,076,218 $(4,790,000) $35,465,900
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-390
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,143,119 $ 3,228,741 $ 3,378,973
Distributions from joint ventures...... 271,075 249,318 259,407
Cash paid for expenses................. (252,042) (218,106) (246,748)
Interest received...................... 54,576 46,642 43,050
----------- ----------- -----------
Net cash provided by operating
activities............................ 3,216,728 3,306,595 3,434,682
----------- ----------- -----------
Cash Flows from Investing Activities:
Investment in joint ventures........... (216,992) -- (129,939)
Return of capital from joint venture... -- 51,950 --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.................. (216,992) 51,950 (129,939)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,400,000) (3,280,000) (3,200,000)
----------- ----------- -----------
Net cash used in financing activities.. (3,400,000) (3,280,000) (3,200,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (400,264) 78,545 104,743
Cash and Cash Equivalents at Beginning
of Year................................ 1,614,708 1,536,163 1,431,420
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,214,444 $ 1,614,708 $ 1,536,163
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,642,497 $ 3,434,905 $ 3,585,059
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 279,051 245,563 245,563
Amortization........................... 2,837 2,785 2,669
Equity in earnings of joint ventures,
net of distributions.................. 34,522 10,069 (133,455)
Provision for loss on land and
buildings............................. 280,907 -- --
Decrease (increase) in receivables..... (33,427) 3,288 58,013
Decrease in net investment in direct
financing leases...................... 85,884 87,508 77,834
Increase in prepaid expenses........... (1,994) (584) (4,234)
Increase in accrued rental income...... (142,233) (431,079) (431,654)
Increase in accounts payable and
accrued expenses...................... 3,462 1,515 1,972
Increase (decrease) in due to related
parties............................... 16,876 2,956 (6,880)
Increase (decrease) in rents paid in
advance............................... 48,346 (50,331) 39,795
----------- ----------- -----------
Total adjustments..................... 574,231 (128,310) (150,377)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,216,728 $ 3,306,595 $ 3,434,682
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31............................ $ 800,000 $ 800,000 $ 880,000
=========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-391
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that change
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-392
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its interests in
Wood-Ridge Real Estate Joint Venture and properties in Clinton, North Carolina
and Fort Myers, Florida, held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases and some of the leases are classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are operating
leases. Substantially all leases are for 15 to 20 years and provide for
minimum and contingent rentals. In addition, generally the tenant pays all
property taxes and
F-393
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to five successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land.................... $15,579,852 $15,579,852
Buildings............... 8,955,616 7,366,887
----------- -----------
24,535,468 22,946,739
Less accumulated
depreciation........... (1,080,652) (801,601)
----------- -----------
23,454,816 22,145,138
Less allowance for loss
on land and buildings.. (280,907) --
----------- -----------
$23,173,909 $22,145,138
=========== ===========
</TABLE>
During the year ended December 31, 1998, the Partnership established an
allowance for loss on land and buildings of $280,907 for financial reporting
purposes relating to two of the four Long John Silver's properties whose leases
were rejected by the tenant as a result of the tenant filing for bankruptcy.
The loss represents the difference between the carrying value of the properties
at December 31, 1998 and the current estimated net realizable value for these
properties.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997 and 1996, the Partnership recognized $142,233
(net of $250,631 in write-offs), $431,079, and $431,654, respectively, of such
rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,079,263
2000.......................................................... 2,205,272
2001.......................................................... 2,208,745
2002.......................................................... 2,239,958
2003.......................................................... 2,255,872
Thereafter.................................................... 24,476,132
-----------
$35,465,242
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-394
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Minimum lease payments receivable............ $ 15,275,632 $ 19,905,444
Estimated residual values.................... 2,460,656 2,873,859
Less unearned income......................... (10,146,594) (13,514,996)
------------ ------------
Net investment in direct financing leases.... $ 7,589,694 $ 9,264,307
============ ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 922,497
2000.......................................................... 925,241
2001.......................................................... 930,728
2002.......................................................... 953,085
2003.......................................................... 958,440
Thereafter.................................................... 10,585,641
-----------
$15,275,632
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
During the year ended December 31, 1998, four of the eight leases with Long
John Silver's, Inc. were rejected in connection with the tenant filing for
bankruptcy. As a result, the Partnership reclassified these assets from net
investment in direct financing leases to land and buildings on operating
leases. In accordance with the Statement of Financial Accounting Standards #13,
"Accounting for Leases," the Partnership recorded the reclassified assets at
the lower of original cost, present fair value, or present carrying amount. No
losses on the termination of direct financing leases were recorded for
financial reporting purposes.
5. Investment in Joint Ventures:
The Partnership has a 50 percent interest in the profits and losses of Wood-
Ridge Real Estate Joint Venture. The remaining interest in this joint venture
is held by an affiliate of the Partnership which has the same general partners.
The Partnership also has a 16 percent interest in a Property in Clinton, North
Carolina, with affiliates of the Partnership that has the same general
partners, as tenants-in-common. The Partnership accounts for its investment in
this property using the equity method since the Partnership shares control with
affiliates, and amounts relating to its investment are included in investment
in joint ventures.
In January 1997, Wood-Ridge Real Estate Joint Venture reinvested $502,598,
of the net sales proceeds from the sale of two properties during 1996 in one
property. As of December 31, 1998, the Partnership had received approximately
$52,000, representing its pro-rata share of the uninvested net sales proceeds.
As of December 31, 1998, the Partnership owned a 50 percent interest in the
profits and losses of the joint venture.
F-395
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In June 1998, the Partnership acquired a property in Fort Myers, Florida,
with an affiliate of the general partners as tenants-in-common. In connection
therewith, the Partnership contributed an amount to acquire a 15 percent
interest in such property. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with
affiliates, and amounts relating to its investment are included in investment
in joint ventures.
Wood-Ridge Real Estate Joint Venture owns and leases six properties to
operators of national fast-food or family-style restaurants. The Partnership
and affiliates, as tenants-in-common in two separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food or family-style restaurants.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,063,237 $5,563,722
Net investment in direct financing lease......... 826,780 --
Cash............................................. 87,245 10,890
Receivables...................................... 1,677 5,923
Accrued rental income............................ 96,768 74,001
Other assets..................................... 857 1,078
Liabilities...................................... 69,285 18,195
Partners' capital................................ 7,007,279 5,637,419
Revenues......................................... 705,002 650,354
Net income....................................... 579,480 522,611
</TABLE>
The Partnership recognized income totalling $236,553, $239,249 and $392,862
for the years ended December 31, 1998, 1997 and 1996, respectively, from these
entities.
6. Allocations and Distributions:
Generally, all net income and losses of the Partnership, excluding gains and
losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners shall be subordinated to receipt by the
limited partners of an aggregate, eight percent, cumulative, noncompounded
annual return on their invested capital contributions (the "Limited Partners'
8% Return").
Generally, net sales proceeds from the sales of properties not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their Limited Partners' 8% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from a sale of a property not in
liquidation of the Partnership is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
in general, allocated first, on a pro rata basis, to
F-396
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
partners with positive balances in their capital accounts, and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,400,000, $3,200,000 and
$3,280,000, respectively. No distributions have been made to the general
partners to date.
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $2,642,497 $3,434,905 $3,585,059
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes.... (126,518) (160,007) (160,007)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 85,884 87,508 77,834
Allowance for loss on land and
buildings........................... 280,907 -- --
Equity in earnings of joint ventures
for tax reporting purposes in excess
of (less than) equity in earnings of
joint ventures for financial
reporting purposes.................. 33,872 23,823 (158,836)
Accrued rental income................ (142,233) (431,079) (431,654)
Rents paid in advance................ 48,346 (50,331) 39,795
Capitalization of transaction costs
for tax reporting purposes.......... 23,196 -- --
Other................................ 1,686 (670) 2,127
---------- ---------- ----------
Net income for federal income tax
purposes............................ $2,847,637 $2,904,149 $2,954,318
========== ========== ==========
</TABLE>
F-397
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Affiliate. All or any portion of the
management fee not taken as to any fiscal year shall be deferred without
interest and may be taken in such other fiscal year as the Affiliate shall
determine. The Partnership incurred management fees of $33,990, $35,321 and
$35,126 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 8% Preferred Return, plus
their invested capital contributions. No deferred, subordinated real estate
disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997 and 1996, the Affiliate of
the general partners provided accounting and administrative services to the
Partnership on a day-to-day basis. The Partnership incurred $92,573, $78,051
and $87,265 for the years ended December 31, 1998, 1997 and 1996, respectively,
for such services.
The due to related parties at December 31, 1998 and 1997, totalled $23,337
and $4,311, respectively.
F-398
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees or affiliated groups of lessees, each representing more than
ten percent of the Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from joint ventures) for
each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In Restaurants, Inc. .......... $719,308 $716,905 $723,558
Golden Corral Corporation..................... 595,343 582,600 531,775
Flagstar Enterprises, Inc. (and Quincy's
Restaurants, Inc. for the years ended
December 31, 1997
and 1996).................................... 541,527 635,413 638,042
Long John Silver's, Inc....................... 510,187 710,325 714,804
Foodmaker, Inc................................ 417,426 417,426 417,426
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In Restaurants................. $719,308 $716,905 $723,558
Golden Corral Family Steakhouse Restaurants... 595,343 582,600 531,775
Long John Silver's............................ 573,104 773,265 777,743
Hardee's...................................... 541,527 543,889 546,037
Jack in the Box............................... 417,426 417,426 417,426
</TABLE>
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
In June 1998, the tenant of eight of the Long John Silver's Properties filed
for bankruptcy and rejected the leases relating to four Properties. The rental
income relating to these Properties will terminate until new tenants or buyers
for the Properties are located. While Long John Silver's, Inc. has not rejected
or affirmed the remaining four leases, there can be no assurance that some of
all of the leases will not be rejected in the future. The lost revenues
resulting from the four leases that were rejected, as described above, and the
possible rejection of the remaining four leases could have an adverse effect on
the results of operations of the Partnership if the Partnership is unable to
re-lease these Properties in a timely manner.
F-399
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Subsequent Events:
In January 1999, a Boston Market tenant rejected its lease and ceased making
rental payments related to this lease.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,733,901 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $36,726,950 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
11. APF Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 1,866,951 shares valued at $20.00 per
APF share.
F-400
<PAGE>
CNL INCOME FUND XVI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-402
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-403
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998....................... F-404
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-405
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-406
Report of Independent Certified Public Accountants....................... F-408
Balance Sheets as of December 31, 1998 and 1997.......................... F-409
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-410
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-411
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-412
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-413
</TABLE>
F-401
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building............................................. $30,635,221 $ 30,215,549
Net investment in direct financing leases............. 4,560,540 5,361,848
Investment in joint ventures.......................... 1,657,442 1,504,465
Cash and cash equivalents............................. 1,233,857 1,603,589
Receivables, less allowance for doubtful accounts of
$112,153 and $89,822, respectively................... 88,638 63,214
Prepaid expenses...................................... 17,282 13,745
Lease costs, less accumulated amortization of $333 in
1999................................................. 11,476 --
Organization costs, less accumulated amortization of
$10,000 and $8,550, respectively..................... -- 1,450
Accrued rental income................................. 1,593,617 1,424,781
----------- ------------
$39,798,073 $ 40,188,641
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 85,275 $ 1,816
Accrued construction costs payable.................... 15,000 --
Accrued and escrowed real estate taxes payable........ 17,515 7,163
Distributions payable................................. 900,000 900,000
Due to related party.................................. 30,120 26,476
Rents paid in advance and deposits.................... 46,771 61,262
----------- ------------
Total liabilities................................. 1,094,681 996,717
Commitments and Contingencies (Note 4)
Partners' capital..................................... 38,703,392 39,191,924
----------- ------------
$39,798,073 $ 40,188,641
=========== ============
</TABLE>
See accompanying notes to condensed financial statements.
F-402
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases...................... $ 806,415 $ 883,229 $1,604,784 $1,771,324
Adjustments to accrued rental
income...................... -- (119,072) -- (119,072)
Earned income from direct
financing leases............ 134,016 160,329 267,561 335,376
Interest and other income.... 11,239 19,743 31,192 34,504
---------- ---------- ---------- ----------
951,670 944,229 1,903,537 2,022,132
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative.............. 30,838 41,002 78,457 74,023
Professional services........ 17,733 8,511 27,060 17,951
Management fees to related
party....................... 9,112 9,853 18,113 19,816
Real estate taxes............ 12,867 839 30,020 839
State and other taxes........ 1,191 89 24,356 19,391
Depreciation and
amortization................ 148,233 128,081 293,087 268,997
Transaction costs............ 83,052 -- 116,210 --
---------- ---------- ---------- ----------
303,026 188,375 587,303 401,017
---------- ---------- ---------- ----------
Income Before Equity in
Earnings of Joint Ventures and
Provision for Loss on
Building...................... 648,644 755,854 1,316,234 1,621,115
Equity in Earnings of Joint
Ventures...................... 41,906 33,522 79,712 64,956
Provision for Loss on
Building...................... (84,478) -- (84,478) --
---------- ---------- ---------- ----------
Net Income..................... $ 606,072 $ 789,376 $1,311,468 $1,686,071
========== ========== ========== ==========
Allocation of Net Income:
General partners............. $ 6,628 $ 7,894 $ 13,682 $ 16,861
Limited partners............. 599,444 781,482 1,297,786 1,669,210
---------- ---------- ---------- ----------
$ 606,072 $ 789,376 $1,311,468 $1,686,071
========== ========== ========== ==========
Net Income Per Limited Partner
Unit.......................... $ 0.13 $ 0.17 $ 0.29 $ 0.37
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding................... 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-403
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
---------------- ------------
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 131,300 $ 99,615
Net income.................................... 13,682 31,685
----------- -----------
144,982 131,300
----------- -----------
Limited partners:
Beginning balance............................. 39,060,624 39,805,311
Net income.................................... 1,297,786 2,945,313
Distributions ($0.40 and $0.82 per limited
partner unit, respectively).................... (1,800,000) (3,690,000)
----------- -----------
38,558,410 39,060,624
----------- -----------
Total partners' capital......................... $38,703,392 $39,191,924
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-404
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........... $ 1,600,589 $ 1,922,221
----------- -----------
Cash Flows from Investing Activities:
Reimbursement of construction costs from
developer......................................... -- 161,204
Investment in direct financing leases.............. -- (31,504)
Investment in joint ventures....................... (158,512) (607,896)
Decrease in restricted cash........................ -- 610,384
Payment of lease costs............................. (11,809) --
----------- -----------
Net cash provided by (used in) investing
activities...................................... (170,321) 132,188
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,800,000) (1,890,000)
----------- -----------
Net cash used in financing activities............ (1,800,000) (1,890,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (369,732) 164,409
Cash and Cash Equivalents at Beginning of Period..... 1,603,589 1,673,869
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,233,857 $ 1,838,278
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Land and building under operating lease exchanged
for land and building under operating lease........ $ -- $ 779,181
=========== ===========
Land and building under direct financing lease
exchanged for land and building under direct
financing lease.................................... $ -- $ 761,334
=========== ===========
Construction costs incurred and unpaid at end of
period............................................. $ 15,000 $ --
=========== ===========
Distributions declared and unpaid at end of period.. $ 900,000 $ 900,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-405
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XVI, Ltd. (the "Partnership") for the year ended December 31, 1998.
Effective January 1, 1999, the Partnership adopted Statement of Position 98-
5 "Reporting on the Costs of Start-Up Activities." The Statement requires that
an entity expense the costs of start-up activities and organization costs as
they are incurred. Adoption of this statement did not have a material effect on
the Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land.............................................. $15,378,217 $15,378,217
Buildings......................................... 17,826,235 17,045,781
----------- -----------
33,204,452 32,423,998
Less accumulated depreciation..................... (2,233,496) (1,942,192)
----------- -----------
30,970,956 30,481,806
Construction in progress.......................... 15,000 --
----------- -----------
30,985,956 30,481,806
Less allowance for loss on building............... (350,735) (266,257)
----------- -----------
$30,635,221 $30,215,549
=========== ===========
</TABLE>
During the six months ended June 30, 1999, the Partnership recorded a
provision for loss on building of $84,478 relating to the Boston Market
property in Lawrence, Kansas. The tenant of this property filed for bankruptcy
and ceased payment of rents under the terms of its lease agreement. The
allowance represents the difference between the carrying value of the property
at June 30, 1999 and the estimated net realizable value for the property.
3. Investment in Direct Financing Leases:
During the six months ended June 30, 1999, the tenant of the Shoney's
property in Las Vegas, Nevada terminated its lease due to financial
difficulties. As a result, the Partnership reclassified the asset from net
F-406
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
investment in direct financing leases to land and buildings on operating
leases. In accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," the Partnership recorded the reclassified asset at the
lower of original cost, present fair value, or present carrying amount. No loss
on termination of direct financing leases was recorded for financial reporting
purposes.
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,160,474 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $42,519,005 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
In February 1999, the Partnership entered into a new lease for the property
in Las Vegas, Nevada, with a new tenant to operate the property as a Big Boy
restaurant. In connection with the agreement, the Partnership has agreed to pay
up to $150,000 in renovation costs, $15,000 of which had been incurred and
accrued as construction in process as of June 30, 1999. The renovations are
expected to be completed in August 1999.
F-407
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XVI, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partner's capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XVI, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 26, 1999, except for Note 11
for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-408
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.............................................. $30,215,549 $30,658,994
Net investment in direct financing leases.............. 5,361,848 5,968,812
Investment in joint ventures........................... 1,504,465 771,684
Cash and cash equivalents.............................. 1,603,589 1,673,869
Restricted cash........................................ -- 627,899
Receivables, less allowance for doubtful accounts of
$89,822 and $879...................................... 63,214 31,946
Prepaid expenses....................................... 13,745 9,293
Organization costs, less accumulated amortization of
$8,550 and $6,550..................................... 1,450 3,450
Accrued rental income.................................. 1,424,781 1,192,373
----------- -----------
$40,188,641 $40,938,320
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Acquisition and construction costs payable............. $ -- $ 53,278
Accounts payable....................................... 1,816 2,707
Accrued and escrowed real estate taxes payable......... 7,163 4,353
Distributions payable.................................. 900,000 900,000
Due to related parties................................. 26,476 3,351
Rents paid in advance and deposits..................... 61,262 69,705
----------- -----------
Total liabilities...................................... 996,717 1,033,394
Partners' capital...................................... 39,191,924 39,904,926
----------- -----------
$40,188,641 $40,938,320
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-409
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $3,446,902 $3,562,920 $3,571,244
Adjustments to accrued rental income...... (184,368) -- --
Earned income from direct financing
leases................................... 601,587 703,149 726,314
Contingent rental income.................. 35,860 35,604 37,600
Interest income........................... 60,199 73,634 75,160
Other income.............................. 1,574 7,180 8,232
---------- ---------- ----------
3,961,754 4,382,487 4,418,550
---------- ---------- ----------
Expenses:
General operating and administrative...... 158,519 186,934 183,734
Professional services..................... 40,471 25,352 26,569
Management fees to related parties........ 38,570 40,087 39,206
Real estate taxes......................... 9,060 -- --
State and other taxes..................... 19,398 20,559 12,369
Loss on termination of direct financing
lease.................................... 4,471 -- --
Depreciation and amortization............. 555,360 563,883 552,447
Transaction costs......................... 24,652 -- --
---------- ---------- ----------
850,501 836,815 814,325
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and
Buildings, and Provision for Loss on
Building................................... 3,111,253 3,545,672 3,604,225
Equity in Earnings of Joint Ventures........ 132,002 73,507 19,668
Gain on Sale of Land and Buildings.......... -- 41,148 124,305
Provision for Loss on Building.............. (266,257) -- --
---------- ---------- ----------
Net Income.................................. $2,976,998 $3,660,327 $3,748,198
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 31,685 $ 36,192 $ 36,239
Limited partners.......................... 2,945,313 3,624,135 3,711,959
---------- ---------- ----------
$2,976,998 $3,660,327 $3,748,198
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.65 $ 0.81 $ 0.82
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-410
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $ 1,000 $ 26,184 $45,000,000 $ (2,589,266) $ 2,592,234 $(5,390,000) $39,640,152
Distributions to
limited
partners ($0.79 per
limited partner
unit)................. -- -- -- (3,543,751) -- -- (3,543,751)
Net income............. -- 36,239 -- -- 3,711,959 -- 3,748,198
------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 62,423 45,000,000 (6,133,017) 6,304,193 (5,390,000) 39,844,599
Distributions to
limited
partners ($0.80 per
limited partner
unit)................. -- -- -- (3,600,000) -- -- (3,600,000)
Net income............. -- 36,192 -- -- 3,624,135 -- 3,660,327
------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 98,615 45,000,000 (9,733,017) 9,928,328 (5,390,000) 39,904,926
Distributions to
limited
partners ($0.82 per
limited partner
unit)................. -- -- -- (3,690,000) -- -- (3,690,000)
Net income............. -- 31,685 -- -- 2,945,313 -- 2,976,998
------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $ 1,000 $130,300 $45,000,000 $(13,423,017) $12,873,641 $(5,390,000) $39,191,924
======= ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-411
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,675,430 $ 3,881,005 $ 4,007,432
Distributions from joint venture....... 143,279 76,212 20,279
Cash paid for expenses................. (273,929) (231,712) (349,145)
Interest received...................... 78,914 54,919 75,160
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,623,694 3,780,424 3,753,726
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. -- 610,384 775,000
Reimbursement of construction costs
from developer........................ 161,648 -- --
Additions to land and buildings on
operating leases...................... (3,545) (23,501) (2,355,627)
Investment in direct financing leases.. (28,403) (29,257) (405,937)
Investment in joint ventures........... (744,058) -- (775,000)
Decrease (increase) in restricted
cash.................................. 610,384 (610,384) --
----------- ----------- -----------
Net cash used in investing
activities........................... (3,974) (52,758) (2,761,564)
----------- ----------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership........................... -- -- (2,494)
Distributions to limited partners...... (3,690,000) (3,600,000) (3,431,251)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,690,000) (3,600,000) (3,433,745)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (70,280) 127,666 (2,441,583)
Cash and Cash Equivalents at Beginning
of Year................................ 1,673,869 1,546,203 3,987,786
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,603,589 $ 1,673,869 $ 1,546,203
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,976,998 $ 3,660,327 $ 3,748,198
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss on termination of direct financing
lease................................. 4,471 -- --
Depreciation........................... 553,360 561,883 550,447
Amortization........................... 2,000 2,000 2,000
Equity in earnings of joint ventures,
net of distributions.................. 11,277 2,705 611
Gain on sale of land and buildings..... -- (41,148) (124,305)
Provision for loss on building......... 266,257 -- --
Decrease (increase) in receivables..... (13,753) 26,633 58,396
Decrease in net investment in direct
financing leases...................... 43,343 37,684 29,269
Increase in prepaid expenses........... (4,452) (119) (8,514)
Increase in accrued rental income...... (232,408) (444,650) (468,201)
Increase in accounts payable and
accrued expenses...................... 1,919 1,455 517
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition costs paid on behalf of
the Partnership....................... 23,125 1,059 (76,259)
Increase (decrease) in rents paid in
advance and deposits.................. (8,443) (27,405) 41,567
----------- ----------- -----------
Total adjustments.................... 646,696 120,097 5,528
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,623,694 $ 3,780,424 $ 3,753,726
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition costs on behalf of the
Partnership as follows: $ -- $ -- $ 9,356
=========== =========== ===========
Land and building under operating lease
exchanged for land and building under
operating lease....................... $ 779,181 $ -- $ --
=========== =========== ===========
Land and building under direct
financing lease exchanged for land and
building under direct financing
lease................................. $ 761,334 $ -- $ --
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 900,000 $ 900,000 $ 900,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-412
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XVI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease, or events or changes
in circumstance indicate that the tenant will not lease the property through
the end of the lease term, the Partnership either reserves or writes-off the
cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-413
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership's investments in Columbus
Joint Venture and the properties in Corpus Christi, Texas and Memphis,
Tennessee, each of which is held as tenants-in-common with affiliates, are
accounted for using the equity method since the Partnership shares control
with affiliates which have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs- Organization costs are being amortized over five years
using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases and some of the leases have been classified as
direct financing leases. For the leases classified as direct financing leases,
the building portions of the property leases are accounted for as direct
financing leases while the land portion of some of the leases are operating
leases. All leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains
F-414
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
the interior and exterior of the building and carries insurance coverage for
public liability, property damage, fire and extended coverage. The lease
options generally allow tenants to renew the leases for two to five successive
five-year periods subject to the same terms and conditions as the initial
lease. Most leases also allow the tenant to purchase the property at fair
market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $15,378,217 $15,259,455
Buildings....................................... 17,045,781 16,836,982
----------- -----------
32,423,998 32,096,437
Less accumulated depreciation................... (1,942,192) (1,437,443)
----------- -----------
30,481,806 30,658,994
Less allowance for loss on building............. (266,257) --
----------- -----------
$30,215,549 $30,658,994
=========== ===========
</TABLE>
In March 1997, the Partnership sold its property in Oviedo, Florida, for
$620,000 and received net sales proceeds of $610,384, resulting in a gain of
$41,148 for financial reporting purposes. This property was originally acquired
by the Partnership in November 1994 and had a cost of approximately $509,700,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $100,700 in excess of its
original purchase price.
In May 1998, the tenant of the property in Madison, Tennessee exercised its
option under the terms of its lease agreement, to exchange one existing
property with a replacement property. In conjunction therewith, the Partnership
exchanged the Boston Market property in Madison, Tennessee for a Boston Market
property in Lawrence, Kansas. The lease for the property in Madison, Tennessee
was amended to allow the property in Lawrence, Kansas to continue under the
terms of the original lease. All closing costs were paid by the tenant. The
Partnership accounted for this as a nonmonetary exchange of similar assets and
recorded the acquisition of the property in Lawrence, Kansas at the net book
value of the property in Madison, Tennessee. No gain or loss was recognized due
to this being accounted for as a monetary exchange of similar assets.
During the year ended December 31, 1998, the Partnership recorded a
provision for loss on building of $266,257, relating to the Long John Silver's
property located in Celina, Ohio. The tenant of this Property filed for
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
property at December 31, 1998, and the current estimate of net realizable value
for this property.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997 and 1996, the Partnership recognized $232,408
(net of $184,368 in write-offs), $444,650, and $468,201, respectively, of such
rental income.
F-415
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,903,108
2000.......................................................... 3,029,386
2001.......................................................... 3,085,219
2002.......................................................... 3,102,234
2003.......................................................... 3,110,316
Thereafter.................................................... 31,971,152
-----------
$47,201,415
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $11,674,487 $13,526,299
Estimated residual values....................... 1,710,925 1,932,560
Less unearned income............................ (8,023,564) (9,490,047)
----------- -----------
Net investment in direct financing leases....... $ 5,361,848 $ 5,968,812
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 684,769
2000.......................................................... 692,689
2001.......................................................... 695,755
2002.......................................................... 701,765
2003.......................................................... 706,248
Thereafter.................................................... 8,193,261
-----------
$11,674,487
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
In June 1998, the tenant of the property in Chattanooga, Tennessee exercised
its option under the terms of its lease agreement, to exchange one existing
property with a replacement property. In conjunction therewith, the Partnership
exchanged the Boston Market property in Chattanooga, Tennessee for a Boston
Market property in Indianapolis, Indiana. The lease for the property in
Chattanooga, Tennessee was amended to allow the property in Indianapolis,
Indiana to continue under the terms of the original lease. All closing costs
were paid
F-416
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
by the tenant. The Partnership accounted for this as a nonmonetary exchange of
similar assets and recorded the acquisition of the property in Indianapolis,
Indiana at the net book value of the property in Chattanooga, Tennessee. No
gain or loss was recognized due to this being accounted for as a nonmonetary
exchange of similar assets.
During the year ended December 31, 1998, one of the Partnership's leases
with Long John Silver's, Inc. was rejected in connection with the tenant filing
for bankruptcy. As a result, the Partnership reclassified the asset from net
investment in direct financing leases to land and buildings on operating
leases. In accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," the Partnership recorded the reclassified asset at the
lower of original cost, present fair value, or present carrying amount, which
resulted in a loss on the termination of a direct financing lease of $4,471 for
financial reporting purposes.
5. Investment in Joint Ventures:
The Partnership owns a property in Fayetteville, North Carolina, as tenants-
in-common with an affiliate of the general partners. The Partnership accounts
for its investment in this property using the equity method since the
Partnership shares control with an affiliate. As of December 31, 1998, the
Partnership owned an 80.44% interest in this property.
In January 1998, the Partnership acquired a 40.42% interest in an IHOP
property in Memphis, Tennessee, as tenants-in-common with affiliates of the
general partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with affiliates,
and amounts relating to its investment are included in investment in joint
ventures.
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant property. As of December 31, 1998, the Partnership had
contributed approximately $134,500, to purchase land and pay construction costs
relating to the joint venture. The Partnership has agreed to contribute
additional amounts to the joint venture relating to $182,900 in additional
construction costs to the joint venture. As of December 31, 1998, the
Partnership owned a 32.35% interest in this joint venture. When funding is
completed, the Partnership expects to have an approximate 32 percent interest
in the profits and losses of the joint venture. The Partnership accounts for
its investment in this joint venture under the equity method since the
Partnership shares control with affiliates.
Columbus Joint Venture and the Partnership and affiliates, as tenants-in-
common in two separate tenancy-in-common arrangements, each own and lease one
property to operators of national fast-food and family-style restaurants. The
following presents the combined, condensed financial information for the joint
venture and the properties held as tenants-in-common with affiliates at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Land and buildings on operating lease, less
accumulated depreciation.......................... $3,274,577 $941,142
Cash............................................... 4,825 8,190
Prepaid expenses................................... 197 29
Accrued rental income.............................. 56,105 20,171
Liabilities........................................ 477,951 8,163
Partners' capital.................................. 2,857,753 961,369
Revenues........................................... 284,333 112,744
Net income......................................... 235,485 91,575
</TABLE>
F-417
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Partnership recognized income totalling $132,002, $73,507, and $19,668
for the years ended December 31, 1998, 1997, and 1996, respectively, from this
joint venture and the properties held as tenants-in-common with affiliates.
6. Restricted Cash:
As of December 31, 1997, the net sales proceeds of $610,384 from the sale of
the property in Oviedo, Florida, plus accrued interest of $17,515, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property. In January 1998, the funds were
released from escrow and the Partnership acquired a 40.42% interest in an IHOP
property in Memphis, Tennessee, as tenants-in-common with affiliates of the
general partners (see Note 5).
7. Allocations and Distributions:
Generally, net income and losses of the Partnership, excluding gains and
losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners shall be subordinated to receipt by the
limited partners of an aggregate, eight percent, cumulative, noncompounded
annual return on their invested capital contributions (the "Limited Partners'
8% Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their Limited
Partners' 8% Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners.
Any gain from the sale of a property, not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general, allocated
first, on a pro rata basis, to partners with positive balances in their capital
accounts; and thereafter, 95 percent to the limited partners and five percent
to the general partners.
Generally, net sales proceeds from a sale of properties in liquidation of
the Partnership, will be used in the following order: i) first to pay and
discharge all of the Partnership's liabilities to creditors, ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, iii) third, to pay
all of the Partnership's liabilities, if any, to the general and limited
partners, iv) fourth, after allocations of net income, gains and/or losses, to
the partners with positive capital account balances, in proportion to such
balances, up to amounts sufficient to reduce such positive balances to zero,
and v) thereafter, any funds remaining shall then be distributed 95 percent to
the limited partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,690,000, $3,600,000, and
$3,543,751, respectively. No distributions have been made to the general
partners to date.
F-418
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $2,976,998 $3,660,327 $3,748,198
Depreciation for tax reporting
purposes less than (in excess of)
depreciation for financial reporting
purposes............................ 809 3,576 (1,943)
Allowance for loss on building....... 266,257 -- --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 43,343 37,684 29,269
Loss on termination of direct
financing leases.................... 4,471 -- --
Equity in earnings of joint ventures
for financial reporting purposes in
excess of equity in earnings of
joint ventures for tax reporting
purposes............................ (11,217) (477) (1,330)
Gain on sale of land and buildings
for financial reporting purposes
less than (in excess of) gain for
tax reporting purposes.............. -- 23,764 (124,305)
Allowance for doubtful accounts...... 88,943 (8,996) 6,913
Accrued rental income................ (232,408) (444,650) (468,201)
Rents paid in advance................ (8,443) (27,405) 47,221
Capitalization of transaction costs
for tax reporting purposes.......... 24,652 -- --
Other................................ 212 -- 4,008
---------- ---------- ----------
Net income for federal income tax
purposes............................ $3,153,617 $3,243,823 $3,239,830
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director, and vice chairman of the board of directors of CNL Fund
Advisors. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures. The management fee, which will not exceed fees which are competitive
for similar services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliate. All
or any portion of the management fee not taken as to any fiscal year shall be
deferred without interest and may be taken in such other fiscal year as the
Affiliate shall
F-419
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
determine. The Partnership incurred management fees of $38,570, $40,087, and
$39,206 for the years ended December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties, based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate Limited Partners' 8%
Return, plus their invested capital contributions. No deferred, subordinated
real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $102,840, $89,270, and $118,677 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1996, the Partnership acquired one property from an affiliate of the
general partners, for a purchase price of $775,000. The property is being held
as tenants-in-common, with another affiliate of the general partners. The
affiliate had purchased and temporarily held title to this property in order to
facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the costs incurred by the affiliate
to acquire the property, including closing costs.
The due to related parties at December 31, 1998 and 1997 totalled $26,476
and $3,351, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental income from the joint venture and the properties held as
tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
DenAmerica Corp......................... $1,164,160 $1,046,845 $1,051,328
Golden Corral Corporation............... 971,344 979,009 954,476
Foodmaker, Inc.......................... 558,466 556,610 556,610
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental income from the joint venture and the properties held as
tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Denny's................................ $1,164,160 $1,164,928 $1,163,621
Golden Corral Family Steakhouse
Restaurants........................... 971,344 979,009 954,476
Jack in the Box........................ 558,466 556,610 556,610
Boston Market.......................... 467,043 329,300 260,756
</TABLE>
F-420
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
In October 1998, Finest Foodservice, L.L.C. and Boston Chicken, Inc., the
tenants of four Boston Market properties filed for bankruptcy and rejected the
leases relating to two properties. The Partnership will not recognize any
rental and earned income from these properties until new tenants for the
properties are located, or until the properties are sold and the proceeds from
such sales are reinvested in additional properties. While the tenants have not
rejected or affirmed the remaining two leases, there can be no assurance that
some or all of the leases will not be rejected in the future. The lost revenues
resulting from the two leases that were rejected, as described above, and the
possible rejection of the remaining two leases could have an adverse effect on
the results of operations of the Partnership if the Partnership is not able to
re-lease these properties in a timely manner.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,320,947 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $42,519,005 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,160,474 shares valued at $20.00 per
APF share.
F-421
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Unaudited Pro Forma Balance Sheet--As of June 30, 1999.................. F-424
Unaudited Pro Forma Statement of Earnings--For the Six Months Ended June
30, 1999............................................................... F-425
Unaudited Pro Forma Statement of Earnings--For the Year Ended December
31, 1998............................................................... F-426
Unaudited Pro Forma Statement of Cash Flows--For the Six Months Ended
June 30, 1999.......................................................... F-427
Unaudited Pro Forma Statement of Cash Flows--For the Year Ended December
31, 1998............................................................... F-429
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................. F-431
</TABLE>
F-422
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of the Advisor
and the CNL Restaurant Financial Services Group, and the acquisition of the
Income Funds (the acquisition of the Income Funds is referred to as the
"Acquisition"), and is based on estimates and assumptions set forth below in
the notes to such information which included pro forma adjustments. This
unaudited pro forma financial information has been prepared utilizing the
historical financial statements of APF, the historical combined financial
information of the Income Funds, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CNL Financial Services, Inc. and CNL
Financial Corp.) and should be read in conjunction with the selected historical
financial data and accompanying notes of APF, the Income Funds, Advisor and CNL
Restaurant Financial Services Group. The pro forma balance sheet assumes that
the Acquisition occurred on June 30, 1999, and the pro forma consolidated
statements of earnings and statements of cash flows assume that the acquisition
of properties by APF from January 1, 1998 through July 31, 1999, the
acquisition of the Advisor and CNL Restaurant Financial Services Group, and the
Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
F-423
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
as of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical Combining
Historical Pro Forma Historical Financial CNL Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Land and
Buildings on
operating
leases, net..... $569,567,003 $3,369,856(A) $572,936,859 0 0 0 0
Net Investment
in Direct
Financing
Leases.......... 132,179,949 0 132,179,949 0 0 0 0
Mortgages and
Notes
Receivable...... 63,351,507 0 63,351,507 0 0 290,522,671 0
Other
Investments..... 16,197,812 0 16,197,812 0 0 6,361,082 0
Investment In
Joint Ventures.. 1,081,046 0 1,081,046 0 0 0 0
Cash and Cash
Equivalents..... 18,764,033 0 18,764,033 333,295 639,036 1,767,517 (2,183,599)(B1)
Restricted
Cash/Certificates
of Deposit...... 2,006,690 0 2,006,690 0 0 2,482,041 0
Receivables net
allowances)/Due
From Related
Parties......... 649,972 0 649,972 8,668,738 5,417,084 1,125,933 (6,614,629)(C)
Accrued Rental
Income.......... 5,875,698 0 5,875,698 0 0 0 0
Other Assets.... 12,551,632 0 12,551,632 405,214 313,486 2,479,317 (2,575,792)(B1)
Goodwill........ 0 0 0 0 0 0 40,275,088 (B1)
------------ ---------- ------------ ---------- ---------- ------------ ------------
Total Assets.... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561 $ 28,901,068
============ ========== ============ ========== ========== ============ ============
LIABILITIES AND
EQUITY
Accounts Payable
and accrued
liabilities..... $ 2,105,725 0 $ 2,105,725 $ 673,437 $ 311,969 $ 2,013,172 0
Accrued
Construction
Costs Payable... 9,745,014 0 9,745,014 0 0 0 0
Distributions
Payable......... 0 0 0 0 0 0 0
Due to Related
Parties......... 1,444,444 0 1,444,444 0 500,981 30,170,185 (6,614,629)(C)
Income Tax
Payable......... 0 0 0 51,466 16,906 274,485 (342,857)(D)
Line of
Credit/Notes
payable......... 149,000,000 3,369,856(A) 152,369,856 351,869 0 267,685,382 0
Deferred
Income.......... 2,466,355 0 2,466,355 0 0 0 0
Rents Paid in
Advance......... 1,617,367 0 1,617,367 0 0 0 0
Minority
Interest........ 644,611 0 644,611 0 0 0 0
Common Stock.... 373,484 0 373,484 0 0 0 61,500 (B1)
Common Stock--
Class A......... 0 0 0 6,400 2,000 200 (8,600)(B1)
Common Stock--
Class B......... 0 0 0 3,600 724 501 (4,825)(B1)
Additional Paid-
in-Capital...... 669,997,715 0 669,997,715 3,328,376 5,303,503 3,937,095 122,938,500 (B1)
(12,568,974)(B1)
Accumulated
distributions in
excess of net
earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523 657,541 (5,883,163)(B1)
(69,018,741)(B1)
342,857 (D)
Partners
Capital......... 0 0 0 0 0 0 0
------------ ---------- ------------ ---------- ---------- ------------ ------------
Total
Liabilities and
Equity.......... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561 $ 28,901,068
============ ========== ============ ========== ========== ============ ============
Wtd Avg. Shares
Outstanding..... $ 37,347,883
============
Shares
Outstanding..... $ 37,348,464
============
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
--------------- ------------ ----------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Land and
Buildings on
operating
leases, net..... $ 572,936,859 $274,875,464 $ 80,142,382 (B2) $ 927,954,705
Net Investment
in Direct
Financing
Leases.......... 132,179,949 81,600,746 20,448,150 (B2) 234,228,845
Mortgages and
Notes
Receivable...... 353,874,178 3,669,623 0 357,543,801
Other
Investments..... 22,558,894 0 0 22,558,894
Investment In
Joint Ventures.. 1,081,046 51,051,185 14,171,514 (B2) 66,303,745
Cash and Cash
Equivalents..... 19,320,282 21,601,102 (9,708,401)(B2) 25,050,983
(6,162,000)(B2)
Restricted
Cash/Certificates
of Deposit...... 4,488,731 7,176,733 0 11,665,464
Receivables net
allowances)/Due
From Related
Parties......... 9,247,098 871,401 (1,323,882)(E) 8,794,617
Accrued Rental
Income.......... 5,875,698 18,287,268 (18,287,268)(B2) 5,875,698
Other Assets.... 13,173,857 785,376 (785,376)(B2) 13,173,857
Goodwill........ 40,275,088 0 0 40,275,088
--------------- ------------ ----------------- ---------------
Total Assets.... $1,175,011,680 $459,918,898 $ 78,495,119 $1,713,425,697
=============== ============ ================= ===============
LIABILITIES AND
EQUITY
Accounts Payable
and accrued
liabilities..... $ 5,104,303 $ 1,581,247 0 $ 6,685,550
Accrued
Construction
Costs Payable... 9,745,014 615,000 0 10,360,014
Distributions
Payable......... 0 11,629,504 0 11,629,504
Due to Related
Parties......... 25,500,981 1,323,882 (1,323,882)(E) 25,500,981
Income Tax
Payable......... 0 0 0 0
Line of
Credit/Notes
payable......... 420,407,107 0 0 420,407,107
Deferred
Income.......... 2,466,355 0 0 2,466,355
Rents Paid in
Advance......... 1,617,367 720,112 0 2,337,479
Minority
Interest........ 644,611 1,244,782 0 1,889,393
Common Stock.... 434,984 0 270,351 (B2) 705,335
Common Stock--
Class A......... 0 0 0 0
Common Stock--
Class B......... 0 0 0 0
Additional Paid-
in-Capital...... 792,936,215 0 522,353,021 (B2) 1,315,289,236
Accumulated
distributions in
excess of net
earnings........ (83,845,257) 0 0 (83,845,257)
Partners
Capital......... 0 442,804,371 (442,804,371)(B2) 0
--------------- ------------ ----------------- ---------------
Total
Liabilities and
Equity.......... $1,175,011,680 $459,918,898 $ 78,495,119 $1,713,425,697
=============== ============ ================= ===============
Wtd Avg. Shares
Outstanding..... 73,533,026
===============
Shares
Outstanding..... 70,533,607
===============
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-424
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
for the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
Earned Income... $27,900,894 3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 0
Fees............ 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income.... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- --------- ---------- -----------
Total Revenue... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 (9,668,502)
----------- ---------- ----------- ---------- --------- ---------- -----------
Expenses:
General and
Administrative
Expenses........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Advisory Fees... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees Paid to
Related
Parties......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest........ 0 0 0 92,707 0 10,294,499 0
State Taxes..... 464,966 0 464,966 0 0 0 0
Depreciation--
Other........... 0 0 0 77,130 39,032 0 0
Depreciation--
Property........ 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization.... 9,700 0 9,700 36 0 0 1,006,877 (h)
Transaction
Costs........... 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- --------- ---------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,424,882)
----------- ---------- ----------- ---------- --------- ---------- -----------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... 23,564,432 2,089,441 25,653,873 3,877,654 42,804 (239,337) (6,243,620)
Equity Earnings
of Joint
Ventures/Minority
Interest........ 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties...... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties...... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- --------- ---------- -----------
Net Earnings
(Losses) Before
Income Taxes.... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,243,620)
Benefit/(Provision)
for Income
Taxes........... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- --------- ---------- -----------
Net Earnings
(Losses)......... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,717,880)
=========== ========== =========== ========== ========= ========== ===========
Earnings Per
Share/Unit....... $ 0.61 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ========== ===========
Book Value Per
Share/Unit....... $ 17.54 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ========== ===========
Dividends Per
Share/Unit....... $ 0.76 n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ========== ===========
Ratio of Earnings
to Fixed
Charges.......... 18.16x n/a n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ========== ===========
Cash
Distributions
declared......... $28,476,150 0 $28,476,150 n/a n/a n/a $ 4,689,252(s)
=========== ========== =========== ========== ========= ========== ===========
Wtd. Avg. Shares
Outstanding...... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
=========== ========== =========== ========== ========= ========== ===========
Shares
Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
=========== ========== =========== ========== ========= ========== ===========
<CAPTION>
Historical
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ -------------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental and
Earned Income... $30,957,514 $21,613,405 553,747 (j) $53,124,666
Fees............ 2,616,185 0 (536,852)(k) 2,079,333
Interest and
Other Income.... 16,269,383 708,042 0 16,977,425
------------ ------------ -------------------- ---------------
Total Revenue... 49,843,082 22,321,447 16,895 72,181,424
------------ ------------ -------------------- ---------------
Expenses:
General and
Administrative
Expenses........ 9,579,902 1,593,825 (787,964)(l),(m) 10,385,763
Advisory Fees... 0 112,161 (112,161)(n) 0
Fees Paid to
Related
Parties......... 34,701 0 0 34,701
Interest........ 10,387,206 0 0 10,387,206
State Taxes..... 464,966 292,633 105,025 (o) 862,624
Depreciation--
Other........... 116,162 0 0 116,162
Depreciation--
Property........ 4,669,153 2,779,197 1,038,410 (p) 8,486,760
Amortization.... 1,016,613 13,616 0 1,030,229
Transaction
Costs........... 483,005 1,716,823 0 2,199,828
------------ ------------ -------------------- ---------------
Total Expenses.. 26,751,708 6,508,255 243,310 33,503,273
------------ ------------ -------------------- ---------------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... 23,091,374 15,813,192 (226,415) 38,678,151
Equity Earnings
of Joint
Ventures/Minority
Interest........ 31,241 2,589,175 (260,189)(q) 2,360,227
Gain (Loss) on
Sale of
Properties...... (201,843) 1,731,417 0 1,529,574
Provision For
Losses on
Properties...... (540,522) (338,131) 0 (878,653)
------------ ------------ -------------------- ---------------
Net Earnings
(Losses) Before
Income Taxes.... 22,380,250 19,795,653 (486,604) 41,689,299
Benefit/(Provision)
for Income
Taxes........... 0 0 0 0
------------ ------------ -------------------- ---------------
Net Earnings
(Losses)......... $22,380,250 $19,795,653 $ (486,604) $41,689,299
============ ============ ==================== ===============
Earnings Per
Share/Unit....... n/a n/a n/a $ 0.59
============ ============ ==================== ===============
Book Value Per
Share/Unit....... n/a n/a n/a $ 17.47
============ ============ ==================== ===============
Dividends Per
Share/Unit....... n/a n/a n/a $ 0.76
============ ============ ==================== ===============
Ratio of Earnings
to Fixed
Charges.......... n/a n/a n/a 4.50x
============ ============ ==================== ===============
Cash
Distributions
declared......... $33,165,402 $23,259,008 $ (2,645,252)(s) $53,779,158
============ ============ ==================== ===============
Wtd. Avg. Shares
Outstanding...... 43,497,883 27,035,143 n/a 70,533,026 (r)
============ ============ ==================== ===============
Shares
Outstanding...... 43,498,464 n/a 27,035,143 70,533,607
============ ============ ==================== ===============
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-425
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical Combining
Historical Pro Forma Historical Financial CNL Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
Earned Income... $33,129,661 22,951,799(a) $56,081,460 $ 0 $ 0 $ 0 0
Fees............ 0 0 0 28,904,063 6,619,064 418,904 (32,715,768)(b)(c)
Interest and
Other Income.... 9,057,376 0 9,057,376 145,016 574,078 22,238,311 207,144 (d)
----------- ----------- ----------- ----------- ---------- ---------- ------------
Total Revenue... 42,187,037 22,951,799 65,138,836 29,049,079 7,193,142 22,657,215 (32,508,624)
----------- ----------- ----------- ----------- ---------- ---------- ------------
Expenses:
General and
Administrative
Expenses........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109 (4,241,719)(e)
Management and
Advisory Fees... 1,851,004 0 1,851,004 0 0 2,807,430 (4,658,434)(f)
Fees to Related
Parties......... 0 0 0 1,247,278 1,773,406 0 (2,161,897)(g)
Interest
Expense......... 0 0 0 148,415 0 21,350,174 0
State Taxes..... 548,320 0 548,320 19,126 0 0 0
Depreciation--
Other........... 0 0 0 119,923 79,234 0 0
Depreciation--
Property........ 4,042,290 6,246,947(a) 10,289,237 0 0 0 (340,898)(r)
Amortization.... 11,808 0 11,808 57,077 0 95,116 2,013,754 (h)
Transaction
Costs........... 157,054 0 157,054 0 0 0 0
----------- ----------- ----------- ----------- ---------- ---------- ------------
Total Expenses.. 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829 (9,389,194)
----------- ----------- ----------- ----------- ---------- ---------- ------------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, Gain
on
Securitization,
Other Expenses
and Provision for
Losses on
Properties....... 32,778,080 16,704,852 49,482,932 17,613,851 (773,774) (3,020,614) (23,119,430)
Equity in
Earnings of
Joint
Ventures/Minority
Interest........ (14,138) 0 (14,138) 0 0 0 0
Gain on Sale of
Properties...... 0 0 0 0 0 0 0
Gain on
Securitization.. 0 0 0 0 0 3,694,351 0
Other Expenses.. 0 0 0 0 0 0 0
Provision For
Losses on
Properties...... (611,534) 0 (611,534) 0 0 0 0
----------- ----------- ----------- ----------- ---------- ---------- ------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes............ 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737 (23,119,430)
Benefit/(Provision)
for Federal
Income Taxes.... 0 0 0 (6,957,472) 305,641 (246,603) 6,898,434 (i)
----------- ----------- ----------- ----------- ---------- ---------- ------------
Net
Earnings(Losses).. $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134 $(16,220,996)
=========== =========== =========== =========== ========== ========== ============
Earnings Per
Share/Unit....... $ 1.21 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ========== ============
Book Value Per
Share/Unit....... $ 17.70 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ========== ============
Dividend per
share/unit....... $ 1.52 n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ========== ============
Ratio of Earnings
to Fixed
Charges.......... 79.97x n/a n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ========== ============
Cash Distribution
declared......... $39,449,149 $11,966,904(t) $51,416,053 n/a n/a n/a 9,378,504 (t)
=========== =========== =========== =========== ========== ========== ============
Wtd. Avg. Shares
Outstanding...... 26,648,219 7,847,356 34,495,575 n/a n/a n/a 6,150,000
=========== =========== =========== =========== ========== ========== ============
Shares
Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a 6,150,000
=========== =========== =========== =========== ========== ========== ============
<CAPTION>
Historical
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------ ------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Rental and
Earned Income... $56,081,460 $43,462,064 $ 1,107,494 (j) $100,651,018
Fees............ 3,226,263 0 (737,898)(k) 2,488,365
Interest and
Other Income.... 32,221,925 1,767,773 0 33,989,698
------------ ------------ ------------------- ----------------
Total Revenue... 91,529,648 45,229,837 369,596 137,129,081
------------ ------------ ------------------- ----------------
Expenses:
General and
Administrative
Expenses........ 15,939,556 3,261,776 (1,207,980)(l)(m) 17,993,352
Management and
Advisory Fees... 0 226,177 (226,177)(n) 0
Fees to Related
Parties......... 858,787 0 0 858,787
Interest
Expense......... 21,498,589 0 0 21,498,589
State Taxes..... 567,446 227,933 168,127 (o) 963,506
Depreciation--
Other........... 199,157 0 0 199,157
Depreciation--
Property........ 9,948,339 5,480,695 2,076,819 (p) 17,505,853
Amortization.... 2,177,755 91,310 0 2,269,065
Transaction
Costs........... 157,054 315,081 0 472,135
------------ ------------ ------------------- ----------------
Total Expenses.. 51,346,683 9,602,972 810,789 61,760,444
------------ ------------ ------------------- ----------------
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties, Gain
on
Securitization,
Other Expenses
and Provision for
Losses on
Properties....... 40,182,965 35,626,865 (441,193) 75,368,637
Equity in
Earnings of
Joint
Ventures/Minority
Interest........ (14,138) 3,569,877 (520,378)(q) 3,035,361
Gain on Sale of
Properties...... 0 2,519,894 0 2,519,894
Gain on
Securitization.. 3,694,351 0 0 3,694,351
Other Expenses.. 0 (45,150) 0 (45,150)
Provision For
Losses on
Properties...... (611,534) (2,834,338) 0 (3,445,872)
------------ ------------ ------------------- ----------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes............ 43,251,644 38,837,148 (961,571) 81,127,221
Benefit/(Provision)
for Federal
Income Taxes.... 0 0 0 0
------------ ------------ ------------------- ----------------
Net
Earnings(Losses).. $43,251,644 $38,837,148 $ (961,571) $ 81,127,221
============ ============ =================== ================
Earnings Per
Share/Unit....... n/a n/a n/a $ 1.20
============ ============ =================== ================
Book Value Per
Share/Unit....... n/a n/a n/a $ 17.77
============ ============ =================== ================
Dividend per
share/unit....... n/a n/a n/a $ 1.51
============ ============ =================== ================
Ratio of Earnings
to Fixed
Charges.......... n/a n/a n/a 4.76x
============ ============ =================== ================
Cash Distribution
declared......... 60,794,557 53,610,357 $(12,382,845)(t) $102,022,069
============ ============ =================== ================
Wtd. Avg. Shares
Outstanding...... 40,645,575 n/a 27,035,143 67,680,718 (s)
============ ============ =================== ================
Shares
Outstanding...... 43,487,927 n/a 27,035,143 70,523,070
============ ============ =================== ================
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-426
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
for the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical Combining
Historical Pro Forma Historical Financial CNL Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating
Activities:
Net Income
(loss).......... $22,853,308 $2,089,441(a) $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,717,880)(a)
Adjustments to
reconcile net
income (loss) to
net cash
provided by
(used in)
operating
activities:
Depreciation..... 3,701,974 967,179(b) 4,669,153 77,130 28,372 0 0
Amortization
expense......... 9,700 0 9,700 36 0 900,017 1,006,877 (c)
Minority interest
in income of
consolidated
joint venture... 17,610 0 17,610 0 0 0 0
Equity in
earnings of
joint ventures,
net of
distributions... 25,120 0 25,120 0 0 0 0
Loss (gain) on
sale of land,
buildings, and
net investment
in direct
financing
leases.......... 201,843 0 201,843 0 0 0 0
Provision for
loss on land,
buildings, and
direct financing
leases and
deferred taxes.. 540,522 0 540,522 0 0 (96,475) 0
Gain on
securitization.. 0 0 0 0 0 0 0
Net cash proceeds
from
securitization
of notes
receivable...... 0 0 0 0 0 0 0
Decrease
(increase) in
other
receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340) 0
Increase in
accrued interest
income included
in notes
receivable...... 0 0 0 0 0 0 0
Decrease
(increase) in
accrued interest
on mortgage note
receivable...... 0 0 0 0 0 (183,569) 0
Investment in
notes
receivable...... 0 0 0 0 0 (88,701,265) 0
Collections on
notes
receivable...... 0 0 0 0 0 9,662,971 0
Increase in
restricted
cash............ 0 0 0 0 0 (2,031,259) 0
Decrease in due
from related
party........... 0 0 0 0 (193,244) 81,412 0
Decrease
(increase) in
prepaid
expenses........ (320,425) 0 (320,425) 0 0 0 0
Decrease in net
investment in
direct financing
leases.......... 721,624 0 721,624 0 0 0 0
Increase in
accrued rental
income.......... (1,915,785) 0 (1,915,785) 0 0 0 0
Decrease
(increase)in
intangibles and
other assets.... 0 0 0 (36,946) 0 (51,848) 0
Increase
(decrease) in
accounts
payable, accrued
expenses and
other
liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671 0
Increase
(decrease) in
due to related
parties,
excluding
reimbursement of
acquisition, and
stock issuance
costs paid on
behalf of the
entity.......... 575,868 0 575,868 (8,810) 18,669 0 0
Decrease in
accrued
interest........ 0 0 0 0 0 (57,986) 0
Increase in rents
paid in advance
and deposits.... 663,096 0 663,096 0 3,623 0 0
Increase
(decrease) in
deferred rental
income.......... 1,276,472 0 1,276,472 0 0 0 0
----------- ---------- ----------- ---------- -------- ------------ -----------
Total
adjustments.... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671) 1,006,877
----------- ---------- ----------- ---------- -------- ------------ -----------
Net cash
provided by
(used in)
operating
activities..... 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806) (3,711,003)
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating
Activities:
Net Income
(loss).......... $ 22,380,250 $19,795,653 $(486,604)(a) $ 41,689,299
Adjustments to
reconcile net
income (loss) to
net cash
provided by
(used in)
operating
activities:
Depreciation..... 4,774,655 2,779,197 1,038,410 (b) 8,592,262
Amortization
expense......... 1,916,630 13,616 0 1,930,246
Minority interest
in income of
consolidated
joint venture... 17,610 64,716 0 82,326
Equity in
earnings of
joint ventures,
net of
distributions... 25,120 19,696 260,189 (d) 305,005
Loss (gain) on
sale of land,
buildings, and
net investment
in direct
financing
leases.......... 201,843 (1,731,417) 0 (1,529,574)
Provision for
loss on land,
buildings, and
direct financing
leases and
deferred taxes.. 444,047 338,131 0 782,178
Gain on
securitization.. 0 0 0 0
Net cash proceeds
from
securitization
of notes
receivable...... 0 0 0 0
Decrease
(increase) in
other
receivables..... (2,201,960) 419,956 0 (1,782,004)
Increase in
accrued interest
income included
in notes
receivable...... 0 0 0 0
Decrease
(increase) in
accrued interest
on mortgage note
receivable...... (183,569) 9,388 0 (174,181)
Investment in
notes
receivable...... (88,701,265) 0 0 (88,701,265)
Collections on
notes
receivable...... 9,662,971 0 0 9,662,971
Increase in
restricted
cash............ (2,031,259) 0 0 (2,031,259)
Decrease in due
from related
party........... (111,832) 0 0 (111,832)
Decrease
(increase) in
prepaid
expenses........ (320,425) (113,368) 0 (433,793)
Decrease in net
investment in
direct financing
leases.......... 721,624 644,625 0 1,366,249
Increase in
accrued rental
income.......... (1,915,785) (1,062,120) 0 (2,977,905)
Decrease
(increase)in
intangibles and
other assets.... (88,794) (100) 0 (88,894)
Increase
(decrease) in
accounts
payable, accrued
expenses and
other
liabilities..... (663,478) 1,230,756 0 567,278
Increase
(decrease) in
due to related
parties,
excluding
reimbursement of
acquisition, and
stock issuance
costs paid on
behalf of the
entity.......... 585,727 214,400 0 800,127
Decrease in
accrued
interest........ (57,986) (3,005) 0 (60,991)
Increase in rents
paid in advance
and deposits.... 666,719 (198,745) 0 467,974
Increase
(decrease) in
deferred rental
income.......... 1,276,472 0 0 1,276,472
------------- ------------ -------------- -------------
Total
adjustments.... (75,982,935) 2,625,726 1,298,599 (72,058,610)
------------- ------------ -------------- -------------
Net cash
provided by
(used in)
operating
activities..... (53,602,685) 22,421,379 811,995 (30,369,311)
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-427
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
for the Six months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical Combining
Historical Pro Forma Historical Financial CNL Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ------------ ------------ ---------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Flows from
Investing
Activities:
Proceeds from
sale of land,
buildings,
direct financing
leases, and
equipment....... 3,673,907 0 3,673,907 22,157 0 0 0
Additions to
land and
buildings on
operating
leases.......... (170,153,724) 121,715,562(f) (48,438,162) 0 (20,873) 0 4,452,252(e)
Investment in
direct financing
leases.......... (44,186,644) 0 (44,186,644) 0 0 0 0
Investment in
joint venture... (117,663) 0 (117,663) 0 0 0 0
Acquisition of
businesses...... 0 0 0 0 0 0 0
Purchase of
other
investments..... 0 0 0 0 0 0 0
Net loss in
market value
from investments
in trading
securities...... 0 0 0 0 0 0 0
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... 0 0 0 0 0 182,607 0
Investment in
mortgage notes
receivable...... (2,596,244) 0 (2,596,244) 0 0 0 0
Collections on
mortgage note
receivable...... 224,373 0 224,373 0 0 0 0
Investment in
notes
receivable...... (22,358,869) 0 (22,358,869) 0 0 0 0
Collection on
notes
receivable...... 626,959 0 626,959 0 0 0 0
Decrease in
restricted
cash............ 0 0 0 0 0 0 0
Increase in
intangibles and
other assets.... (3,198,326) 0 (3,198,326) 0 0 0 0
Investment in
certificates of
deposit......... 0 0 0 0 0 0 0
Other........... 0 0 0 0 0 0 0
------------ ------------ ------------ -------- -------- ----------- ----------
Net cash
provided by
(used in)
investing
activities...... (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607 4,452,252
Cash Flows from
Financing
Activities:
Subscriptions
received from
stockholders.... 210,736 0 210,736 0 20,570 0 0
Contributions
from limited
partners........ 0 0 0 0 0 0 0
Contributions
from holder of
minority
interest........ 366,289 0 366,289 0 0 0 0
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (1,258,062) 0 (1,258,062) 0 0 0 0
Payment of stock
issuance costs.. (735,785) 0 (735,785) 0 0 0 0
Proceeds from
borrowing on
line of
credit/notes
payable......... 151,437,245 0 151,437,245 0 0 94,272,038 0
Payment on line
of credit/notes
payable......... (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254) 0
Retirement of
shares of common
stock........... 0 0 0 0 0 0 0
Distributions to
holders of
minority
interest........ (21,105) 0 (21,105) 0 0 0 0
Distributions to
stockholders/limited
partners........ (28,476,150) 0 (28,476,150) (119,808) 0 0 (4,689,252)(g)
Other........... (3,548,744) 0 (3,548,744) 0 0 (181,146) 0
------------ ------------ ------------ -------- -------- ----------- ----------
Net cash
provided by
(used in)
financing
activities...... 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638 (4,689,252)
Net increase
(decrease) in
cash............. (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561) (3,948,003)
Cash at beginning
of year.......... 123,199,837 (110,730,667) 12,469,170 713,308 962,573 2,526,078 (4,315,857)
------------ ------------ ------------ -------- -------- ----------- ----------
Cash at end of
year............. $ 18,764,033 $ 14,041,515 $ 32,805,548 $333,295 $639,036 1,767,517 (8,263,860)
============ ============ ============ ======== ======== =========== ==========
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Cash Flows from
Investing
Activities:
Proceeds from
sale of land,
buildings,
direct financing
leases, and
equipment....... 3,696,064 13,675,305 0 17,371,369
Additions to
land and
buildings on
operating
leases.......... (44,006,783) (3,563,230) 0 (47,570,013)
Investment in
direct financing
leases.......... (44,186,644) (1,307,530) 0 (45,494,174)
Investment in
joint venture... (117,663) (1,965,495) 0 (2,083,158)
Acquisition of
businesses...... 0 0 0 0
Purchase of
other
investments..... 0 0 0 0
Net loss in
market value
from investments
in trading
securities...... 0 0 0 0
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... 182,607 0 0 182,607
Investment in
mortgage notes
receivable...... (2,596,244) 0 0 (2,596,244)
Collections on
mortgage note
receivable...... 224,373 1,362,663 0 1,587,036
Investment in
notes
receivable...... (22,358,869) 0 0 (22,358,869)
Collection on
notes
receivable...... 626,959 0 0 626,959
Decrease in
restricted
cash............ 0 (4,624,660) 0 (4,624,660)
Increase in
intangibles and
other assets.... (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit......... 0 0 0 0
Other........... 0 (80,878) 0 (80,878)
------------- ------------ -------------- -------------
Net cash
provided by
(used in)
investing
activities...... (111,734,526) 3,496,175 0 (108,238,351)
Cash Flows from
Financing
Activities:
Subscriptions
received from
stockholders.... 231,306 0 0 231,306
Contributions
from limited
partners........ 0 0 0 0
Contributions
from holder of
minority
interest........ 366,289 0 0 366,289
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs.. (735,785) 0 0 (735,785)
Proceeds from
borrowing on
line of
credit/notes
payable......... 245,709,283 0 0 245,709,283
Payment on line
of credit/notes
payable......... (27,013,351) 0 0 (27,013,351)
Retirement of
shares of common
stock........... 0 0 0 0
Distributions to
holders of
minority
interest........ (21,105) (80,314) 0 (101,419)
Distributions to
stockholders/limited
partners........ (33,285,210) (23,934,008) 2,645,252(g) (54,573,966)
Other........... (3,729,890) 0 0 (3,729,890)
------------- ------------ -------------- -------------
Net cash
provided by
(used in)
financing
activities...... 180,263,475 (24,014,322) 2,645,252 158,894,405
Net increase
(decrease) in
cash............. 14,926,264 1,903,232 3,457,247 20,286,743
Cash at beginning
of year.......... 12,355,272 19,697,870 (1,851,930) 30,201,212
------------- ------------ -------------- -------------
Cash at end of
year............. 27,281,536 21,601,102 1,605,317 50,487,955
============= ============ ============== =============
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-428
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical Combining
Historical Pro Forma Historical Financial CNL Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating
Activities:
Net Income
(loss)........... $32,152,408 $16,704,852(a) $48,857,260 $10,656,379 $(468,133) $ 427,134 $(16,220,996)(a)
Adjustments to
reconcile net
income (loss) to
net cash
provided by
(used in)
operating
activities:
Depreciation.... 4,042,290 6,246,947(b) 10,289,237 119,923 79,234 0 (340,898)(b)
Amortization
expense......... 11,808 0 11,808 56,003 0 2,246,273 2,013,754 (c)
Minority
interest in
income of
consolidated
joint venture... 30,156 0 30,156 0 0 0 0
Equity in
earnings of
joint ventures,
net of
distributions... (15,440) 0 (15,440) 0 0 0 0
Loss (gain) on
sale of land,
building, net
investment in
direct leases... 0 0 0 0 0 0 0
Provision for
loss on land,
buildings, and
direct financing
leases/provision
for deferred
taxes........... 611,534 0 611,534 0 0 398,042 0
Gain on
securitization.. 0 0 0 0 0 (3,356,538) 0
Net cash
proceeds from
securitization
of notes
receivable...... 0 0 0 0 0 265,871,668 0
Decrease
(increase) in
other
receivables..... 899,572 0 899,572 (3,896,090) 0 453,105 0
Increase in
accrued interest
income included
in notes
receivable...... 0 0 0 0 0 (170,492) 0
Increase in
accrued interest
on mortgage note
receivable...... 0 0 0 0 0 0 0
Investment in
notes
receivable...... 0 0 0 0 0 (288,590,674) 0
Collections on
notes
receivable...... 0 0 0 0 0 23,539,641 0
Decrease in
restricted
cash............ 0 0 0 0 0 2,504,091 0
Decrease
(increase) in
due from related
party........... 0 0 0 0 89,839 (1,043,527) 0
Increase in
prepaid
expenses........ 0 0 0 0 7,246 0 0
Decrease in net
investment in
direct financing
leases.......... 1,971,634 0 1,971,634 0 0 0 0
Increase in
accrued rental
income.......... (2,187,652) 0 (2,187,652) 0 0 0 0
Increase in
intangibles and
other assets.... (29,477) 0 (29,477) (44,716) (20,635) (59,523) 0
Increase
(decrease) in
accounts
payable, accrued
expenses and
other
liabilities..... 467,972 0 467,972 156,317 325,898 (103,507) 0
Increase in due
to related
parties,
excluding
reimbursement of
acquisition, and
stock issuance
costs paid on
behalf of the
entity.......... 31,255 0 31,255 0 (164,619) 0 0
Increase in
accrued
interest........ 0 0 0 0 0 (77,968) 0
Increase in
rents paid in
advance and
deposits........ 436,843 0 436,843 0 0 0 0
Decrease in
deferred rental
income.......... 693,372 0 693,372 0 0 0 0
----------- ----------- ----------- ----------- --------- ------------ ------------
Total
adjustments..... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591 1,672,856
----------- ----------- ----------- ----------- --------- ------------ ------------
Net cash
provided by
(used in)
operating
activities...... 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725 (14,548,140)
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Cash Flows from
Operating
Activities:
Net Income
(loss)........... $ 43,251,644 $38,837,148 $(961,571)(a) $ 81,127,221
Adjustments to
reconcile net
income (loss) to
net cash
provided by
(used in)
operating
activities:
Depreciation.... 10,147,496 5,480,695 2,076,819 (b) 17,705,010
Amortization
expense......... 4,327,838 91,310 0 4,419,148
Minority
interest in
income of
consolidated
joint venture... 30,156 103,284 0 133,440
Equity in
earnings of
joint ventures,
net of
distributions... (15,440) 1,167,915 520,378 (d) 1,672,853
Loss (gain) on
sale of land,
building, net
investment in
direct leases... 0 (2,519,894) 0 (2,519,894)
Provision for
loss on land,
buildings, and
direct financing
leases/provision
for deferred
taxes........... 1,009,576 2,834,338 0 3,843,914
Gain on
securitization.. (3,356,538) 0 0 (3,356,538)
Net cash
proceeds from
securitization
of notes
receivable...... 265,871,668 0 0 265,871,668
Decrease
(increase) in
other
receivables..... (2,543,413) (53,211) 0 (2,596,624)
Increase in
accrued interest
income included
in notes
receivable...... (170,492) 0 0 (170,492)
Increase in
accrued interest
on mortgage note
receivable...... 0 (6,533) 0 (6,533)
Investment in
notes
receivable...... (288,590,674) 0 0 (288,590,674)
Collections on
notes
receivable...... 23,539,641 0 0 23,539,641
Decrease in
restricted
cash............ 2,504,091 0 0 2,504,091
Decrease
(increase) in
due from related
party........... (953,688) 0 0 (953,688)
Increase in
prepaid
expenses........ 7,246 18,470 0 25,716
Decrease in net
investment in
direct financing
leases.......... 1,971,634 1,273,904 0 3,245,538
Increase in
accrued rental
income.......... (2,187,652) (376,728) 0 (2,564,380)
Increase in
intangibles and
other assets.... (154,351) (2,380) 0 (156,731)
Increase
(decrease) in
accounts
payable, accrued
expenses and
other
liabilities..... 846,680 (194,293) 0 652,387
Increase in due
to related
parties,
excluding
reimbursement of
acquisition, and
stock issuance
costs paid on
behalf of the
entity.......... (133,364) 227,855 0 94,491
Increase in
accrued
interest........ (77,968) 0 0 (77,968)
Increase in
rents paid in
advance and
deposits........ 436,843 219,115 0 655,958
Decrease in
deferred rental
income.......... 693,372 0 0 693,372
------------- ------------ -------------- -------------
Total
adjustments..... 13,202,661 8,263,847 2,597,197 24,063,705
------------- ------------ -------------- -------------
Net cash
provided by
(used in)
operating
activities...... 56,454,305 47,100,995 1,635,626 105,190,926
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-429
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical Combining
Historical Pro Forma Historical Financial CNL Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ------------- ------------ ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Flows from
Investing
Activities:
Proceeds from
sale of land,
buildings,
direct financing
leases, and
equipment....... 2,385,941 0 2,385,941 0 0 0 0
Additions to
land and
buildings on
operating
leases.......... (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0 21,794,386 (h)
(121,715,562)(i)
Investment in
direct financing
leases.......... (47,115,435) 0 (47,115,435) 0 0 0 0
Investment in
joint venture... (974,696) 0 (974,696) 0 0 0 0
Acquisition of
businesses...... 0 0 0 0 0 0 (2,183,599)(f)
Purchase of
other
investments..... (16,083,055) 0 (16,083,055) 0 0 0 0
Net loss in
market value
from investments
in trading
securities...... 0 0 0 0 0 295,514 0
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... 0 0 0 0 0 212,821 0
Investment in
mortgage notes
receivable...... (2,886,648) 0 (2,886,648) 0 0 0 0
Collections on
mortgage note
receivable...... 291,990 0 291,990 0 0 0 0
Investment in
equipment notes
receivable...... (7,837,750) 0 (7,837,750) 0 0 0 0
Collections on
equipment notes
receivable...... 1,263,633 0 1,263,633 1,783,240 0 0 0
Decrease in
restricted
cash............ 0 0 0 0 0 0 0
Increase in
intangibles and
other assets.... (6,281,069) 0 (6,281,069) 0 0 0 0
Other........... 0 0 0 200,000 0 0 0
------------ ------------- ------------ ----------- --------- ------------ -----------
Net cash
provided by
(used in)
investing
activities...... (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335 19,610,787
Cash Flows from
Financing
Activities:
Subscriptions
received from
stockholders.... 385,523,966 0 385,523,966 966,115 51,830 50,100 0
Contributions
from limited
partners........ 0 0 0 0 0 0 0
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (4,574,925) 0 (4,574,925) 0 0 0 0
Payment of stock
issuance costs.. (34,579,650) 0 (34,579,650) 0 0 0 0
Proceeds from
borrowing on
line of
credit/notes
payable......... 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624 0
Payment on line
of credit/notes
payable......... (8,039) 0 (8,039) 0 0 (411,805,787) 0
Retirement of
shares of common
stock........... (639,528) 0 (639,528) 0 0 0 0
Distributions to
holders of
minority
interest........ (34,073) 0 (34,073) 0 0 0 0
Distributions to
stockholders/limited
partners........ (39,449,149) (11,966,904)(j) (51,416,053) (9,364,488) 0 0 (9,378,504)(j)
Other........... (95,101) 0 (95,101) 0 24 (2,500,011) 0
------------ ------------- ------------ ----------- --------- ------------ -----------
Net cash
provided by
(used in)
financing
activities...... 313,835,541 (8,597,048) 305,238,493 (8,200,077) 51,854 (700,074) (9,378,504)
Net increase
(decrease) in
cash............ 75,613,060 (110,730,667) (35,117,607) 449,308 (335,688) 1,845,986 (4,315,857)
Cash at
beginning of
year............ 47,586,777 0 47,586,777 264,000 1,298,261 680,092 0
------------ ------------- ------------ ----------- --------- ------------ -----------
Cash at end of
year............ $123,199,837 $(110,730,667) $ 12,469,170 $ 713,308 $ 962,573 $ 2,526,078 $(4,315,857)
============ ============= ============ =========== ========= ============ ===========
<CAPTION>
Historical Merger
Combined Income Pro Forma Adjusted
APF Funds Adjustments Pro Forma
------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Cash Flows from
Investing
Activities:
Proceeds from
sale of land,
buildings,
direct financing
leases, and
equipment....... 2,385,941 17,221,106 0 19,607,047
Additions to
land and
buildings on
operating
leases.......... (304,010,742) (2,304,586) 0 (306,315,328)
Investment in
direct financing
leases.......... (47,115,435) (959,640) 0 (48,075,075)
Investment in
joint venture... (974,696) (8,730,835) 0 (9,705,531)
Acquisition of
businesses...... (2,183,599) 0 (9,708,401)(g) (18,054,000)
(6,162,000)(g)
Purchase of
other
investments..... (16,083,055) 0 0 (16,083,055)
Net loss in
market value
from investments
in trading
securities...... 295,514 0 0 295,514
Proceeds from
retained
interest and
securities,
excluding
investment
income.......... 212,821 0 0 212,821
Investment in
mortgage notes
receivable...... (2,886,648) 0 0 (2,886,648)
Collections on
mortgage note
receivable...... 291,990 785,947 0 1,077,937
Investment in
equipment notes
receivable...... (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable...... 3,046,873 0 0 3,046,873
Decrease in
restricted
cash............ 0 2,054,030 0 2,054,030
Increase in
intangibles and
other assets.... (6,281,069) 0 0 (6,281,069)
Other........... 200,000 194,644 0 394,644
------------- ------------- ---------------- --------------
Net cash
provided by
(used in)
investing
activities...... (380,939,855) 8,260,666 (15,870,401) (388,549,590)
Cash Flows from
Financing
Activities:
Subscriptions
received from
stockholders.... 386,592,011 0 0 386,592,011
Contributions
from limited
partners........ 0 0 0 0
Reimbursement of
acquisition and
stock issuance
costs paid by
related parties
on behalf of the
entity.......... (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs.. (34,579,650) 0 0 (34,579,650)
Proceeds from
borrowing on
line of
credit/notes
payable......... 424,815,816 0 0 424,815,816
Payment on line
of credit/notes
payable......... (411,813,826) 0 0 (411,813,826)
Retirement of
shares of common
stock........... (639,528) 0 0 (639,528)
Distributions to
holders of
minority
interest........ (34,073) (170,715) 0 (204,788)
Distributions to
stockholders/limited
partners........ (70,159,045) (54,151,978) 12,382,845 (j) (111,928,178)
Other........... (2,595,088) 0 0 (2,595,088)
------------- ------------- ---------------- --------------
Net cash
provided by
(used in)
financing
activities...... 287,011,692 (54,322,693) 12,382,845 245,071,844
Net increase
(decrease) in
cash............ (37,473,858) 1,038,968 (1,851,930) (38,286,820)
Cash at
beginning of
year............ 49,829,130 18,658,902 0 68,488,032
------------- ------------- ---------------- --------------
Cash at end of
year............ $ 12,355,272 $ 19,697,870 $ (1,851,930) $ 30,201,212
============= ============= ================ ==============
</TABLE>
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-430
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Funds. This unaudited pro forma financial
information has been prepared utilizing the historical financial statements of
APF and the historical combined financial information of the Advisor, CNL
Restaurant Financial Services Group and the Income Funds and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, the Advisor the CNL Restaurant Financial Services Group and the Income
Funds. The Pro Forma Balance Sheet was prepared as if the transactions
described above occurred on June 30, 1999. The Pro Forma Statements of Earnings
were prepared as if the transactions described above occurred as of January 1,
1998. The pro forma information is unaudited and is not necessarily indicative
of the consolidated operating results which would have occurred if the
transactions described above had been consummated at the beginning of the
period, nor does it purport to represent the future financial position or
results of operations for future periods. In management's opinion, all material
adjustments necessary to reflect the recurring effects of the transactions
described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the Note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Funds will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Funds have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders approved a proposal for a one-for-two reverse
stock split at the annual stockholder meeting. All information relating to
shares outstanding and per share information has been restated for all periods
presented.
F-431
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma properties acquired from July 1, 1999 through July
31, 1999 as if these properties had been acquired on June 30, 1999. Based on
historical results through July 31, 1999, all interest costs related to the
borrowings under the credit facility were eligible for capitalization,
resulting in no pro forma adjustments to interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Financial Services Group and the Income Funds using the purchase accounting
method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Funds Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration Received... $77,349,216 $47,834,383 $538,493,773 $663,677,372
=========== =========== ============ ============
Share Consideration....... $76,000,000 $47,000,000 $522,623,372 $645,623,372
Cash Consideration........ -- -- 6,162,000 6,162,000
APF Transaction Costs..... 1,349,216 834,383 9,708,401 11,892,000
----------- ----------- ------------ ------------
Total Purchase Price...... $77,349,216 $47,834,383 $538,493,773 $663,677,372
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.... $ 8,330,475 $10,135,087 $442,804,371 $461,269,933
Purchase Price Adjust-
ments:
Land and buildings on op-
erating leases.......... -- -- 80,142,382 80,142,382
Net investment in direct
financing leases........ -- -- 20,448,150 20,448,150
Investment in joint ven-
tures................... -- -- 14,171,514 14,171,514
Accrued rental income.... -- -- (18,287,268) (18,287,268)
Intangibles and other as-
sets.................... -- (2,575,792) (785,376) (3,361,168)
Goodwill* ............... -- 40,275,088 -- 40,275,088
Excess purchase price.... 69,018,741 -- -- 69,018,741
----------- ----------- ------------ ------------
Total Allocation...... $77,349,216 $47,834,383 $538,493,773 $663,677,372
=========== =========== ============ ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-432
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated on a pro rata basis
to each acquisition based on the total purchase price for the acquisition of
the Advisor, the CNL Financial Services Group and the Income Funds. The excess
purchase price paid for the Advisor to a related party of $69,018,741 was
expensed at June 30, 1999 because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of $40,275,088 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A.................. 8,600
Common Stock (CFA, CFS, CFC)--Class B.................. 4,825
Additional Paid-In Capital (CFA, CFS, CFC)............. 12,568,974
Retained Earnings...................................... 5,883,163
Accumulated distributions in excess of earnings........ 69,018,741
Goodwill for CFC/CFS (Intangibles and other assets).... 40,275,088
CFC/CFS Organizational Costs/Other Assets............ 2,575,792
Cash to pay APF transaction costs.................... 2,183,599
APF Common Stock..................................... 61,500
APF Capital in excess of par value................... 122,938,500
(To record acquisition of CFA, CFS and CFC)
</TABLE>
<TABLE>
<S> <C> <C>
2.Partners' Capital..................................... 442,804,371
Land and buildings on operating leases................ 80,142,382
Net investment in direct financing leases............. 20,448,150
Investment in joint ventures.......................... 14,171,514
Accrued rental income............................... 18,287,268
Intangibles and other assets........................ 785,376
Cash to pay APF Transaction costs................... 9,708,401
Cash consideration to Income Funds.................. 6,162,000
APF Common Stock.................................... 270,351
APF Capital in excess of par value.................. 522,353,021
(To record the acquisition of the Income Funds)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Acquisition Agreement
requires that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes at
the time of the acquisition.
(E) Represents the elimination by the Funds of $1,323,882 in related party
payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
F-433
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Income Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended June
30, 1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.............................................. $ 144,014
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
General and administrative costs............................. $(774,311)
</TABLE>
F-434
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4)
Amortization of goodwill................................... $ 1,006,877
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $553,747 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Funds as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Funds:
<TABLE>
<S> <C>
Management fees.............................................. $(112,161)
Reimbursement of administrative costs........................ (424,691)
---------
$(536,852)
=========
</TABLE>
(l) Represents the elimination of $424,691 in administrative costs
reimbursed by the Funds to the Advisor.
(m) Represents savings of $363,273 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $112,161 in management fees by the
Funds to the Advisor.
(o) Represents additional state income taxes of $105,025 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1999 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Funds
had been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $1,038,410 as a
result of adjusting the historical basis of the real estate wholly owned by
the Income Funds to fair value as a result of accounting
F-435
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
for the Acquisition of the Income Funds under the purchase accounting
method. The adjustment to the basis of the buildings is being depreciated
using the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$260,189 as a result of adjusting the historical basis of the real estate
owned by the Income Funds, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Funds under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Funds is being depreciated using the straight-line method over the
remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 which was in effect during the pro forma
period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799, and depreciation
expense of $6,246,947 as if properties that had been operational when they
were acquired by APF from January 1, 1998 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Income Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted
F-436
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services, Inc. from borrowers during the year ended December
31, 1998, which were deferred for pro forma purposes as described in
5(II)(c). These deferred loan origination fees are being amortized and
recorded as interest income over the terms of the underlying loans (15
years).
<TABLE>
<S> <C>
Interest income............................................. $ 207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.......................... $ (4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4)
<TABLE>
<S> <C>
Amortization of goodwill.................................... $2,013,754
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $1,107,494 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the lease acquired from the Income Funds as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Funds:
Management fees............................................. $ (226,177)
Reimbursement of administrative costs....................... (511,721)
----------
$ (737,898)
==========
</TABLE>
F-437
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(l) Represents the elimination of $511,721 in administrative costs
reimbursed by the Income Funds to the Advisor.
(m) Represents savings of $696,259 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $226,177 in management fees by the
Income Funds to the Advisor.
(o) Represents additional state income taxes of $168,127 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1998 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Funds
had been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $2,076,819 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair value as a
result of accounting for the Acquisition of the Income Funds under the
purchase accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining useful
lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$520,378 as a result of adjusting the historical basis of the real estate
owned by the Income Funds, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Funds under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Funds is being depreciated using the straight-line method over the
remaining useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the basis
of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a one-
for-two stock split proposal and a proposal to increase the number of
authorized common shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 which was in effect during the pro forma
period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
F-438
<PAGE>
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(f) Represents the reversed of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for properties that
had been operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 which was in effect during the pro forma
period presented.
Non Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Funds, as
described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July 1,
1999 through July 31, 1999 to acquire properties that had been operational
upon acquisition by APF since it is assumed that these properties had been
acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Funds and ii) to pay the transaction
costs allocated to the acquisition of the Income Funds.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational upon
acquisition by APF as if these properties had been acquired on January 1,
1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 which was in effect during the pro forma
period presented.
Non-cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Funds, as
described in 4(A) and 4(B).
F-439
<PAGE>
CNL INCOME FUND, LTD.
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Unaudited Pro Forma Financial Information............................... F-441
Unaudited Pro Forma Balance Sheet--As of June 30, 1999.................. F-442
Unaudited Pro Forma Statement of Earnings--For the Six Months Ended June
30, 1999 .............................................................. F-443
Unaudited Pro Forma Statement of Earnings--For the Year Ended December
31, 1998 .............................................................. F-446
Unaudited Pro Forma Statement of Cash Flows--For the Six Months Ended
June 30, 1999 ......................................................... F-448
Unaudited Pro Forma Statement of Cash Flows--For the Year Ended December
31, 1998............................................................... F-450
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................. F-451
</TABLE>
F-440
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-441
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Combining
Pro Forma Combined Historical CNL Pro Forma Adjusted
Adjustments APF Income Fund, Ltd. Adjustments Pro Forma
------------ -------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases
(net depreciation)..... $ 0 $ 572,936,859 $7,472,578 $ 2,329,471 (B2) $ 582,738,908
Net Investment in Direct
Financing Leases....... 0 132,179,949 0 594,360 (B2) 132,774,309
Mortgages and Notes
Receivable............. 0 353,874,178 0 0 353,874,178
Other Investments....... 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 1,081,046 832,194 411,919 (B2) 2,325,159
Cash and Cash
Equivalents............ (10,868,941)(B1) 10,634,940 203,524 (1,023,059)(B2) 9,662,405
(153,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)/Due from
Related Party.......... (6,614,629)(C) 9,247,098 10,896 (149,805)(E) 9,108,189
Accrued Rental Income... 0 5,875,698 31,065 (31,065)(B2) 5,875,698
Other Assets............ (2,575,792)(B1) 13,173,857 30,998 (30,998)(B2) 13,173,857
Goodwill................ 43,593,878 (B1) 43,593,878 0 0 43,593,878
------------ -------------- ---------- ----------- --------------
Total Assets........... $ 23,534,516 $1,169,645,128 $8,581,255 $ 1,947,823 $1,180,174,206
============ ============== ========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 0 $ 5,104,303 $ 36,183 $ 0 $ 5,140,486
Accrued Construction
Costs Payable.......... 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 266,982 0 266,982
Due to Related Parties.. (6,614,629)(C) 25,500,981 149,805 (149,805)(E) 25,500,981
Income Tax Payable...... (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 1,617,367 17,930 0 1,635,297
Minority Interest....... 0 644,611 0 0 644,611
Common Stock............ 61,500 (B1) 434,984 0 5,712 (B2) 440,696
Common Stock--Class A... (8,600)(B1) 0 0 0 0
Common Stock--Class B... (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,936,215 0 10,202,271 (B2) 803,138,486
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ (5,883,163)(B1) (89,211,809) 0 0 (89,211,809)
(74,385,293)(B1)
342,857 (D)
Partners' Capital....... 0 0 8,110,355 (8,110,355)(B2) 0
------------ -------------- ---------- ----------- --------------
Total Liabilities and
Equity................ $ 23,534,516 $1,169,645,128 $8,581,255 $ 1,947,823 $1,180,174,206
============ ============== ========== =========== ==============
Wtd. Avg. Shares
Outstanding 44,069,113
==============
Shares Outstanding 44,069,694
==============
</TABLE>
F-442
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
------------ ---------- ----------- ---------- --------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
------------ ---------- ----------- ---------- --------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... 23,564,432 2,089,441 25,653,873 3,877,654 42,804 (239,337)
Equity Earnings of
Joint
Ventures/Minority
Interest ............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision For Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
------------ ---------- ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
------------ ---------- ----------- ---------- --------- -----------
Net Earnings (Losses)... $ 22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
============ ========== =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
============ ========== =========== ========== ========= ===========
Cash Distributions
Declared............... $ 28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
============ ========== =========== ========== ========= ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
============ ========== =========== ========== ========= ===========
</TABLE>
F-443
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $482,159 $ 11,071 (j) $31,450,744
Fees................... (9,812,516)(b),(c) 2,616,185 0 (16,883)(i) 2,599,302
Interest and Other
Income................ 144,014 (d) 16,269,383 5,203 0 16,274,586
----------- ----------- -------- -------- -----------
Total Revenue.......... (9,668,502) 49,843,082 487,362 (5,812) 50,324,632
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 51,373 (33,172)(l),(m) 9,598,103
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 5,667 2,223 (o) 472,856
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 101,609 68,213 (p) 4,838,975
Amortization........... 1,089,847 (h) 1,099,583 1,251 0 1,100,834
Transaction Costs...... 0 483,005 57,570 0 540,575
----------- ----------- -------- -------- -----------
Total Expenses......... (3,341,912) 26,834,678 217,470 37,264 27,089,412
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... (6,326,590) 23,008,404 269,892 (43,076) 23,235,220
Equity Earnings of
joint
Ventures/Minority
Interest ............. 0 31,241 47,408 (5,820)(q) 72,829
Gain (Loss) on Sale of
Properties............ 0 (201,843) 0 0 (201,843)
Provision For Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- -------- -------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,326,590) 22,297,280 317,300 (48,896) 22,565,684
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- -------- -------- -----------
Net Earnings (Losses)... $(4,800,850) $22,297,280 $317,300 $(48,896) $22,565,684
=========== =========== ======== ======== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 10.58 $ n/a $ 0.51
=========== =========== ======== ======== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 270.35 $ n/a $ 16.21
=========== =========== ======== ======== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 17.80 $ n/a $ 0.76
=========== =========== ======== ======== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.84x
=========== =========== ======== ======== ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $533,964 $(98,413)(s) $33,600,953
=========== =========== ======== ======== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 571,230 44,069,113(r)
=========== =========== ======== ======== ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 571,230 44,069,694
=========== =========== ======== ======== ===========
</TABLE>
F-444
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- --------- ----------
Total Revenue.......... 42,187,037 22,951,799 65,138,836 29,049,079 7,193,142 22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- --------- ----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... 32,778,080 16,704,852 49,482,932 17,613,851 (773,774) (3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- --------- ----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- --------- ----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $(468,133) $ 427,134
=========== =========== =========== =========== ========= ==========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========= ==========
Cash Distributions
Declared............... $39,449,149 $11,544,286(t) $50,993,435 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,570,222 34,218,441 n/a n/a n/a
=========== =========== =========== =========== ========= ==========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========= ==========
</TABLE>
F-445
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $1,037,485 $ 22,141 (i) $57,141,086
Fees................... (32,715,768)(b),(c) 3,226,263 0 (19,424)(k) 3,206,839
Interest and Other
Income................ 207,144 (d) 32,221,925 21,087 0 32,243,012
------------ ----------- ---------- --------- -----------
Total Revenue.......... (32,508,624) 91,529,648 1,058,572 2,717 92,590,937
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 108,159 (45,732)(l),(m) 16,001,983
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(q) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 4,450 3,559 (o) 575,455
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 206,181 136,425 (p) 10,290,945
Amortization........... 2,179,694 (h) 2,343,695 62,079 0 2,405,774
Transaction Costs...... 0 157,054 7,322 0 164,376
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,223,254) 51,512,623 388,191 94,252 51,995,066
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... (23,285,370) 40,017,025 670,381 (91,535) 40,595,871
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 95,252 (11,640)(q) 69,474
Gain on Sale of
Properties............ 0 0 235,804 0 235,804
Gain (Loss) on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,285,370) 43,085,704 1,001,437 (103,175) 43,983,966
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,386,936) $43,085,704 $1,001,437 $(103,175) $43,983,966
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 33.38 $ n/a $ 1.07
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 277.57 $ n/a $ 16.31
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 56.78 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.99x
============ =========== ========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,371,939 $1,703,467 $(832,364)(t) $61,243,042
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,368,441 n/a 571,230 40,939,671 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 571,230 44,059,157
============ =========== ========== ========= ===========
</TABLE>
F-446
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Property CNL Historical
Acquisition Financial CNL
Historical Pro Forma Historical Services, Financial
APF Adjustments Subtotal Advisor Inc. Corp.
------------- ------------ ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments..... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities........... 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities........... (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities........... 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,308,049) 12,891,788 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,464,133 $ 33,228,166 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-447
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
------------ ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ (4,800,850)(a) $ 22,297,280 $ 317,300 $ (48,896)(a) $ 22,565,684
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 0 4,774,655 101,609 68,213 (b) 4,944,477
Amortization expense... 1,089,847 (c) 1,999,600 1,251 0 2,000,851
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 9,185 5,820 (d) 40,125
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 0 0 201,843
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 20,063 0 (2,181,897)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (1,160) 0 (321,585)
Decrease in net
investment in direct
financing leases...... 0 721,624 0 0 721,624
Increase in accrued
rental income......... 0 (1,915,785) (274) 0 (1,916,059)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 34,423 0 (629,055)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 20,745 0 606,472
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (18,175) 0 648,544
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- --------- --------- -------------
Total adjustments..... 1,089,847 (75,899,965) 167,667 74,033 (75,658,265)
------------ ------------- --------- --------- -------------
Net cash provided by
(used in) operating
activities........... (3,711,003) (53,602,685) 484,967 25,137 (53,092,581)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 0 0 3,696,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Aqcuisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596.244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- --------- --------- -------------
Net cash provided by
(used in) investing
activities........... 4,452,252 (111,734,526) 0 0 (111,734,526)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,240) (533,964) 98,413(g) (33,720,761)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- --------- --------- -------------
Net cash provided by
(used in) financing
activities........... (4,689,252) 180,263,475 (533,964) 98,413 179,827,924
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (48,997) 123,550 15,000,817
Cash at beginning of
year................... (13,001,199) 4,092,548 252,521 (298,805) 4,046,264
------------ ------------- --------- --------- -------------
Cash at end of year..... $(16,949,202) $ 19,018,812 $ 203,524 $(175,666) $ 19,047,081
============ ============= ========= ========= =============
</TABLE>
F-448
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to
reconcile net income
(loss) to net cash
provided
by (used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments..... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities........... 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
0 0 0 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities........... (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,544,286)(j) (50,993,435) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities........... 313,835,541 (8,174,430) 305,661,111 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,308,049) (34,694,989) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,308,049) $ 12,891,788 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-449
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Subtotal Adjustments Pro Forma
------------ ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $(16,386,936)(a) $ 43,085,704 $ 1,001,437 $ 44,087,141 $ (103,175)(a) $ 43,983,966
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation........... (340,898)(b) 10,147,496 206,181 10,353,677 136,425 (b) 10,490,102
Amortization expense... 2,179,694 (c) 4,493,778 62,079 4,555,857 0 4,555,857
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 18,518 3,078 11,640 (d) 14,718
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (235,804) (235,804) 0 (235,804)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 0 1,009,576 0 1,009,576
Gain on
securitization........ 0 (3,356,538) 0 (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... 0 (2,543,413) (6,380) (2,549,793) 0 (2,549,793)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. 0 (953,688) 0 (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 (474) 6,772 0 6,772
Decrease in net
investment in direct
financing leases...... 0 1,971,634 0 1,971,634 0 1,971,634
Increase in accrued
rental income......... 0 (2,187,652) (3,486) (2,191,138) 0 (2,191,138)
Increase in intangibles
and other assets...... 0 (154,351) 0 (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 846,680 (1,569) 845,111 845,111
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) (7,081) (140,445) 0 (140,445)
Increase in accrued
interest.............. 0 (77,968) 0 (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 368 437,211 0 437,211
Decrease in deferred
rental income......... 0 693,372 0 693,372 0 693,372
------------ ------------- ----------- ------------- ----------- -------------
Total adjustments..... 1,838,796 13,368,601 32,352 13,400,953 148,065 13,549,018
------------ ------------- ----------- ------------- ----------- -------------
Net cash provided by
(used in) operating
activities........... (14,548,140) 56,454,305 1,033,789 57,488,094 44,890 57,532,984
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 661,300 3,047,241 0 3,047,241
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 (304,010,742) 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 (47,115,435) 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) 0 (974,696) 0 (974,696)
Acquisition of
businesses............ (10,868,941)(f) (10,868,941) (10,868,941) (1,023,059)(g) (12,045,000)
0 (153,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 212,821 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 291,990 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 126,009 126,009 0 126,009
Increase in intangibles
and other assets...... 0 (6,281,069) 0 (6,281,069) 0 (6,281,069)
Other.................. 0 200,000 0 200,000 0 200,000
------------ ------------- ----------- ------------- ----------- -------------
Net cash provided by
(used in) investing
activities........... 10,925,445 (389,625,197) 787,309 (388,837,888) (1,176,059) (390,013,947)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 424,815,816 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 (34,073) 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,736,427) (1,752,707) (71,489,134) 832,364 (j) (70,656,770)
Other.................. 0 (2,595,088) 0 (2,595,088) 0 (2,595,088)
------------ ------------- ----------- ------------- ----------- -------------
Net cash provided by
(used in) financing
activities........... (9,378,504) 287,434,310 (1,752,707) 285,681,603 832,364 286,513,967
Net increase (decrease)
in cash................ (13,001,199) (45,736,582) 68,391 (45,668,191) (298,805) (45,966,996)
Cash at beginning of
year................... 0 49,829,130 184,130 50,013,260 0 50,013,260
------------ ------------- ----------- ------------- ----------- -------------
Cash at end of year..... $(13,001,199) $ 4,092,548 $ 252,521 $ 4,345,069 $ (298,805) $ 4,046,264
============ ============= =========== ============= =========== =============
</TABLE>
F-450
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-451
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit
facility at June 30, 1999 to pro forma properties acquired from July 1,
1999 through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all interest
costs related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $10,207,983 $133,207,983
Cash Consideration...... -- -- 153,000 153,000
APF Transaction Costs... 6,715,768 4,153,173 1,023,059 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $ 8,110,355 $ 26,575,917
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 2,329,471 2,329,471
Net investment in
direct financing
leases............... -- -- 594,360 594,360
Investment in joint
ventures............. -- -- 411,919 411,919
Accrued rental
income............... -- -- (31,065) (31,065)
Intangibles and other
assets............... -- (2,575,792) (30,998) (2,606,790)
Goodwill*............. -- 43,593,878 -- 43,593,878
Excess purchase
price................ 74,385,293 -- -- 74,385,293
----------- ----------- ----------- ------------
Total Allocation.... $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-452
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,385,293 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of $43,593,878 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A........... 8,600
Common Stock (CFA, CFS, CFC)--Class B........... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of
earnings....................................... 74,385,293
Goodwill for CFC/CFS (Intangibles and other
assets)........................................ 43,593,878
CFC/CFS Org Costs/Other Assets................ 2,575,792
Cash to pay APF transaction costs............. 10,868,941
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 8,110,355
Land and buildings on operating leases.......... 2,329,471
Net investment in direct financing leases....... 594,360
Investment in joint ventures.................... 411,919
Accrued rental income......................... 31,065
Intangibles and other assets.................. 30,998
Cash to pay APF Transaction costs............. 1,023,059
Cash consideration to Income Funds............ 153,000
APF Common Stock.............................. 5,712
APF Capital in Excess of Par Value............ 11,418,888
(To record acquisition of Income Fund) 10,202,271
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of
$342,857 from liabilities assumed in the acquisition since the Merger
Agreement requires that the Advisor and CNL Restaurant Financial Services
Group have no accumulated or current earnings and profits for federal
income tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $149,805 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
F-453
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $ (689,425)
Secured equipment lease fees................................. (67,967)
Advisory fees................................................ (126,788)
Reimbursement of administrative costs........................ (382,728)
Acquisition fees............................................. (4,452,252)
Underwriting fees............................................ (54,248)
Administrative, executive and guarantee fees................. (532,389)
Servicing fees............................................... (572,728)
Development fees............................................. (38,853)
Management fees.............................................. (1,681,870)
-----------
Total...................................................... $(8,599,248)
===========
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 deferred for pro forma purposes and are being amortized over the
terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended June
30, 1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
Interest income.............................................. $ 144,014
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
General and administrative costs............................. $ (774,311)
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
Management fees.............................................. $(1,681,870)
Administrative executive and guarantee fees.................. (532,389)
Servicing fees............................................... (572,728)
Advisory fees................................................ (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $292,786 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
F-454
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,089,847
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $11,071 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................. $ 0
Reimbursement of administrative costs........................... (16,883)
--------
$(16,883)
========
</TABLE>
(l) Represents the elimination of $16,883 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $16,289 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $2,223 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1999 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $68,213 as a
result of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings is being depreciated using the straight-line
method over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of $5,820
as a result of adjusting the historical basis of the real estate owned by
the Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
F-455
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational when they
were acquired by APF from January 1, 1998 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................ $ (1,773,406)
Secured equipment lease fees................................ (54,998)
Advisory fees............................................... (305,030)
Reimbursement of administrative costs....................... (408,762)
Acquisition fees............................................ (21,794,386)
Underwriting fees........................................... (388,491)
Administrative, executive and guarantee fees................ (1,233,043)
Servicing fees.............................................. (1,570,331)
Development fees............................................ (229,153)
Management fees............................................. (1,851,004)
------------
Total..................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended December
31, 1998, which were deferred for pro forma purposes as described in
5(II)(c). These deferred loan origination fees are being amortized and
recorded as interest income over the terms of the underlying loans (15
years).
<TABLE>
<S> <C>
Interest income................................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.............................................. $(1,851,004)
Administrative executive and guarantee fees.................. (1,233,043)
Servicing fees............................................... (1,269,357)
Advisory fees................................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
F-456
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill....................................... $2,176,694
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $22,141 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................. $ 0
Reimbursement of administrative costs........................... (19,424)
--------
$(19,424)
========
</TABLE>
(l) Represents the elimination of $19,424 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $26,308 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $3,559 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1998 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $136,425 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair value as a
result by the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings is being depreciated using the
straight-line method over the remaining useful lives of the properties.
F-457
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$11,640 as a result of adjusting the historical basis of the real estate
owned by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Fund is being depreciated using the straight-line method over the remaining
useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the basis
of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a one-
for-two reverse stock split proposal and a proposal to increase the number
of authorized common shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for properties that
had been operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
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CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July 1,
1999 through July 31, 1999 to acquire properties that had been operational
upon acquisition by APF since it is assumed that these properties had been
acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational upon
acquisition by APF as if these properties had been acquired on January 1,
1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
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CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of your
Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis.
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Unlike your Income Fund, which is restricted, due to capital and other
limitations, to owning and leasing a static number of restaurant properties on
a triple-net basis, APF has the ability to offer a complete range of restaurant
property services to operators of national and regional restaurant chains, from
triple-net leasing and mortgage financing to site selection, construction
management and build-to-suit development. If APF acquires all of the Income
Funds in the Acquisition, APF expects to have total assets of approximately
$1.5 billion at the time of the consummation of the Acquisition and will be one
of the largest triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 578,880 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be
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counted as a vote "For" the Acquisition. If you do not vote or you abstain from
voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,924.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
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Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 578,880 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $843, $843 and $1,136, respectively, to you per $10,000
investment. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $391 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring
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all the terms and conditions of the Acquisition. We engaged legal counsel to
assist with the preparation of the documentation for the Acquisition, including
the consent solicitation, and such legal counsel did not serve, or purport to
serve, as legal counsel for the Income Funds or Limited Partners. If an
independent representative had been retained for the Income Funds, the terms of
the Acquisition may have been different and possibly more favorable to the
Limited Partners. In particular, had separate representation for each of the
Income Funds been arranged by us, issues unique to the value of each of the
specific Income Funds might have been highlighted or received greater
attention, resulting in adjustments to the value assigned to the assets of such
Income Funds and increasing the number of APF Shares or notes that would be
allocable to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,210 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the
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mortgage loans on favorable terms could be adversely affected by a variety of
factors, including adverse market conditions and adverse performance of its
loan portfolio or servicing responsibilities. If APF is unable to access the
securitization market, it would have to retain as assets those mortgage loans
it would otherwise securitize, thereby remaining exposed to the related credit
and repayment risks on such mortgage loans. Under such circumstances, APF would
also have to seek a different source for funding its operations than
securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.94%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.35x and its ratio of debt-to-total assets would
have been 35.62%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
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APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience, services
and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or that
of its franchisor or vendors, to adequately address year 2000 issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of June
30, 1999, your Income Fund had no tenants under bankruptcy protection.
Therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999, would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for the same period.
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Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funds available for stockholder
distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
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CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Investments
Original less
Limited Distributions
Partner of Net Sales Estimated Value of
Investments Proceeds per Estimated APF Shares per
less Average Number of Value of APF Estimated Value Average $10,000
Distributions $10,000 APF Shares Shares Estimated of APF Shares Original Limited
of Net Sales Original Offered to Payable to Acquisition after Acquisition Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$12,001,150 $8,001 578,880 $11,577,600 $153,000 $11,424,600 $7,616
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$15,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
S-9
<PAGE>
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)...................................................... $ 8,684
Appraisals and Valuation(2)........................................ 2,640
Fairness Opinions(3)............................................... 30,000
Solicitation Fees(4)............................................... 5,831
Printing and Mailing(5)............................................ 32,705
Accounting and Other Fees(6)....................................... 16,364
--------
Subtotal....................................................... 96,224
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7).......................... 27,810
Legal Closing Fees(8).............................................. 13,737
Partnership Liquidation Costs(9)................................... 15,229
--------
Subtotal....................................................... 56,776
--------
Total.............................................................. $153,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
S-10
<PAGE>
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 66 2/3% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
S-11
<PAGE>
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
S-12
<PAGE>
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended
----------------------- June 30,
1996 1997 1998 1999
------- ------- ------- ----------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions............. -- -- -- --
Accounting and Administrative Services.... $67,685 $57,679 $63,981 $29,458
Broker/Dealer Commissions................. -- -- -- --
Due Diligence and Marketing Support Fees.. -- -- -- --
Acquisition Fees.......................... -- -- -- --
Asset Management Fees..................... -- -- -- --
Real Estate Disposition Fees(1)........... -- -- 20,400 --
------- ------- ------- -------
Total historical....................... $67,685 $57,679 $84,381 $29,458
Pro Forma Distributions to Be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares(2)....... -- -- -- --
Salary Compensation....................... -- -- -- --
------- ------- ------- -------
Total pro forma........................ -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of the original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
---------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
------ ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income... $ 798 $635 $715 $824 $ 662 $209 $195
Distributions from Sales of
Properties................. 574 -- -- -- 391 -- --
Distributions from Return of
Capital(1)................. 147 208 128 19 83 147 95
------ ---- ---- ---- ------ ---- ----
Total..................... $1,519 $843 $843 $843 $1,136 $356 $290
====== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To
S-13
<PAGE>
review the pro forma financial information in greater detail with respect to
APF after giving effect to the Acquisition and the acquisition of the CNL
Restaurant Businesses, see the section entitled "Unaudited Pro Forma Financial
Information" in the consent solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is more
economically attractive to you and the other Limited Partners than such
alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired, all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
S-14
<PAGE>
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-orientated operating
company, you will have the opportunity, as an APF stockholder, to participate
in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
S-15
<PAGE>
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales Average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd. .. $12,001,150 $8,001 $7,616 $7,589 $7,033 $7,504
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$15,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
S-16
<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds.
James M. Seneff, Jr. and Robert A. Bourne act as the individual general
partners of all of the Income Funds and also as members of the Board of
Directors of APF. While Messrs. Seneff and Bourne have sought faithfully to
discharge their obligations to your Income Fund, there is an inherent conflict
of interest in serving, directly or indirectly, in a similar capacity with
respect to your Income Fund and also on APF's Board of Directors. Additionally,
as stockholders of APF, Messrs. Seneff's and Bourne's interest in the
completion of the Acquisition may conflict with yours as a Limited Partner of
the Income Fund and with their own as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all
of your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement
for your Income Fund prohibits the Income Fund from incurring
indebtedness, the only liabilities the Income Fund has are liabilities
with respect to its ongoing business operations. In the event that your
Income Fund is acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund.
S-17
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
S-18
<PAGE>
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner Investment
------------------
<S> <C>
CNL Income Fund, Ltd. ................................. $1,924
</TABLE>
- --------
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses
S-19
<PAGE>
from the sale of section 1231 assets of your Income Fund would be combined with
any other section 1231 gains and losses that you recognize in that year. If the
result is a net loss, such loss is characterized as an ordinary loss. If the
result is a net gain, it is characterized as a capital gain, except that the
gain will be treated as ordinary income to the extent that you have "non-
recaptured section 1231 losses." For these purposes, the term "non-recaptured
section 1231 losses" means your aggregate section 1231 losses for the five most
recent prior years that have not been previously recaptured. However, gain
recognized on the sale of personal property will be taxed as ordinary income to
the extent of all prior depreciation deductions taken by your Income Fund prior
to sale. In general, you may only use up to $3,000 of capital losses in excess
of capital gains to offset ordinary income in any taxable year. Any excess loss
is carried forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employees'
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The
S-20
<PAGE>
basis of the restaurant properties received by APF from the Income Funds will
equal the fair market value of the APF Shares, plus the issue price of the
notes issued in the Acquisition, plus the amount of any liabilities of the
Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,089,847 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,341,912)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,326,590)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,326,590)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (l)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,800,850)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
Combined CNL Income Pro Forma Adjusted
APF Fund, Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $482,159 $ 11,071 (j) $31,450,744
Fees............. 2,616,185 0 (16,883)(k) 2,599,302
Interest and
Other Income..... 16,269,383 5,203 0 16,274,586
------------ ---------- ------------------ ------------
Total Revenue... $49,843,082 $487,362 $ (5,812) $50,324,632
Expenses:
General and
Administrative... 9,579,902 51,373 (33,172)(l),(m) 9,598,103
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 5,667 2,223 (o) 472,856
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 101,609 68,213 (p) 4,838,975
Amortization..... 1,099,583 1,251 0 1,100,834
Transaction
Costs............ 483,005 57,570 0 540,575
------------ ---------- ------------------ ------------
Total Expenses.. 26,834,678 217,470 37,264 27,089,412
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,008,404 $269,892 $(43,076) $23,235,220
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 47,408 (5,820)(q) 72,829
Gain (Loss) on
Sale of
Properties....... (201,843) 0 0 (201,843)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,297,280 317,300 (48,896) 22,565,684
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $22,297,280 $317,300 $(48,896) $22,565,684
============ ========== ================== ============
</TABLE>
S-22
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $23,534,516 (u1),(v)
Total liabilities/
minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $30,492,002 (u1),(w)
<CAPTION>
Historical
Combined CNL Income Pro Forma Adjusted
APF Fund, Ltd. Adjustments Pro Forma
-------------- ---------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 17 n/a 598
============== ========== ==================== =================
Earnings per
share/unit...... $ n/a $ 10.58 $ n/a $ 0.51
============== ========== ==================== =================
Book value per
share/unit...... $ n/a $ 270.35 $ n/a $ 16.21
============== ========== ==================== =================
Dividends per
share/unit...... $ n/a $ 17.80 $ n/a $ 0.76
============== ========== ==================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.84x
============== ========== ==================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 533,964 $ (98,413)(s) $ 33,600,953
============== ========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 571,230 44,069,113(r)
============== ========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 571,230 44,069,694
============== ========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $7,472,578 $2,923,832 (u2) $ 705,209,393
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 10,896 $ (149,805)(x) $ 9,108,189
Investment in
joint ventures.. $ 1,081,046 $ 832,194 $ 411,919 (u2) $ 2,325,159
Total assets.... $1,169,645,128 $8,581,255 $1,947,823 (u2),(x) $1,180,174,206
Total liabilities/
minority
interest........ 465,485,738 $ 470,900 $ (149,805)(x) $ 465,806,833
Total equity.... $ 704,159,390 $8,110,355 $2,097,628 (u2) $ 714,367,373
</TABLE>
S-23
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
------------
Total.................................................... $(8,599,248)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<CAPTION>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
------------
$(2,913,775)
============
</TABLE>
(g) Represents the elimination of $292,786 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
S-24
<PAGE>
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ............................. $1,089,847
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $11,071 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees........................................ $ 0
Reimbursement of administrative costs.................. (16,883)
--------
$(16,883)
========
</TABLE>
(l) Represents the elimination of $16,883 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $16,289 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $2,223 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $68,213 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $5,820
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from July
1, 1999 through July 31, 1999 as if these properties had been acquired
on June 30, 1999. Based on historical results through July 31, 1999,
all interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma adjustments
to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
S-25
<PAGE>
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $10,207,983 $133,207,983
Cash Consideration...... -- -- 153,000 153,000
APF Transaction Costs... 6,715,768 4,153,173 1,023,059 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets Historical... $ 8,330,475 $10,135,087 $ 8,110,355 $ 26,575,917
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 2,329,471 2,329,471
Net investment in
direct financing
leases................ -- -- 594,360 594,360
Investment in joint
ventures.............. -- -- 411,919 411,919
Accrued rental income.. -- -- (31,065) (31,065)
Intangibles and other
assets................ -- (2,575,792) (30,998) (2,606,790)
Goodwill*.............. -- 43,593,878 -- 43,593,878
Excess purchase price.. 74,385,293 -- -- 74,385,293
----------- ----------- ----------- ------------
Total Allocation...... $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,385,293 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $43,593,878 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A........... 8,600
Common Stock (CFA, CFS, CFC)--Class B............ 4,825
Additional Paid-in Capital (CFA, CFS, CFC)....... 12,568,974
Retained Earnings................................ 5,883,163
Accumulated distributions in excess of earnings.. 74,385,293
Goodwill for CFC/CFS (Intangibles and other
assets)......................................... 43,593,878
CFC/CFS Organizational Costs/Other Assets........ 2,575,792
Cash to pay APF transaction costs................ 10,868,941
APF Common Stock................................. 61,500
APF Capital in Excess of Par Value............... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners' Capital............................... 8,110,355
Land and buildings on operating leases........... 2,329,471
Net investment in direct financing leases........ 594,360
Investment in joint ventures..................... 411,919
Accrued rental income............................ 31,065
Intangibles and other assets..................... 30,998
Cash to pay APF Transaction costs................ 1,023,059
Cash consideration to Income Funds............... 153,000
APF Common Stock................................. 5,712
APF Capital in Excess of Par Value............... 10,202,271
(To record acquisition of your Income Fund)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
S-26
<PAGE>
(x) Represents the elimination by the Income Fund of $149,805 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on F-422 through F-459.
S-27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund,
Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
--------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 534,770 $ 584,745 $1,153,824 $1,333,000 $1,389,308 $1,290,567 $ 1,358,871
Net income (2).......... 317,300 650,012 1,001,437 1,248,757 1,083,109 962,102 1,208,576
Cash distributions
declared (3)........... 533,964 1,169,504 1,703,468 1,264,884 1,264,884 1,264,883 2,279,123
Net income per unit
(2).................... 10.47 21.50 33.09 41.24 35.75 31.75 39.91
Cash distributions
declared per unit (3).. 17.80 38.98 56.78 42.16 42.16 42.16 75.97
GAAP book value per
unit .................. 270.35 283.65 277.57 300.97 301.51 307.57 317.66
Weighted average number
of Limited Partner
units outstanding...... 30,000 30,000 30,000 30,000 30,000 30,000 30,000
<CAPTION>
June 30, December 31,
--------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $8,581,255 $9,542,020 $8,760,926 $9,500,078 $9,479,777 $9,668,878 $10,857,414
Total partners'
capital................ 8,110,355 8,509,558 8,327,019 9,029,050 9,045,177 9,226,952 9,529,733
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the six months ended June 30, 1998 and the year ended
December 31, 1998 includes $235,804 from gain on sale of land and building.
In addition, net income for the years ended December 31, 1997 and 1996,
includes $233,183 and $19,000, respectively, from gains on sale of land and
buildings.
(3) Distributions for the six months ended June 30, 1998 and the year ended
December 31, 1998 include $586,300 and 1994 include $861,500 as a result of
the distribution of a portion of the net sales proceeds from the sales of
restaurant properties.
S-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 26, 1985, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food
restaurant chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 17 restaurant properties,
which included interests in two restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and one restaurant property owned
with affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998, was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. For the six months ended June 30, 1999
and 1998, the Income Fund generated cash from operations of $484,967 and
$557,386, respectively. The decrease in cash from operations for the six months
ended June 30, 1999 is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Income Fund's
working capital.
In addition, in July 1999, the Income Fund entered into a promissory note
with the corporate general partner for a loan in the amount of $21,000 in
connection with the operations of the Income Fund. The loan is
uncollateralized, non-interest bearing and due on demand.
Currently, rental income from the Income Fund's restaurant properties and
any amounts borrowed under a promissory note, as described above, are invested
in money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, certificates of deposit, and money
market accounts with less than a 30-day maturity date, pending the Income
Fund's use of such funds to pay Income Fund expenses or to make distributions
to the Limited Partners. At June 30, 1999, the Income Fund had $203,524
invested in such short-term investments, as compared to $252,521 at December
31, 1998. The funds remaining at June 30, 1999 will be used to pay
distributions and other liabilities.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
generated cash from operations, which includes cash received from tenants,
distributions from joint ventures and interest received, less cash paid for
expenses, of $1,033,789, $1,316,816, and $1,132,688. The decrease in cash from
operations during 1998, as compared to 1997, and the increase during 1997, as
compared to 1996, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Income Fund's
working capital during each of the respective years.
S-29
<PAGE>
Cash from operations during the years ended December 31, 1998, 1997, and
1996, was also affected by the following.
In August 1996, the Income Fund entered into a lease amendment with the
tenant of the restaurant property in Mesquite, Texas, to provide for lower
initial base rent with scheduled rent increases retroactively effective March
1996. In anticipation of entering into this lease amendment, the Income Fund
accepted a promissory note in March 1996, in the amount of $156,308, for past
due rental and other amounts, and real estate taxes previously paid by the
Income Fund on behalf of the tenant. Payments were due in 60 monthly
installments of $3,492, including interest at a rate of 11 percent per annum,
and collections commenced on June 1, 1996. Receivables at December 31, 1996,
included $150,787 of such amounts, including accrued interest of $5,657 and
late fees of $1,222. During 1997, the Income Fund collected the full amount of
the promissory note.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In June 1996, the Income Fund sold a small, undeveloped portion of the land
relating to its restaurant property in Mesquite, Texas. In connection
therewith, the Income Fund received net sales proceeds of $20,000 and
recognized a gain for financial reporting purposes of $19,000. Proceeds from
the sale were used for operating activities of the Income Fund.
During 1996 and 1997, the Income Fund entered into various promissory notes
with the corporate general partner for loans totalling $83,100 and $133,000,
respectively, in connection with the operations of the Income Fund. The loans
were uncollateralized, non-interest bearing and due on demand. As of December
31, 1997, the Income Fund had repaid the loans in full to the corporate general
partner.
In August 1997, the Income Fund sold its restaurant property in Casa Grande,
Arizona, to a third party for $840,000 and received net sales proceeds of
$793,009, resulting in a gain of $233,183 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in December
1986 and had a cost of approximately $667,300, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $128,400 in excess of its original
purchase price. In October 1997, the Income Fund reinvested the majority of the
net sales proceeds in a restaurant property in Camp Hill, Pennsylvania, as
described below. The Income Fund used the remaining net sales proceeds to pay
liabilities of the Income Fund, including quarterly distributions to the
Limited Partners. The transaction, or a portion thereof, relating to the sale
of the restaurant property in Casa Grande, Arizona, and the reinvestment of the
majority of the net sales proceeds in a restaurant property in Camp Hill,
Pennsylvania, qualified as a like-kind exchange transaction for federal income
tax purposes.
In addition, in August 1997, Seventh Avenue Joint Venture, in which the
Income Fund owned a 50 percent interest, sold its restaurant property to its
tenant for $950,000 and received net sales proceeds of
$944,747, resulting in a gain to the joint venture of approximately $295,100
for financial reporting purposes. The restaurant property was originally
acquired by Seventh Avenue Joint Venture in June 1986 and had a total cost of
approximately $770,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the joint venture sold the restaurant property
for approximately $177,400 in excess of its original purchase price. During
1997, as a result of the sale of the restaurant property, the joint venture was
dissolved in accordance with the joint venture agreement. As a result, the
Income Fund received approximately $472,400, representing its pro rata share of
the net sales proceeds received by the joint venture. In October 1997, the
Income Fund reinvested a portion of these net sales proceeds in a Ground Round
restaurant property in Camp Hill, Pennsylvania, as described below. In December
1997, the Income Fund reinvested the remaining net sales proceeds in a
restaurant property located in Vancouver, Washington, as tenants-in-common with
certain of our affiliates. The Income Fund distributed amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, if any, at a
level reasonably assumed by us, resulting from the sale.
S-30
<PAGE>
In April 1998, the Income Fund sold its restaurant property in Kissimmee,
Florida, to the tenant for $680,000 and received net sales proceeds of
$661,300, resulting in a gain of $235,804 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in 1987 and
had a cost of approximately $475,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold this
restaurant property for approximately $185,900 in excess of its original
purchase price. In connection with the sale, the Income Fund incurred a
deferred, real estate disposition fee of $20,400. Payment of the real estate
disposition fee is subordinated to receipt by the Limited Partners of the
cumulative 10% preferred return, plus their adjusted capital contributions. The
Income Fund distributed $586,300 of the net sales proceeds as a special
distribution to the Limited Partners and made the remaining net sales proceeds
available to pay Income Fund liabilities. The Income Fund distributed amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any, at a level reasonably assumed by us, resulting from the sale. To
the extent that any of the sales proceeds remain undistributed when the Income
Fund is acquired by APF, such funds will become an asset of APF and therefore
will not be distributed to the Limited Partners.
None of the restaurant properties owned by the Income Fund or any joint
venture in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowings from us, however, the Income Fund
may borrow, in our discretion, for the purpose of maintaining the operations of
the Income Fund. The Income Fund will not encumber any of the restaurant
properties in connection with any borrowings or advances. The Income Fund will
not borrow for the purpose of returning capital to the Limited Partners. The
Income Fund also will not borrow under circumstances which would make the
Limited Partners liable to creditors of the Income Fund. Our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, distributions to Limited Partners or use for
the payment of Income Fund liabilities, are invested in money market accounts
or other short-term highly liquid investments such as demand deposit accounts
at commercial banks, CDs and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
Fund had $252,521 invested in such short-term investments as compared to
$184,130 at December 31, 1997. The increase in cash and cash equivalents is
primarily due to the Income Fund not reinvesting all of the net sales proceeds
received from the sale of the restaurant property in Kissimmee, Florida in
April 1998. As of December 31, 1998, the average interest rate earned on the
rental income deposited in demand deposit accounts at commercial banks was
approximately three percent annually. The funds remaining at December 31, 1998,
will be used for the payment of distributions and other liabilities.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution.
S-31
<PAGE>
Based on current and anticipated future cash from operations, for the six
months ended June 30, 1998, proceeds from the sale of a restaurant property,
and to a lesser extent, the loan received from the corporate general partner in
July 1999, the Income Fund declared distributions to Limited Partners of
$533,964 and $1,169,504 for the six months ended June 30, 1999 and 1998,
respectively, or $266,982 and $853,283 for the quarters ended June 30, 1999 and
1998, respectively. This represents distributions of $17.80 and $38.98 per unit
for the six months ended June 30, 1999 and 1998, respectively, or $8.90 and
$28.44 for the quarters ended June 30, 1999 and 1998, respectively. The
distribution for the six months ended June 30, 1998, included $586,300 of net
sales proceeds from the sale of the restaurant property in Kissimmee, Florida.
This special distribution was effectively a return of a portion of the Limited
Partners' investment, although, in accordance with the Income Fund's
partnership agreement, $216,361 was applied towards the Limited Partners' ten
percent preferred return and the balance of $369,939 was treated as a return of
capital for purposes of calculating the Limited Partners' ten percent preferred
return. As a result of this return of capital, the amount of the Limited
Partners' invested capital contributions, which generally is the Limited
Partners' capital contributions, less distributions from the sale of a
restaurant property that are considered to be a return of capital, was
decreased; therefore, the amount of the Limited Partners' invested capital
contributions on which the ten percent preferred return is calculated was
lowered accordingly. As a result of the sale of the restaurant property, the
Income Fund's total revenue was reduced, while the majority of the Income
Fund's operating expenses remained fixed. Therefore, distributions of net cash
flow were adjusted. No distributions were made to us for the quarters and six
months ended June 30, 1999 and 1998. No amounts distributed to the Limited
Partners for the six months ended June 30, 1999 and 1998, except for $369,939
as described above, are required to be or have been treated by the Income Fund
as a return of capital for purposes of calculating the Limited Partners' return
on their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distribution to the Limited Partners
on a quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $470,900 at June 30, 1999, from $433,907 at December 31, 1998,
primarily as a result of the Income Fund accruing transaction costs relating to
the Acquisition. The increase in liabilities at June 30, 1999 was partially
offset by a decrease in rents paid in advance at June 30, 1999, as compared to
December 31, 1998. Liabilities at June 30, 1999, to the extent they exceed cash
and cash equivalents at June 30, 1999, will be paid from future cash from
operations and, in the event we elect to make additional capital contributions
or loans to the Income Fund, from future contributions or loans from us.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases for the Income Fund's restaurant properties are generally on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based primarily on current and anticipated future cash from operations,
proceeds from the sale of restaurant properties as described above, and to a
lesser extent additional loans received from us, the Income Fund declared
distributions to Limited Partners of $1,703,468 during 1998 and $1,264,884 for
each of the years ended December 31, 1997 and 1996. This represents
distributions of $56.78 per Unit for the year ended December 31, 1998 and
$42.16 per unit for each of the years ended December 31, 1997 and 1996.
Distributions during 1998 included $586,300 of net sales proceeds from the sale
of the restaurant property in Kissimmee, Florida. This special distribution was
effectively a return of a portion of the Limited Partners investment; although,
in accordance with the Income Fund's partnership agreement, $216,361 was
applied towards the 10% preferred return, on a cumulative basis, and the
balance of $369,939 was treated as a return of capital for purposes of
calculating the 10% preferred return. As a result of the sale of the restaurant
property during 1998, the Income Fund's total revenue was reduced during 1998
and is expected to remain reduced in
S-32
<PAGE>
subsequent years, while the majority of the Income Fund's operating expenses
remained fixed. Therefore, distributions of net cash flow were adjusted
commencing during the quarter ended June 30, 1998.
Amounts payable to other parties, including distributions payable, decreased
to $268,742 at December 31, 1998, from $319,550 at December 31, 1997. The
decrease is primarily the result of a decrease in distributions payable to the
Limited Partners at December 31, 1998. Liabilities at December 31, 1998, to the
extent they exceed cash and cash equivalents at December 31, 1998, will be paid
from future cash from operations or, in the event we elect to make additional
contributions or loans to the Income Fund, from future contributios or loans
from us.
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $45,018, $33,962, and $40,510, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$41,910 and $48,991, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, as of December 31, 1998
and 1997, the Income Fund also owed affiliates $87,150 and $66,750,
respectively, in real estate disposition fees due as a result of services
rendered in connection with the sale of one restaurant property during 1998 and
two restaurant properties in previous years. The payment of such fees is
deferred until the Limited Partners have received the sum of their cumulative
10% preferred return and their adjusted capital contributions.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund owned and leased
15 wholly owned restaurant properties, including one restaurant property in
Kissimmee, Florida, which was sold in April 1998, and during the six months
ended June 30, 1999, the Income Fund owned and leased 14 wholly owned
restaurant properties, to operators of fast-food and family-style restaurant
chains. In connection therewith, during the six months ended June 30, 1999 and
1998, the Income Fund earned $482,159 and $530,832, respectively, in rental
income from these restaurant properties, $248,493 and $257,223 of which was
earned during the quarters ended June 30, 1999 and 1998, respectively. The
decrease in rental income during the quarter and six months ended June 30,
1999, as compared to the quarter and six months ended June 30, 1998, is
partially attributable to a decrease in rental income as a result of the sale
of the restaurant property in Kissimmee, Florida, during 1998.
The decrease in rental income during the quarter and six months ended June
30, 1999, as compared to the quarter and six months ended June 30, 1998, is
also partially a result of the fact that during the quarter and six months
ended June 30, 1999, the Income Fund established an allowance for doubtful
accounts in connection with the tenant of the restaurant property in Mesquite,
Texas filing for bankruptcy. While the tenant has not rejected or affirmed this
lease, there can be no assurance that the lease will not be rejected in the
future. The possible rejection of this lease could have an adverse effect on
the results of operations of the Income Fund, if the Income Fund is not able to
re-lease the restaurant property in a timely manner.
For the six months ended June 30, 1999 and 1998, the Income Fund owned and
leased two restaurant properties indirectly through joint venture arrangements
and one restaurant property with our affiliates as tenants-in-common. In
connection therewith, during the six months ended June 30, 1999 and 1998, the
Income Fund earned $47,408 and $41,457, respectively, attributable to net
income earned by these joint ventures, $23,518 and $20,584 of which was earned
during the quarters ended June 30, 1999 and 1998, respectively.
S-33
<PAGE>
Operating expenses, including depreciation and amortization expense, were
$217,470 and $170,537 for the six months ended June 30, 1999 and 1998,
respectively, of which $104,225 and $86,465 were incurred for the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, is primarily attributable to the
fact that the Income Fund incurred $26,454 and $57,750, respectively, in
transaction costs related to our retaining financial and legal advisors to
assist us in evaluating and negotiating the Acquisition with APF. If the
Limited Partners reject the Acquisition, the Income Fund will bear their
portion of the transaction costs based upon the percentage of "For" votes and
we will bear its portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
As a result of the sale of a restaurant property during the six months ended
June 30, 1998, the Income Fund recognized a gain of $235,804 for financial
reporting purposes. No restaurant properties were sold during the six months
ended June 30, 1999.
The Years Ended December 31, 1998, 1997 and 1996
During 1996, the Income Fund owned and leased 15 wholly owned restaurant
properties, during 1997, the Income Fund owned and leased 16 wholly owned
restaurant properties, including one restaurant property in Casa Grande,
Arizona, which was sold in August 1997, and during 1998, the Income Fund owned
and leased 15 wholly owned restaurant properties, including one restaurant
property in Kissimmee, Florida, which was sold in April 1998. During the years
ended December 31, 1997 and 1996, the Income Fund was also a co-venturer in
three separate joint ventures that each owned and leased one restaurant
property, including one restaurant property owned and leased by Seventh Avenue
Joint Venture, which was sold in August 1997, and during the year ended
December 31, 1998, the Income Fund was a co-venturer in two separate joint
ventures that each owned and leased one restaurant property. In addition,
during 1997 and 1998, the Income Fund owned and leased one restaurant property,
with one of our affiliates, as tenants-in-common. As of December 31, 1998, the
Income Fund owned, either directly or through joint venture arrangements, 17
restaurant properties which are, in general, subject to long-term, triple net
leases. The leases of the restaurant properties provide for minimum base annual
rental amounts, payable in monthly installments, ranging from approximately
$16,000 to $222,800. Generally, the leases provide for percentage rent based on
sales in excess of a specified amount. In addition, certain leases provide for
increases in the annual base rent during the lease term.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $1,015,292, $1,038,443, and $1,115,530, respectively, in base rental
income from the Income Fund's wholly owned restaurant properties described
above. The decrease in rental income during 1998 and 1997, each as compared to
the previous year, is partially attributable to a decrease in rental income as
a result of the sale of restaurant properties during 1998 and 1997. The
decrease during 1998 and 1997, each as compared to the previous year, is
partially offset by an increase in rental income due to the fact that the
Income Fund reinvested the majority of these net sales proceeds in a restaurant
property in Camp Hill, Pennsylvania, in October 1997, as described above in
"Capital Resources."
The decrease in rental income during 1997, as compared to 1996, is also
partially attributable to the fact that during 1996, the Income Fund recognized
as income approximately $62,000 due under the promissory note with the tenant
of the restaurant property in Mesquite, Texas, for which the Income Fund had
previously established an allowance for doubtful accounts as the result of
collection being doubtful, as described above in "Capital Resources."
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $22,193, $22,205, and $56,409, respectively, in contingent rental
income. The decrease in contingent rental income during 1998 and 1997, as
compared to 1996, is attributable to the fact that during 1996, the Income Fund
recognized approximately $27,800 in contingent rental income due under the
promissory note with the tenant of the restaurant property in Mesquite, Texas,
for which the Income Fund had previously established an allowance for doubtful
accounts as the result of collection being doubtful, as described above in
"Capital Resources."
S-34
<PAGE>
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $21,087, $22,210, and $101,293, respectively, in interest and other
income. The decrease in interest and other income during 1997, as compared to
1996, is primarily attributable to the fact that during 1996, the Income Fund
recognized approximately $82,600 in interest and other income due under the
promissory note with the tenant of the restaurant property in Mesquite, Texas,
for which the Income Fund had previously established an allowance for doubtful
accounts due to collection being doubtful, as described above in "Capital
Resources."
In addition, during the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $95,252, $250,142, and $116,076, respectively, attributable
to net income earned by the three joint ventures in which the Income Fund is a
co-venturer and one restaurant property with affiliates as tenants-in-common,
including one restaurant property owned and leased by Seventh Avenue Joint
Venture, which was sold in August 1997. The decrease in net income earned by
joint ventures during 1998, as compared to 1997, and the increase during 1997,
as compared to 1996, is partially attributable to the fact that in August 1997,
Seventh Avenue Joint Venture, in which the Income Fund owns a 50 percent
interest, recognized a gain of approximately $295,100 for financial reporting
purposes, as a result of the sale of its restaurant property, as described
above in "Capital Resources." The decrease during 1998, as compared to 1997, is
also partially attributable to, and the increase during 1997, as compared to
1996, is partially offset by, a decrease in rental income earned by the joint
venture due to the sale of the restaurant property in August 1997 and the
subsequent liquidation of the joint venture in accordance with the joint
venture agreement. The decrease during 1998 is also partially offset by the
fact that in December 1997, the Income Fund reinvested a portion of its pro
rata share of the net sales proceeds in a restaurant property in Vancouver,
Washington, as tenants-in-common with certain of our affiliates.
During the year ended December 31, 1998, one of the Income Fund's lessees,
Golden Corral Corporation, contributed more than ten percent of the Income
Fund's total rental income, including the Income Fund's share of the rental
income from two restaurant properties owned by joint ventures and one
restaurant property owned with an affiliate as tenants-in-common. As of
December 31, 1998, Golden Corral Corporation was the lessee under leases
relating to five restaurants. It is anticipated that Golden Corral Corporation
will continue to contribute ten percent or more of the Income Fund's total
rental income during 1999. In addition, two restaurant chains, Golden Corral
and Wendy's each accounted for more than ten percent of the Income Fund's total
rental income in 1998, including the Income Fund's share of the rental income
from two restaurant properties owned by joint ventures and one restaurant
property owned with an affiliate as tenants-in-common. It is anticipated that
these two restaurant chains each will continue to account for more than ten
percent of the total rental income to which the Income Fund is entitled under
the terms of its leases. Any failure of these lessees or restaurant chains
could materially affect the Income Fund's income if the Income Fund is not able
to re-lease the restaurant properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$388,191, $317,426, and $325,199 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is partially attributable to an increase in amortization
expense relating to the amortization of the difference between the investment
in a joint venture and the underlying equity of the joint venture at December
31, 1998.
The increase in operating expenses during 1998, as compared to 1997, is also
partially due to the fact that the Income Fund incurred $7,322 in transaction
costs related to us retaining financial and legal advisors to assist us in
evaluating and negotiating the Acquisition. The decrease in operating expenses
during 1997, as compared to 1996, is primarily attributable to a decrease in
accounting and administrative expenses associated with operating the Income
Fund and its restaurant properties.
As a result of the sale of the restaurant property in Kissimmee, Florida, as
described above in "Capital Resources," the Income Fund recognized a gain of
$235,804 for financial reporting purposes during 1998. In addition, as a result
of the sale of the restaurant property in Casa Grande, Arizona, as described
above in "Capital Resources," the Income Fund recognized a gain of $233,183
during 1997, for financial reporting
S-35
<PAGE>
purposes. In 1996, the Income Fund sold a portion of land related to the
restaurant property in Mesquite, Texas, as described above in "Capital
Resources," and recognized a gain of $19,000 for financial reporting purposes.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we believe mitigate the adverse effect
of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
S-36
<PAGE>
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to
S-37
<PAGE>
accurately maintain the records of the Income Fund. This could result in the
inability of the Income Fund to accurately identify its Limited Partners for
purposes of distributions, delivery of disclosure materials and transfers of
units. The Y2K Team has received certification from the Income Fund's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, we cannot be assured that the transfer agent has addressed all
possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-38
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-6
Balance Sheets as of December 31, 1998 and 1997........................... F-7
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-8
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-9
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-10
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-11
Unaudited Pro Forma Financial Information................................. F-19
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-20
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-22
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-24
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-26
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-28
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-30
</TABLE>
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,379,237 and $2,277,627,
respectively.......................................... $7,472,578 $7,574,188
Investment in joint ventures........................... 832,194 841,379
Cash and cash equivalents.............................. 203,524 252,521
Receivables, less allowance for doubtful accounts of
$30,168 in 1999....................................... 10,896 30,959
Prepaid expenses....................................... 6,623 5,463
Lease costs, less accumulated amortization of $25,625
and $24,375, respectively............................. 24,375 25,625
Accrued rental income.................................. 31,065 30,791
---------- ----------
$8,581,255 $8,760,926
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 32,083 $ 736
Escrowed real estate taxes payable..................... 4,100 1,024
Distributions payable.................................. 266,982 266,982
Due to related parties................................. 149,805 129,060
Rents paid in advance and deposits..................... 17,930 36,105
---------- ----------
Total liabilities.................................... 470,900 433,907
Commitments and Contingencies (Note 2)
Partners' capital...................................... 8,110,355 8,327,019
---------- ----------
$8,581,255 $8,760,926
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases...... $248,493 $257,223 $482,159 $530,832
Interest and other income................ 3,605 9,327 5,203 12,456
-------- -------- -------- --------
252,098 266,550 487,362 543,288
-------- -------- -------- --------
Expenses:
General operating and administrative..... 17,404 23,354 39,080 45,502
Professional services.................... 8,937 9,817 11,202 12,602
Real estate taxes........................ -- 1,080 1,091 2,161
State and other taxes.................... -- 43 5,667 4,450
Depreciation and amortization............ 51,430 52,171 102,860 105,822
Transaction costs........................ 26,454 -- 57,570 --
-------- -------- -------- --------
104,225 86,465 217,470 170,537
-------- -------- -------- --------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Building.................................. 147,873 180,085 269,892 372,751
Equity in Earnings of Joint Ventures....... 23,518 20,584 47,408 41,457
Gain on Sale of Land and Building.......... -- 235,804 -- 235,804
-------- -------- -------- --------
Net Income................................. $171,391 $436,473 $317,300 $650,012
======== ======== ======== ========
Allocation of Net Income:
General partners......................... $ 1,714 $ 3,022 $ 3,173 $ 5,157
Limited partners......................... 169,677 433,451 314,127 644,855
-------- -------- -------- --------
$171,391 $436,473 $317,300 $650,012
======== ======== ======== ========
Net Income Per Limited Partner Unit........ $ 5.66 $ 14.45 $ 10.47 $ 21.50
======== ======== ======== ========
Weighted Average Number of Limited Partner
Units Outstanding......................... 30,000 30,000 30,000 30,000
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 330,430 $ 321,759
Net income..................................... 3,173 8,671
---------- -----------
333,603 330,430
---------- -----------
Limited partners:
Beginning balance.............................. 7,996,589 8,707,291
Net income..................................... 314,127 992,766
Distributions ($17.80 and $56.78 per limited
partner unit, respectively)................... (533,964) (1,703,468)
---------- -----------
7,776,752 7,996,589
---------- -----------
Total partners' capital...................... $8,110,355 $ 8,327,019
========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities................ $484,967 $557,386
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.................. -- 661,300
Decrease in restricted cash.............................. -- 126,009
-------- --------
Net cash provided by investing activities................ -- 787,309
-------- --------
Cash Flows from Financing Activities:
Distributions to limited partners........................ (533,964) (632,442)
-------- --------
Net cash used in financing activities.................. (533,964) (632,442)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....... (48,997) 712,253
Cash and Cash Equivalents at Beginning of Period........... 252,521 184,130
-------- --------
Cash and Cash Equivalents at End of Period................. $203,524 $896,383
======== ========
Supplemental Schedule of Non-Cash Financing Activities:
Deferred real estate disposition fee incurred and unpaid
at end of period........................................ $ -- $ 20,400
Distributions declared and unpaid at end of period....... $266,982 $853,283
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income
Fund, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 578,880 shares of its
common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $11,384,042 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
3. Subsequent Event:
In July 1999, the Partnership entered into a promissory note with the
corporate general partner for a loan in the amount of $21,000 in connection
with the operations of the Partnership. The loan is uncollateralized, non-
interest bearing and due on demand.
F-5
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund, Ltd. (a Florida
Limited partnership) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except for
Note 10 for which the date is
March 11, 1999 and Note 11 for
which the date is June 3, 1999
F-6
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accumulated
depreciation........................................... $7,574,188 $8,185,465
Investment in and due from joint ventures............... 841,379 919,476
Cash and cash equivalents............................... 252,521 184,130
Restricted cash......................................... -- 129,257
Receivables, less allowance for doubtful accounts of
$3,092 in 1997......................................... 30,959 21,331
Prepaid expenses........................................ 5,463 4,989
Lease costs, less accumulated amortization of $24,375
and $21,875............................................ 25,625 28,125
Accrued rental income................................... 30,791 27,305
---------- ----------
$8,760,926 $9,500,078
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable........................................ $ 736 $ 2,595
Escrowed real estate taxes payable...................... 1,024 734
Distributions payable................................... 266,982 316,221
Due to related parties.................................. 129,060 115,741
Rents paid in advance and deposits...................... 36,105 35,737
---------- ----------
Total liabilities..................................... 433,907 471,028
Partners' capital....................................... 8,327,019 9,029,050
---------- ----------
$8,760,926 $9,500,078
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,015,292 $1,038,443 $1,115,530
Contingent rental income................... 22,193 22,205 56,409
Interest and other income.................. 21,087 22,210 101,293
---------- ---------- ----------
1,058,572 1,082,858 1,273,232
---------- ---------- ----------
Expenses:
General operating and administrative....... 87,080 86,780 92,462
Professional services...................... 17,110 12,772 13,262
Real estate taxes.......................... 3,969 3,929 4,009
State and other taxes...................... 4,450 5,138 5,260
Depreciation and amortization.............. 268,260 208,807 210,206
Transaction costs.......................... 7,322 -- --
---------- ---------- ----------
388,191 317,426 325,199
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Buildings................................... 670,381 765,432 948,033
Equity in Earnings of Joint Ventures......... 95,252 250,142 116,076
Gain on Sale of Land and Buildings........... 235,804 233,183 19,000
---------- ---------- ----------
Net Income................................... $1,001,437 $1,248,757 $1,083,109
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 8,671 $ 11,577 $ 10,641
Limited partners........................... 992,766 1,237,180 1,072,468
---------- ---------- ----------
$1,001,437 $1,248,757 $1,083,109
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 33.09 $ 41.24 $ 35.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 30,000 30,000 30,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $ 193,400 $106,141 $13,314,525 $(13,429,078) $10,705,104 $(1,663,140) $ 9,226,952
Distributions to
limited partners
($42.16 per limited
partner unit)........ -- -- -- (1,264,884) -- -- (1,264,884)
Net income............ -- 10,641 -- -- 1,072,468 -- 1,083,109
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 193,400 116,782 13,314,525 (14,693,962) 11,777,572 (1,663,140) 9,045,177
Distributions to
limited partners
($42.16 per limited
partner unit)........ -- -- -- (1,264,884) -- -- (1,264,884)
Net income............ -- 11,577 -- -- 1,237,180 -- 1,248,757
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 193,400 128,359 13,314,525 (15,958,846) 13,014,752 (1,663,140) 9,029,050
Distributions to
limited partners
($44.45 per limited
partner unit)........ -- -- (369,939) (1,333,529) -- -- (1,703,468)
Net income............ -- 8,671 -- -- 992,766 -- 1,001,437
--------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $ 193,400 $137,030 $12,944,586 $(17,292,375) $14,007,518 $(1,663,140) $ 8,327,019
========= ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............... $1,030,115 $1,227,883 $1,096,290
Distributions from joint ventures........ 113,770 152,019 133,296
Cash paid for expenses................... (131,054) (84,642) (106,546)
Interest received........................ 20,958 21,556 9,648
---------- ---------- ----------
Net cash provided by operating
activities............................. 1,033,789 1,316,816 1,132,688
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................... 661,300 793,009 20,000
Additions to land and building........... -- (863,135) --
Return of capital from joint venture..... -- 472,373 --
Investment in joint venture.............. -- (303,419) --
Decrease (increase) in restricted cash... 126,009 (126,009) --
---------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 787,309 (27,181) 20,000
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from loan from corporate general
partner................................. -- 133,000 83,100
Repayment of loan from corporate general
partner................................. -- (133,000) (83,100)
Distributions to limited partners........ (1,752,707) (1,264,884) (1,264,884)
---------- ---------- ----------
Net cash used in financing activities... (1,752,707) (1,264,884) (1,264,884)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 68,391 24,751 (112,196)
Cash and Cash Equivalents at Beginning of
Year...................................... 184,130 159,379 271,575
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 252,521 $ 184,130 $ 159,379
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,001,437 $1,248,757 $1,083,109
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 206,181 206,307 207,706
Amortization............................. 62,079 2,500 2,500
Equity in earnings of joint ventures, net
of distributions........................ 18,518 (98,123) 17,220
Gain on sale of land and buildings....... (235,804) (233,183) (19,000)
Decrease (increase) in receivables....... (6,380) 158,360 (151,105)
Increase in prepaid expenses............. (474) (524) (650)
Decrease (increase) in accrued rental
income.................................. (3,486) (3,706) 1,234
Increase (decrease) in accounts payable
and accrued expenses.................... (1,569) 673 (11,712)
Increase (decrease) in due to related
parties................................. (7,081) 20,729 19,873
Increase (decrease) in rents paid in
advance and deposits.................... 368 15,026 (16,487)
---------- ---------- ----------
Total adjustments....................... 32,352 68,059 49,579
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,033,789 $1,316,816 $1,132,688
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fee
incurred and unpaid at end of year....... $ 20,400 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 266,982 $ 316,221 $ 316,221
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are generally leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating expenses
relating to the property, including property taxes, insurance, maintenance and
repairs. The leases are accounted for using the operating method. Under the
operating method, land and building leases are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged to operations as
incurred. Buildings are depreciated on the straight-line method over their
estimated useful lives of 30 years. When scheduled rentals vary during the
lease term, income is recognized on a straight-line basis so as to produce a
constant periodic rent over the lease term commencing on the date the property
is placed in service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease or events or changes in
circumstances indicate that the tenant will not lease the property through the
end of the lease term, the Partnership either reserves or writes-off the
cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonable
possible that changes could occur in the near term which could adversely affect
the general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
the allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Sand Lake
Road Joint Venture, Orange Avenue Joint Venture, and a property in Vancouver,
Washington, held as tenants-in-common with affiliates, are accounted for using
the equity method since the Partnership shares control with affiliates which
have the same general partners.
F-11
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or three successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
F-12
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 3,759,766 $ 3,999,700
Buildings.......................................... 6,092,049 6,358,678
----------- -----------
9,851,815 10,358,378
Less accumulated depreciation...................... (2,277,627) (2,172,913)
----------- -----------
$ 7,574,188 $ 8,185,465
=========== ===========
</TABLE>
In August 1997, the Partnership sold its property in Casa Grande, Arizona,
to a third party for $840,000 and received net sales proceeds of $793,009,
resulting in a gain of $233,183 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1986 and had a cost of
approximately $667,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $128,400 in excess of its original purchase price. In October
1997, the Partnership reinvested the majority of the net sales proceeds in a
property located in Camp Hill, Pennsylvania.
During the year ended December 31, 1998, the Partnership sold its property
in Kissimmee, Florida for $680,000 and received net sales proceeds of $661,300
resulting in a gain of $235,804 for financial reporting purposes. This property
was originally acquired by the Partnership in 1987 and had a cost of
approximately $475,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold this property for
approximately $185,900 in excess of its original purchase price. In connection
with the sale, the Partnership incurred a deferred, subordinated, real estate
disposition fee of $20,400 (See Note 8).
Certain leases provide for escalating guaranteed minimum rents throughout
the lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998 and 1997, the Partnership recognized $3,486 and $3,706, respectively,
of such income. For the year ended December 31, 1996, rental payments received
exceeded the rental income recognized on a straight-line basis by $1,234.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 894,752
2000.............................................................. 894,405
2001.............................................................. 870,528
2002.............................................................. 457,415
2003.............................................................. 456,511
Thereafter........................................................ 4,013,686
----------
$7,587,297
==========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-13
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Investment in Joint Ventures:
In August 1997, Seventh Avenue Joint Venture, in which the Partnership owned
a 50 percent interest, sold its property to its tenant for $950,000, and
received net sales proceeds of $944,747, resulting in a gain to the joint
venture of approximately $295,100 for financial reporting purposes. The
property was originally acquired by Seventh Avenue Joint Venture in June 1986
and had a total cost of approximately $770,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $177,400 in excess of its original purchase price.
During 1997, as a result of the sale of the property, the joint venture was
dissolved in accordance with the joint venture agreement. As a result, the
Partnership received approximately $472,400, representing its pro-rata share of
the net sales proceeds received by the joint venture.
In December 1997, the Partnership acquired a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 12.17% interest in this property.
As of December 31, 1998, the Partnership had a 50 percent interest in the
profits and losses of Orange Avenue Joint Venture and Sand Lake Road Joint
Venture, and owned a 12.17% interest in a property in Vancouver, Washington, as
tenants-in-common. These joint ventures, and the Partnership and affiliates, as
tenants-in-common, each own and lease one property to an operator of national
fast-food or family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the property held as
tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $3,261,368 $3,338,774
Cash................................................ 1,354 1,636
Prepaid expenses.................................... 219 --
Accrued rental income............................... 23,087 --
Liabilities......................................... 1,619 1,677
Partners' capital................................... 3,284,409 3,338,733
Revenues............................................ 420,677 246,236
Gain on sale of land and building................... -- 295,080
Net income.......................................... 340,503 500,285
</TABLE>
The Partnership recognized income totaling $95,252, $250,142 and $116,076
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
5. Restricted Cash:
As of December 31, 1997, the remaining net sales proceeds of $126,009 from
the sale of the property in Casa Grande, Arizona, plus accrued interest of
$3,248, were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional property or use
for other Partnership purposes. During 1998, the funds were returned to the
Partnership and used to pay distributions to the limited partners.
F-14
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $1,703,468, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $1,264,884. Distributions for the year ended
December 31, 1998, included $586,300 in a special distribution, as a result of
the distribution of net sales proceeds from the sale of the property in
Kissimmee, Florida. This special distribution was effectively a return of a
portion of the limited partners' investment, although, in accordance with the
Partnership agreement, $216,361 was applied toward the limited partners' 10%
Preferred Return and the balance of $369,939 was treated as a return of capital
for purposes of calculating the limited partners' 10% Preferred Return. As a
result of the return of capital, and the returns of capital in prior years, the
amount of the limited partners' invested capital contributions (which generally
is the limited partners' capital contributions, less distributions from the
sale of a property that are considered to be a return of capital) was
decreased; therefore, the amount of the limited partners' invested capital
contributions on which the 10% Preferred Return is calculated was lowered
accordingly. As a result of the sale of the property during 1998, the
Partnership's total revenue was reduced, while the majority of the
Partnership's operating expenses remained fixed. Therefore, distributions of
net cash flow were adjusted during the quarter ended June 30, 1998. No
distributions have been made to the general partners to date.
F-15
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,001,437 $1,248,757 $1,083,109
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (87,967) (104,279) (108,995)
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... 58,632 (233,183) --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of
joint ventures for tax reporting
purposes............................... 49,058 (18,410) (17,987)
Capitalization of transaction costs for
tax reporting purposes................. 7,322 -- --
Accrued rental income................... (3,486) (3,706) 1,234
Rents paid in advance................... 368 15,026 (16,487)
Allowance for doubtful accounts......... (3,091) 1,679 (120,724)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $1,022,273 $ 905,884 $ 820,150
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. James M. Seneff, Jr. is director, chairman of the board of
directors and chief executive officer of CNL Fund Advisors, Inc. The other
individual general partner, Robert A. Bourne, serves as treasurer, director and
vice chairman of the board of CNL Fund Advisors, Inc. During the years ended
December 31, 1998, 1997, and 1996, CNL Fund Advisors, Inc. (hereinafter
referred to as the "Affiliate") performed certain services for the Partnership,
as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures or competitive fees for comparable
services. In addition, these fees will be incurred and will be payable only
after the limited partners receive their aggregate, noncumulative 10% Preferred
Return. Due to the fact that these fees are noncumulative, if the limited
partners do not receive their 10% Preferred Return in any particular year, no
management fees will be due or payable for such year. As a result of such
threshold, no management fees were incurred during the years ended December 31,
1998, 1997, and 1996.
The Affiliate is entitled to receive a deferred, subordinated real estate
disposition fee, payable upon the sale of one or more properties based on the
lesser of one-half of a competitive real estate commission or three percent of
the sales price if the Affiliate provides a substantial amount of services in
connection with the sale. However, if the net sales proceeds are reinvested in
a replacement property, no such real estate disposition fees
F-16
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
will be incurred until such replacement property is sold and the net sales
proceeds are distributed. Payment of the real estate disposition fee is
subordinated to receipt by the limited partners of the 10% Preferred Return on
a cumulative basis, plus their adjusted capital contributions. For the year
ended December 31, 1998, the Partnership incurred $20,400 in a deferred,
subordinated real estate disposition fee as a result of the sale of a property
(See Note 3). No deferred, subordinated real estate disposition fees were
incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $63,981, $57,679 and $67,685 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to CNL Fund Advisors, Inc. and its affiliates:
Deferred, subordinated real estate disposition fee....... $ 87,150 $ 66,750
Expenditures incurred on behalf of the Partnership....... 15,123 17,902
Accounting and administrative services................... 26,787 31,089
-------- --------
$129,060 $115,741
======== ========
</TABLE>
The deferred, subordinated real estate disposition fees are the result of
the Partnership's sale of one property during 1998 and two properties in prior
years. These fees will not be paid until after the limited partners have
received their cumulative 10% Preferred Return, plus their adjusted capital
contributions, as described above.
9. Concentration of Credit Risk:
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnership's total rental
income (including the Partnership's share of rental income from joint ventures
and the property held as tenants-in-common with an affiliate), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $452,653 $452,653 $452,653
Wendy's International, Inc....................... N/A 164,857 212,322
Restaurant Management Services, Inc.............. N/A 128,737 129,633
</TABLE>
In addition, the following schedule presents total rental income from
individual restaurant chains, each representing more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from joint ventures and the property held as tenant-in-common with an
affiliate), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $452,653 $452,653 $452,653
Wendy's Old Fashioned Hamburger Restaurants..... 352,330 443,335 507,642
Popeyes Famous Fried Chicken.................... N/A 128,737 129,633
</TABLE>
F-17
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
10. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,157,759 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $11,384,042 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
11. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 578,880 shares valued at $20.00 per
APF share.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ----------- ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0 290,522,671
Other Investments....... 16,197,812 0 16,197,812 0 0 6,361,082
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036 1,767,517
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0 2,482,041
Receivables (net
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084 1,125,933
Accrued Rental Income... 5,875,698 0 5,875,698 0 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486 2,479,317
Goodwill................ 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ =========== ============ ========== ========== ============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969 $ 2,013,172
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0 0
Distributions Payable... 0 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981 30,170,185
Income Tax Payable...... 0 0 0 51,466 16,906 274,485
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0 267,685,382
Deferred Income......... 2,466,355 0 2,466,355 0 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0 0
Minority Interest....... 644,611 0 644,611 0 0 0
Common Stock............ 373,484 0 373,484 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503 3,937,095
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523 657,541
Partners' Capital....... 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ =========== ============ ========== ========== ============
Wtd. Avg. Shares
Outstanding 37,347,883
============
Shares Outstanding 37,348,464
============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Combining
Pro Forma Combined Historical CNL Pro Forma Adjusted
Adjustments APF Income Fund, Ltd. Adjustments Pro Forma
------------ -------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases
(net depreciation)..... $ 0 $ 572,936,859 $7,472,578 $ 2,329,471 (B2) $ 582,738,908
Net Investment in Direct
Financing Leases....... 0 132,179,949 0 594,360 (B2) 132,774,309
Mortgages and Notes
Receivable............. 0 353,874,178 0 0 353,874,178
Other Investments....... 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 1,081,046 832,194 411,919 (B2) 2,325,159
Cash and Cash
Equivalents............ (10,868,941)(B1) 10,634,940 203,524 (1,023,059)(B2) 9,662,405
(153,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)/Due from
Related Party.......... (6,614,629)(C) 9,247,098 10,896 (149,805)(E) 9,108,189
Accrued Rental Income... 0 5,875,698 31,065 (31,065)(B2) 5,875,698
Other Assets............ (2,575,792)(B1) 13,173,857 30,998 (30,998)(B2) 13,173,857
Goodwill................ 43,593,878 (B1) 43,593,878 0 0 43,593,878
------------ -------------- ---------- ----------- --------------
Total Assets........... $ 23,534,516 $1,169,645,128 $8,581,255 $ 1,947,823 $1,180,174,206
============ ============== ========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 0 $ 5,104,303 $ 36,183 $ 0 $ 5,140,486
Accrued Construction
Costs Payable.......... 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 266,982 0 266,982
Due to Related Parties.. (6,614,629)(C) 25,500,981 149,805 (149,805)(E) 25,500,981
Income Tax Payable...... (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 1,617,367 17,930 0 1,635,297
Minority Interest....... 0 644,611 0 0 644,611
Common Stock............ 61,500 (B1) 434,984 0 5,712 (B2) 440,696
Common Stock--Class A... (8,600)(B1) 0 0 0 0
Common Stock--Class B... (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,936,215 0 10,202,271 (B2) 803,138,486
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ (5,883,163)(B1) (89,211,809) 0 0 (89,211,809)
(74,385,293)(B1)
342,857 (D)
Partners' Capital....... 0 0 8,110,355 (8,110,355)(B2) 0
------------ -------------- ---------- ----------- --------------
Total Liabilities and
Equity................ $ 23,534,516 $1,169,645,128 $8,581,255 $ 1,947,823 $1,180,174,206
============ ============== ========== =========== ==============
Wtd. Avg. Shares
Outstanding 44,069,113
==============
Shares Outstanding 44,069,694
==============
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ---------- --------- ----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ---------- --------- ----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... 23,564,432 2,089,441 25,653,873 3,877,654 42,804 (239,337)
Equity Earnings of
Joint
Ventures/Minority
Interest ............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision For Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ---------- --------- ----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ---------- --------- ----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== ========== ========= ==========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========= ==========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========= ==========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========= ==========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========= ==========
Cash Distributions
Declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========= ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== ========== ========= ==========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========= ==========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $482,159 $ 11,071 (j) $31,450,744
Fees................... (9,812,516)(b),(c) 2,616,185 0 (16,883)(i) 2,599,302
Interest and Other
Income................ 144,014 (d) 16,269,383 5,203 0 16,274,586
----------- ----------- -------- -------- -----------
Total Revenue.......... (9,668,502) 49,843,082 487,362 (5,812) 50,324,632
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 51,373 (33,172)(l),(m) 9,598,103
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 5,667 2,223 (o) 472,856
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 101,609 68,213 (p) 4,838,975
Amortization........... 1,089,847 (h) 1,099,583 1,251 0 1,100,834
Transaction Costs...... 0 483,005 57,570 0 540,575
----------- ----------- -------- -------- -----------
Total Expenses......... (3,341,912) 26,834,678 217,470 37,264 27,089,412
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... (6,326,590) 23,008,404 269,892 (43,076) 23,235,220
Equity Earnings of
joint
Ventures/Minority
Interest ............. 0 31,241 47,408 (5,820)(q) 72,829
Gain (Loss) on Sale of
Properties............ 0 (201,843) 0 0 (201,843)
Provision For Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- -------- -------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,326,590) 22,297,280 317,300 (48,896) 22,565,684
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- -------- -------- -----------
Net Earnings (Losses)... $(4,800,850) $22,297,280 $317,300 $(48,896) $22,565,684
=========== =========== ======== ======== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 10.58 $ n/a $ 0.51
=========== =========== ======== ======== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 270.35 $ n/a $ 16.21
=========== =========== ======== ======== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 17.80 $ n/a $ 0.76
=========== =========== ======== ======== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.84x
=========== =========== ======== ======== ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $533,964 $(98,413)(s) $33,600,953
=========== =========== ======== ======== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 571,230 44,069,113(r)
=========== =========== ======== ======== ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 571,230 44,069,694
=========== =========== ======== ======== ===========
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- --------- ----------
Total Revenue.......... 42,187,037 22,951,799 65,138,836 29,049,079 7,193,142 22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- --------- ----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... 32,778,080 16,704,852 49,482,932 17,613,851 (773,774) (3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- --------- ----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- --------- ----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $(468,133) $ 427,134
=========== =========== =========== =========== ========= ==========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========= ==========
Cash Distributions
Declared............... $39,449,149 $11,544,286(t) $50,993,435 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,570,222 34,218,441 n/a n/a n/a
=========== =========== =========== =========== ========= ==========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========= ==========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $1,037,485 $ 22,141 (i) $57,141,086
Fees................... (32,715,768)(b),(c) 3,226,263 0 (19,424)(k) 3,206,839
Interest and Other
Income................ 207,144 (d) 32,221,925 21,087 0 32,243,012
------------ ----------- ---------- --------- -----------
Total Revenue.......... (32,508,624) 91,529,648 1,058,572 2,717 92,590,937
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 108,159 (45,732)(l),(m) 16,001,983
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(q) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 4,450 3,559 (o) 575,455
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 206,181 136,425 (p) 10,290,945
Amortization........... 2,179,694 (h) 2,343,695 62,079 0 2,405,774
Transaction Costs...... 0 157,054 7,322 0 164,376
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,223,254) 51,512,623 388,191 94,252 51,995,066
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... (23,285,370) 40,017,025 670,381 (91,535) 40,595,871
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 95,252 (11,640)(q) 69,474
Gain on Sale of
Properties............ 0 0 235,804 0 235,804
Gain (Loss) on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,285,370) 43,085,704 1,001,437 (103,175) 43,983,966
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,386,936) $43,085,704 $1,001,437 $(103,175) $43,983,966
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 33.38 $ n/a $ 1.07
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 277.57 $ n/a $ 16.31
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 56.78 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.99x
============ =========== ========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,371,939 $1,703,467 $(832,364)(t) $61,243,042
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,368,441 n/a 571,230 40,939,671 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 571,230 44,059,157
============ =========== ========== ========= ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Property CNL Historical
Acquisition Financial CNL
Historical Pro Forma Historical Services, Financial
APF Adjustments Subtotal Advisor Inc. Corp.
------------- ------------ ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments..... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities........... 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities........... (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities........... 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,308,049) 12,891,788 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,464,133 $ 33,228,166 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Adjustments Pro Forma
------------ ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ (4,800,850)(a) $ 22,297,280 $ 317,300 $ (48,896)(a) $ 22,565,684
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 0 4,774,655 101,609 68,213 (b) 4,944,477
Amortization expense... 1,089,847 (c) 1,999,600 1,251 0 2,000,851
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 9,185 5,820 (d) 40,125
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 0 0 201,843
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 20,063 0 (2,181,897)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (1,160) 0 (321,585)
Decrease in net
investment in direct
financing leases...... 0 721,624 0 0 721,624
Increase in accrued
rental income......... 0 (1,915,785) (274) 0 (1,916,059)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 34,423 0 (629,055)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 20,745 0 606,472
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (18,175) 0 648,544
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- --------- --------- -------------
Total adjustments..... 1,089,847 (75,899,965) 167,667 74,033 (75,658,265)
------------ ------------- --------- --------- -------------
Net cash provided by
(used in) operating
activities........... (3,711,003) (53,602,685) 484,967 25,137 (53,092,581)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 0 0 3,696,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Aqcuisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596.244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- --------- --------- -------------
Net cash provided by
(used in) investing
activities........... 4,452,252 (111,734,526) 0 0 (111,734,526)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,240) (533,964) 98,413(g) (33,720,761)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- --------- --------- -------------
Net cash provided by
(used in) financing
activities........... (4,689,252) 180,263,475 (533,964) 98,413 179,827,924
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (48,997) 123,550 15,000,817
Cash at beginning of
year................... (13,001,199) 4,092,548 252,521 (298,805) 4,046,264
------------ ------------- --------- --------- -------------
Cash at end of year..... $(16,949,202) $ 19,018,812 $ 203,524 $(175,666) $ 19,047,081
============ ============= ========= ========= =============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to
reconcile net income
(loss) to net cash
provided
by (used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments..... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities........... 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
0 0 0 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities........... (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,544,286)(j) (50,993,435) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities........... 313,835,541 (8,174,430) 305,661,111 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,308,049) (34,694,989) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,308,049) $ 12,891,788 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund, Ltd. Subtotal Adjustments Pro Forma
------------ ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $(16,386,936)(a) $ 43,085,704 $ 1,001,437 $ 44,087,141 $ (103,175)(a) $ 43,983,966
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation........... (340,898)(b) 10,147,496 206,181 10,353,677 136,425 (b) 10,490,102
Amortization expense... 2,179,694 (c) 4,493,778 62,079 4,555,857 0 4,555,857
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 18,518 3,078 11,640 (d) 14,718
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (235,804) (235,804) 0 (235,804)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 0 1,009,576 0 1,009,576
Gain on
securitization........ 0 (3,356,538) 0 (3,356,538) 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 265,871,668 0 265,871,668
Decrease (increase) in
other receivables..... 0 (2,543,413) (6,380) (2,549,793) 0 (2,549,793)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 (170,492) 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 (288,590,674) 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 23,539,641 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 2,504,091 0 2,504,091
Decrease (increase) in
due from related
party................. 0 (953,688) 0 (953,688) 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 (474) 6,772 0 6,772
Decrease in net
investment in direct
financing leases...... 0 1,971,634 0 1,971,634 0 1,971,634
Increase in accrued
rental income......... 0 (2,187,652) (3,486) (2,191,138) 0 (2,191,138)
Increase in intangibles
and other assets...... 0 (154,351) 0 (154,351) 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 846,680 (1,569) 845,111 845,111
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) (7,081) (140,445) 0 (140,445)
Increase in accrued
interest.............. 0 (77,968) 0 (77,968) 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 368 437,211 0 437,211
Decrease in deferred
rental income......... 0 693,372 0 693,372 0 693,372
------------ ------------- ----------- ------------- ----------- -------------
Total adjustments..... 1,838,796 13,368,601 32,352 13,400,953 148,065 13,549,018
------------ ------------- ----------- ------------- ----------- -------------
Net cash provided by
(used in) operating
activities........... (14,548,140) 56,454,305 1,033,789 57,488,094 44,890 57,532,984
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 661,300 3,047,241 0 3,047,241
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 (304,010,742) 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 (47,115,435) 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) 0 (974,696) 0 (974,696)
Acquisition of
businesses............ (10,868,941)(f) (10,868,941) (10,868,941) (1,023,059)(g) (12,045,000)
0 (153,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 (16,083,055) 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 295,514 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 212,821 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 (2,886,648) 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 291,990 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 (7,837,750) 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 3,046,873 0 3,046,873
Decrease in restricted
cash.................. 0 0 126,009 126,009 0 126,009
Increase in intangibles
and other assets...... 0 (6,281,069) 0 (6,281,069) 0 (6,281,069)
Other.................. 0 200,000 0 200,000 0 200,000
------------ ------------- ----------- ------------- ----------- -------------
Net cash provided by
(used in) investing
activities........... 10,925,445 (389,625,197) 787,309 (388,837,888) (1,176,059) (390,013,947)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 386,592,011 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 (4,574,925) 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 (34,579,650) 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 424,815,816 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 (411,813,826) 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 (639,528) 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 (34,073) 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,736,427) (1,752,707) (71,489,134) 832,364 (j) (70,656,770)
Other.................. 0 (2,595,088) 0 (2,595,088) 0 (2,595,088)
------------ ------------- ----------- ------------- ----------- -------------
Net cash provided by
(used in) financing
activities........... (9,378,504) 287,434,310 (1,752,707) 285,681,603 832,364 286,513,967
Net increase (decrease)
in cash................ (13,001,199) (45,736,582) 68,391 (45,668,191) (298,805) (45,966,996)
Cash at beginning of
year................... 0 49,829,130 184,130 50,013,260 0 50,013,260
------------ ------------- ----------- ------------- ----------- -------------
Cash at end of year..... $(13,001,199) $ 4,092,548 $ 252,521 $ 4,345,069 $ (298,805) $ 4,046,264
============ ============= =========== ============= =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit
facility at June 30, 1999 to pro forma properties acquired from July 1,
1999 through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all interest
costs related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $10,207,983 $133,207,983
Cash Consideration...... -- -- 153,000 153,000
APF Transaction Costs... 6,715,768 4,153,173 1,023,059 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $ 8,110,355 $ 26,575,917
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 2,329,471 2,329,471
Net investment in
direct financing
leases............... -- -- 594,360 594,360
Investment in joint
ventures............. -- -- 411,919 411,919
Accrued rental
income............... -- -- (31,065) (31,065)
Intangibles and other
assets............... -- (2,575,792) (30,998) (2,606,790)
Goodwill*............. -- 43,593,878 -- 43,593,878
Excess purchase
price................ 74,385,293 -- -- 74,385,293
----------- ----------- ----------- ------------
Total Allocation.... $82,715,768 $51,153,173 $11,384,042 $145,252,983
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $74,385,293 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of $43,593,878 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A........... 8,600
Common Stock (CFA, CFS, CFC)--Class B........... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of
earnings....................................... 74,385,293
Goodwill for CFC/CFS (Intangibles and other
assets)........................................ 43,593,878
CFC/CFS Org Costs/Other Assets................ 2,575,792
Cash to pay APF transaction costs............. 10,868,941
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 8,110,355
Land and buildings on operating leases.......... 2,329,471
Net investment in direct financing leases....... 594,360
Investment in joint ventures.................... 411,919
Accrued rental income......................... 31,065
Intangibles and other assets.................. 30,998
Cash to pay APF Transaction costs............. 1,023,059
Cash consideration to Income Funds............ 153,000
APF Common Stock.............................. 5,712
APF Capital in Excess of Par Value............ 11,418,888
(To record acquisition of Income Fund) 10,202,271
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of
$342,857 from liabilities assumed in the acquisition since the Merger
Agreement requires that the Advisor and CNL Restaurant Financial Services
Group have no accumulated or current earnings and profits for federal
income tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $149,805 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $ (689,425)
Secured equipment lease fees................................. (67,967)
Advisory fees................................................ (126,788)
Reimbursement of administrative costs........................ (382,728)
Acquisition fees............................................. (4,452,252)
Underwriting fees............................................ (54,248)
Administrative, executive and guarantee fees................. (532,389)
Servicing fees............................................... (572,728)
Development fees............................................. (38,853)
Management fees.............................................. (1,681,870)
-----------
Total...................................................... $(8,599,248)
===========
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 deferred for pro forma purposes and are being amortized over the
terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended June
30, 1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
Interest income.............................................. $ 144,014
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
General and administrative costs............................. $ (774,311)
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
Management fees.............................................. $(1,681,870)
Administrative executive and guarantee fees.................. (532,389)
Servicing fees............................................... (572,728)
Advisory fees................................................ (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $292,786 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,089,847
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $11,071 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................. $ 0
Reimbursement of administrative costs........................... (16,883)
--------
$(16,883)
========
</TABLE>
(l) Represents the elimination of $16,883 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $16,289 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $2,223 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1999 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $68,213 as a
result of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings is being depreciated using the straight-line
method over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of $5,820
as a result of adjusting the historical basis of the real estate owned by
the Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the properties.
(r) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational when they
were acquired by APF from January 1, 1998 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................ $ (1,773,406)
Secured equipment lease fees................................ (54,998)
Advisory fees............................................... (305,030)
Reimbursement of administrative costs....................... (408,762)
Acquisition fees............................................ (21,794,386)
Underwriting fees........................................... (388,491)
Administrative, executive and guarantee fees................ (1,233,043)
Servicing fees.............................................. (1,570,331)
Development fees............................................ (229,153)
Management fees............................................. (1,851,004)
------------
Total..................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended December
31, 1998, which were deferred for pro forma purposes as described in
5(II)(c). These deferred loan origination fees are being amortized and
recorded as interest income over the terms of the underlying loans (15
years).
<TABLE>
<S> <C>
Interest income................................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.............................................. $(1,851,004)
Administrative executive and guarantee fees.................. (1,233,043)
Servicing fees............................................... (1,269,357)
Advisory fees................................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill....................................... $2,176,694
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $22,141 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................. $ 0
Reimbursement of administrative costs........................... (19,424)
--------
$(19,424)
========
</TABLE>
(l) Represents the elimination of $19,424 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $26,308 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $3,559 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1998 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $136,425 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair value as a
result by the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings is being depreciated using the
straight-line method over the remaining useful lives of the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$11,640 as a result of adjusting the historical basis of the real estate
owned by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Fund is being depreciated using the straight-line method over the remaining
useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the basis
of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a one-
for-two reverse stock split proposal and a proposal to increase the number
of authorized common shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for properties that
had been operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July 1,
1999 through July 31, 1999 to acquire properties that had been operational
upon acquisition by APF since it is assumed that these properties had been
acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational upon
acquisition by APF as if these properties had been acquired on January 1,
1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-38
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
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1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 1,157,759 fully paid and nonassessable APF Common
Shares (578,880 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $10,544,837, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OP
General Partner and The Operating Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 59,842,241 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 30,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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<PAGE>
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $1,157,759 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $115,776 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND, Ltd.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND II, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund II, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her, or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of your
Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a
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static number of restaurant properties on a triple-net basis, APF has the
ability to offer a complete range of restaurant property services to operators
of national and regional restaurant chains, from triple-net leasing and
mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,196,634 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the the notes on your consent form. You
will receive APF Shares if your Income Fund elects to be acquired in the
Acquisition and you vote "For" the Acquisition, or you vote "Against" the
Acquisition and do not affirmatively select the notes on your consent form. In
addition, if Limited Partners in your Income Fund elect to receive notes in an
amount greater than 15% of the estimated value of APF Shares, based on the
exchange value, to be paid to your Income Fund, then APF has the right to
decline to acquire your Income Fund. The notes will not be listed on any
exchange or automated quotation system, and a market for the notes will not
likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,415.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,196,634 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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<PAGE>
substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition, will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $950, $950 and $1,318, respectively, to you per $10,000
investment. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $493 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Finally, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such
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Income Funds and increasing the number of APF Shares or notes that would be
allocable to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,230 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
S-5
<PAGE>
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.93%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.41x and its ratio of debt-to-total assets would
have been 35.26%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant
S-6
<PAGE>
property is in a market in which APF has not invested before, APF will have
relatively little experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had a tenant of
one Boston Market restaurant property which continues to pay lease payments to
your Income Fund.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income
S-7
<PAGE>
taxes. Unless APF is entitled to relief under specific statutory provisions, it
could not elect to be taxed as a REIT for four taxable years following the year
during which it was disqualified. Therefore, if APF loses its REIT status, the
funds available for distribution to you, as an APF stockholder, would be
reduced substantially for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less
Partner Distributions Estimated Value
Investments of Net Sales Number of Estimated of APF Shares
Less Proceeds per APF Value of APF Estimated Value per Average
Distributions $10,000 Shares Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$23,046,408 $9,219 1,196,634 $23,932,680 285,000 $23,647,680 $9,459
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$25,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
S-8
<PAGE>
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(/1/).................................................... $ 18,099
Appraisals and Valuation(/2/)...................................... 6,270
Fairness Opinions(/3/)............................................. 30,000
Solicitation Fees(/4/)............................................. 12,084
Printing and Mailing Fees(/5/)..................................... 67,773
Accounting and Other Fees(/6/)..................................... 34,695
--------
Subtotal......................................................... 168,921
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(/7/)........................ 57,487
Legal Closing Fees(/8/)............................................ 28,396
Partnership Liquidation Costs(/9/)................................. 30,196
--------
Subtotal......................................................... 116,079
--------
Total.............................................................. $285,000
========
</TABLE>
- --------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
S-9
<PAGE>
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number
of Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 66 2/3% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement
S-10
<PAGE>
and the other materials distributed to you, and the terms of APF's Acquisition
of your Income Fund, prior to voting on the Acquisition. The special meeting
will be held at 10:00 a.m., Eastern time, on , 1999, at . We and members
of APF's management intend to solicit actively your support for the Acquisition
and would like to use the special meeting to answer questions about the
Acquisition and the solicitation materials and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding Units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999, a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if
S-11
<PAGE>
the compensation and distribution structure, which will be in effect after the
Acquisition, had been in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
------------------------ Ended
1996 1997 1998 June 30, 1999
------- ------- -------- -------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions....... -- -- -- --
Accounting and Administrative
Services........................... $79,624 $78,139 $ 86,009 $41,944
Broker/Dealer Commissions........... -- -- -- --
Due Diligence and Marketing Support
Fees............................... -- -- -- --
Acquisition Fees.................... -- -- -- --
Asset Management Fees............... -- -- -- --
Real Estate Disposition Fees(1)..... -- -- 45,150 --
------- ------- -------- -------
Total historical.................. $79,624 $78,139 $131,159 $41,944
Pro Forma Distributions to Be Paid
to the General Partners Following
the Acquisition:
Cash Distributions on APF
Shares(2).......................... -- -- -- --
Salary Compensation................. -- -- -- --
------- ------- -------- -------
Total pro forma................... -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
-------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $763 $728 $739 $950 $ 686 $379 $245
Distributions from Sales of
Properties................... -- -- -- -- 493 -- --
Distributions from Return of
Capital(1)................... 187 222 211 -- 139 34 116
---- ---- ---- ---- ------ ---- ----
Total....................... $950 $950 $950 $950 $1,318 $413 $361
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. we will be relieved from our material ongoing liabilities with respect
to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We
S-14
<PAGE>
note that because the Acquisition of any one Income Fund is not a condition of
the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
.the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy that was
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
S-15
<PAGE>
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales Average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund II,
Ltd. .................. $23,046,408 $9,219 $9,459 $9,419 $8,727 $8,942
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$25,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund of units as part of its
distribution reinvestment program, and do not necessarily reflect the
prices in a secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice
S-16
<PAGE>
Chairman. Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income Funds
if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all of
your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement for
your Income Fund prohibits the Income Fund from incurring indebtedness,
the only liabilities the Income Fund has are liabilities with respect to
its ongoing business operations. In the event that your Income Fund is
acquired by APF, we would be relieved of our legal obligation to satisfy
the liabilities of the acquired Income Fund.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares
S-17
<PAGE>
and/or notes. Your Income Fund will then immediately liquidate and distribute
such property to you. The IRS requires that you recognize a share of the income
or loss, subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Partner Investment
---------------------
<S> <C>
CNL Income Fund II, Ltd................................... $1,415
</TABLE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
S-18
<PAGE>
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition
described above. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17)
S-19
<PAGE>
or (20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,081,116 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,350,643)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,317,859)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,317,859)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740(i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,792,119)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund II, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------- ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 857,643 $ 6,490 (j) $31,821,647
Fees............. 2,616,185 0 (22,198)(k) 2,593,987
Interest and
Other Income..... 16,269,383 35,872 0 16,305,255
------------ ---------- ------------------- ------------
Total Revenue... $49,843,082 $893,515 $ (15,708) $50,720,889
Expenses:
General and
Administrative... 9,579,902 77,365 (43,945)(l),(m) 9,613,322
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 15,711 4,596 (o) 485,273
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 163,120 105,533 (p) 4,937,806
Amortization..... 1,090,852 1,465 0 1,092,317
Transaction
Costs............ 483,005 88,522 0 571,527
------------ ---------- ------------------- ------------
Total Expenses.. 26,825,947 346,183 66,184 27,238,314
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,017,135 $ 547,332 $ (81,892) $23,482,575
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 214,763 (25,660)(q) 220,344
Gain (Loss) on
Sale of
Properties....... (201,843) 192,752 0 (9,091)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------- ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,306,011 954,847 (107,552) 23,153,306
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------- ------------
Net
Earnings(Losses).. $22,306,011 $ 954,847 $ (107,552) $23,153,306
============ ========== =================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252(s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,099,222 (u1)(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v)(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,056,708 (u1)(w)
<CAPTION>
Historical
CNL Income
Combined Fund II, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 37 n/a 618
============== =========== =================== =================
Earnings per
share/unit...... $ n/a $ 19.10 $ n/a $ 0.52
============== =========== =================== =================
Book value per
share/unit...... $ n/a $ 351.29 $ n/a $ 16.25
============== =========== =================== =================
Dividends per
share/unit...... $ n/a $ 20.63 $ n/a $ 0.76
============== =========== =================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.89x
============== =========== =================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,031,258 $ (129,714)(s) $ 34,066,946
============== =========== =================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,182,384 44,680,267(r)
============== =========== =================== =================
Shares
outstanding..... 43,498,464 n/a 1,182,384 44,680,848
============== =========== =================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $12,186,046 $5,419,119 (u2) $ 712,418,148
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 108,847 $ (164,293)(x) $ 9,191,652
Investment in
joint ventures.. $ 1,081,046 $ 4,326,459 $ 763,463 (u2) $ 6,170,968
Total assets.... $1,170,209,834 $18,345,650 $3,597,897 (u2)(x) $1,192,153,381
Total
liabilities/minority
interest........ $ 465,485,738 $ 781,180 $ (164,293)(x) $ 466,102,625
Total equity.... $ 704,724,096 $17,564,470 $3,762,190 (u2) $ 726,050,756
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
------------
Total..................................................... $(8,599,248)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<CAPTION>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (126,788)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (532,389)
------------
$(2,913,775)
============
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,081,116
</TABLE>
S-23
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $6,490 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (22,198)
--------
$(22,198)
========
</TABLE>
(l) Represents the elimination of $22,198 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $21,747 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $4,596 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $105,533 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $25,660
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from July
1, 1999 through July 31, 1999 as if these properties had been acquired
on June 30, 1999. Based on historical results through July 31, 1999,
all interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma adjustments
to interest expense.
S-24
<PAGE>
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration Received
....................... $82,151,062 $50,803,946 $23,548,652 $156,503,660
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $21,326,660 $144,326,660
Cash Consideration...... -- -- 285,000 285,000
APF Transaction Costs... 6,151,062 3,803,946 1,936,992 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $82,151,062 $50,803,946 $23,548,652 $156,503,660
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical............. $ 8,330,475 $10,135,087 $17,564,470 $ 36,030,032
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 4,317,515 4,317,515
Net investment in
direct financing
leases................ -- -- 1,101,604 1,101,604
Investment in joint
ventures.............. -- -- 763,463 763,463
Accrued rental income.. -- -- (185,562) (185,562)
Intangibles and other
assets................ -- (2,575,792) (12,838) (2,588,630)
Goodwill*.............. -- 43,244,651 -- 43,244,651
Excess purchase price.. 73,820,587 -- -- 73,820,587
----------- ----------- ----------- ------------
Total Allocation.... $82,151,062 $50,803,946 $23,548,652 $156,503,660
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed
to relate to ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $73,820,587 was expensed at
June 30, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations." Goodwill of $43,244,651 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A............ 8,600
Common Stock (CFA, CFS, CFC)--Class B............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC) ....... 12,568,974
Retained Earnings................................. 5,883,163
Accumulated distributions in excess of earnings... 73,820,587
Goodwill for CFC/CFS (Intangibles and other
assets).......................................... 43,244,651
CFC/CFS Organizational Costs/Other Assets........ 2,575,792
Cash to pay APF transaction costs................ 9,955,008
APF Common Stock................................. 61,500
APF Capital in Excess of Par Value............... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital................................. 17,564,470
Land and buildings on operating leases............ 4,317,515
Net investment in direct financing leases......... 1,101,604
Investment in joint ventures...................... 763,463
Accrued rental income............................ 185,562
Intangibles and other assets..................... 12,838
Cash to pay APF Transaction costs................ 1,936,992
Cash consideration to Income Funds............... 285,000
APF Common Stock................................. 11,824
APF Capital in Excess of Par Value............... 21,314,836
(To record acquisition of Income Fund)
</TABLE>
S-25
<PAGE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $164,293 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND II, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
II, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,108,278 $ 1,128,798 $2,337,414 $ 2,547,854 $ 2,455,884 $ 2,455,754 $ 2,323,678
Net income (2).......... 954,847 811,782 1,733,739 3,639,880 1,866,961 1,838,517 1,925,517
Cash distributions
declared (3)........... 1,031,258 2,263,253 3,294,507 2,376,000 2,376,000 2,376,000 2,376,000
Net income per unit
(2).................... 18.93 16.06 34.32 72.18 36.97 36.40 38.14
Cash distributions
declared per unit (3).. 20.63 45.27 65.89 47.52 47.52 47.52 47.52
GAAP book value per
unit................... 351.29 355.00 352.82 384.03 358.76 368.94 379.69
Weighted average number
of Limited Partner
units outstanding...... 50,000 50,000 50,000 50,000 50,000 50,000 50,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $18,345,650 $18,483,522 $18,392,911 $19,959,059 $18,671,318 $19,110,615 $19,736,258
Total partners'
capital................ 17,564,470 17,750,178 17,640,881 19,201,649 17,937,769 18,446,808 18,984,291
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the six months ended June 30, 1998 and the year ended
December 31, 1998 has been reduced by a real estate disposition fee of
$41,150 as a result of 1997 sales of two restaurant properties. Net income
for the six months ended June 30, 1999 and for the years ended December 31,
1997 and 1994, includes $192,752, $1,476,124 and $70,554, respectively,
from gain on sale of land and buildings. In addition, net income for the
year ended December 31, 1994, includes $29,904 from a loss on sale of land
and building. Net income for the years ended December 31, 1997 and 1994
also includes lease termination income of $214,000 and $198,482,
respectively, recognized by the Income Fund in connection with
consideration the Income Fund received for releasing the former tenants
from their obligations under the terms of the leases of three of the
restaurant properties sold.
(3) Distributions for the six months ended June 30, 1998, and the year ended
December 31, 1998 include a special distribution to the Limited Partners of
$1,232,003 as a result of the distribution of net sales proceeds from the
1997 sales of two restaurant properties.
S-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND II, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 13, 1986, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food
restaurant chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 37 restaurant properties,
including interests in three restaurant properties owned by joint ventures in
which the Income Fund is a co-venturer and six restaurant properties owned with
affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund
generated cash from operations, including cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses, of $976,678 and $1,088,196, respectively. The decrease
in cash from operations for the six months ended June 30, 1999, as compared to
the six months ended June 30, 1998, is primarily a result of changes in the
Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In March 1999, the Income Fund sold its restaurant property in Columbia,
Missouri for $682,500 and received net sales proceeds of $677,678, resulting in
a gain of $192,752 for financial reporting purposes. This restaurant property
was originally acquired by the Income Fund in November 1987 and had a cost of
approximately $511,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $166,500 in excess of its original purchase price. As of June
30, 1999, the net sales proceeds of $677,678, plus accrued interest of $6,092,
were being held in an interest-bearing escrow account pending the release of
funds to acquire an additional restaurant property. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Columbia, Missouri, and the reinvestment of the net sales proceeds,
will qualify as a like-kind exchange transaction for federal income tax
purposes. However, the Income Fund will distribute amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any, at a level
reasonably assumed by us, resulting from the sale.
Currently, rental income from the Income Fund's restaurant properties and
net sales proceeds from the sale of a restaurant property, pending reinvestment
in an additional restaurant property, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts at
commercial banks, certificates of deposit, and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At June 30,
1999, the Income Fund had $842,128 invested in such short-term investments, as
compared to $889,891 at December 31, 1998. The funds remaining at June 30,
1999, after payment of distributions and other liabilities, will be used to
meet the Income Fund's working capital and other needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
S-28
<PAGE>
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
generated cash from operations, which includes cash received from tenants,
distributions from joint ventures and interest received, less cash paid for
expenses, of $2,135,691, $2,157,912, and $2,347,731, respectively. The decrease
in cash from operations during 1998, as compared to 1997, is primarily a result
of changes in income and expenses as described in "Results of Operations"
below, and a result of changes in the Income Fund's working capital. The
decrease in cash from operations during 1997, as compared to 1996, is primarily
a result of changes in the Income Fund's working capital. Cash from operations
was also affected by the following transactions during the years ended December
31, 1998, 1997, and 1996.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In 1993, the Income Fund accepted a promissory note from the tenant of two
restaurant properties in Farmington Hills, Michigan, whereby $61,987, which had
been included in receivables for past due rents, was converted to a loan
receivable. The loan, which was non-interest bearing, was collected in 48
monthly installments with collections commencing January 1993. The receivable
was collected in full during 1996.
In March 1996, the Income Fund accepted a promissory note from the former
tenant of the restaurant property in Gainesville, Texas, in the amount of
$96,502, representing past due rental and other amounts that had been included
in receivables and for which the Income Fund had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense by
the Income Fund. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11 percent per annum, commencing on June 1,
1996. Due to the uncertainty of the collectibility of this note, the Income
Fund established an allowance for doubtful accounts and is recognizing income
as collected. During 1998, the Income Fund collected and recognized as income
approximately $18,700 relating to this promissory note. As of December 31, 1998
and 1997, the balance in the allowance for doubtful accounts relating to this
promissory note was $55,330 and $74,590, respectively, including accrued
interest of $2,654 in 1998 and 1997.
In November 1995, the Income Fund entered into a new lease for the
restaurant property in Lombard, Illinois. In connection therewith, the Income
Fund incurred approximately $40,600 in renovation costs which were paid during
the years ended December 31, 1996 and 1997. Additional renovation costs of
$25,000 were funded by the tenant, in accordance with the terms of the lease.
The renovations were completed in November 1996 and rental payments commenced
in July 1997, in accordance with the terms of the lease.
In January 1996, the Income Fund entered into a promissory note with the
corporate general partner for a loan in the amount of $26,300 in connection
with the operations of the Income Fund. The loan, which was uncollateralized
and bore interest at a rate of prime plus 0.25% per annum was due on demand.
The Income Fund repaid the loan in full, along with approximately $200 in
interest, to the corporate general partner. In addition, 1997 and 1996, the
Income Fund entered into various promissory notes with the corporate general
partner for loans totalling $721,000 and $177,600, respectively, in connection
with the operations of the Income Fund. The loans were uncollateralized, non-
interest bearing and due on demand. As of December 31, 1997, the Income Fund
had repaid the loans in full to the corporate general partner.
In January 1997, Show Low Joint Venture, in which the Income Fund owns a 64
percent interest, sold its restaurant property to the tenant for $970,000,
resulting in a gain to the joint venture of approximately $360,000 for
financial reporting purposes. The restaurant property was originally
contributed to Show Low Joint Venture in July 1990 and had a total cost of
approximately $663,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the joint venture sold the restaurant property
for approximately $306,500 in excess of its original purchase price. In June
1997, Show Low Joint Venture reinvested $782,413 of the net sales proceeds in a
Darryl's restaurant property in Greensboro, North Carolina. As of December 31,
1997, the Income Fund had received approximately $124,400, representing a
return of capital, for its pro-rata
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share of the uninvested net sales proceeds. The Income Fund used these amounts
to pay liabilities of the Income Fund, including quarterly distributions to the
Limited Partners.
During 1997, the Income Fund sold its restaurant property in Eagan,
Minnesota, to the tenant, for $668,033 and received net sales proceeds of
$665,882, of which $42,000 were in the form of a promissory note, resulting in
a gain of $158,251 for financial reporting purposes. This restaurant property
was originally acquired by the Income Fund in August 1987 and had a cost of
approximately $601,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $64,800 in excess of its original purchase price. In October
1997, the Income Fund reinvested the net cash sales proceeds of approximately
$623,900 in a restaurant property in Mesa, Arizona, as tenants-in-common with
one of our affiliates. In connection therewith, the Income Fund and the
affiliate entered into an agreement whereby each co-venturer will share in the
profits and losses of the restaurant property in proportion to each co-
venturer's interest. The Income Fund owns an approximate 58 percent interest in
the restaurant property. The Income Fund distributed amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, at a level
reasonably assumed by us, resulting from the sale.
In connection with the sale during 1997 of its restaurant property in Eagan,
Minnesota, the Income Fund accepted a promissory note in the principal sum of
$42,000. The promissory note bears interest at a rate of 10.50% per annum and
is collateralized by personal property. Initially, the note was to be collected
in 18 monthly installments of interest only and thereafter, the entire
principal balance became due. During 1998, the note was amended to require six
monthly installments of $7,368, including interest, commencing on July 1, 1998.
As of December 31, 1998 and 1997, the mortgage note receivable balance was
$6,872 and $42,734, respectively, including accrued interest of $56 and $734,
respectively. In January 1999, the balance, including accrued interest, was
collected.
In addition, during 1997, the Income Fund sold its restaurant properties in
Jacksonville, Plant City and Avon Park, Florida; its restaurant property in
Mathis, Texas and its two restaurant properties in Farmington Hills, Michigan
to third parties for aggregate sales prices of $4,162,006 and received
aggregate net sales proceeds of $4,035,196, resulting in aggregate gains of
$1,317,873 for financial reporting purposes. These six restaurant properties
were originally acquired by the Income Fund during 1987 and had aggregate costs
of approximately $3,338,800, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold these six restaurant
properties for approximately $714,400, in the aggregate, in excess of their
original aggregate purchase prices. During 1997, the Income Fund reinvested
approximately $1,512,400 of these net sales proceeds in a restaurant property
in Vancouver, Washington, and a restaurant property in Smithfield, North
Carolina, as tenants-in-common with certain of our affiliates. As of December
31, 1997, remaining net sales proceeds from five of the six restaurant
properties of $2,470,175, including accrued interest of $12,505, were being
held in interest bearing escrow accounts. In January 1998, the Income Fund
reinvested a portion of the net sales proceeds in a restaurant property in
Overland Park, Kansas, and a restaurant property in Memphis, Tennessee, as
tenants-in-common with certain of our affiliates. The Income Fund distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, at a level reasonably assumed by us, resulting from these sales.
During 1998, the Income Fund distributed the remaining net sales proceeds to
the Limited Partners in a special distribution, as described below. In
connection with the sale of both of the Farmington Hills, Michigan restaurant
properties, the Income Fund also received $214,000 as a lease termination fee
from the former tenant in consideration of the Income Fund's releasing the
tenant from its obligation under the terms of the leases.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing from us, however, the Income Fund
may borrow, in our discretion, for the purpose of maintaining the operations
and paying liabilities of the Income Fund including quarterly distributions.
The Income Fund will not borrow for the purpose of returning capital to the
Limited Partners. The Income Fund will not encumber any of the restaurant
properties in connection with any borrowing or advances. The Income Fund also
will not borrow under circumstances which would make the Limited Partners
liable to creditors of the Income Fund. Certain of our
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affiliates from time to time incur certain operating expenses on behalf of the
Income Fund for which the Income Fund reimburses the affiliates without
interest.
Currently rental income from the Income Fund's restaurant properties and net
sales proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, distributions to Limited Partners or use for
the payment of Income Fund liabilities, are invested in money market accounts
or other short-term highly liquid investments such as demand deposit accounts
at commercial banks, CD's and money market accounts with less than 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
Fund had $889,891 invested in such short-term investments, as compared to
$470,194 at December 31, 1997. The increase in cash and cash equivalents during
1998, as compared to 1997, is primarily attributable to the release of funds
held in escrow at December 31, 1997 relating to the sales of certain restaurant
properties during 1997. As of December 31, 1998, the average interest rate
earned on the rental income deposited in demand deposit accounts at commercial
banks was approximately three percent annually. The funds remaining at December
31, 1998, after payment of distributions and other liabilities, will be used to
meet the Income Fund's working capital and other needs.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that the we
determine that such funds are available for distribution. Based on cash from
operations, and for the six months ended June 30, 1998, a portion of the
proceeds received from the 1997 sales of two restaurant properties in Avon
Park, Florida and Farmington Hills, Michigan, the Income Fund declared
distributions to Limited Partners of $1,031,258 and $2,263,253 for the six
months ended June 30, 1999 and 1998, respectively, or $515,629 and $515,625 for
the quarters ended June 30, 1999 and 1998, respectively. This represents
distributions of $20.63 and $45.27 for each of the six months ended June 30,
1999 and 1998, respectively, or $10.31 for each of the quarters ended June 30,
1999 and 1998. Distributions for the six months ended June 30, 1998 included
$1,232,003 as a result of the distribution of the majority of the net sales
proceeds from the 1997 sales of the restaurant properties in Avon Park, Florida
and Farmington Hills, Michigan. No distributions were made to us for the
quarter and six months ended June 30, 1999 and 1998. No amounts distributed to
the Limited Partners for the six months ended June 30, 1999 and 1998 are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $781,180 at June 30, 1999 from $752,030 at December 31, 1998. The
increase in liabilities at June 30, 1999 is primarily a result of the Income
Fund accruing transaction costs relating to the Acquisition. We believe the
Income Fund has sufficient cash on hand to meet its current working capital
needs.
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The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases of the Income Fund's restaurant properties are generally on a triple-net
basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based primarily on current and anticipated future cash from operations, and
during the year ended December 31, 1997, the return of capital from Show Low
Joint Venture, a portion of the proceeds received from the sale of restaurant
properties as described above, and for the years ended December 31, 1997 and
1996, loans received from us, the Income Fund declared distributions to the
Limited Partners of $3,294,507 for the year ended December 31, 1998, and
$2,376,000 for each of the years ended December 31, 1997 and 1996. This
represents distributions of $65.89 per unit for the year ended December 31,
1998, and $47.52 per Unit for each of the years ended December 31, 1997 and
1996. Distributions for the year ended December 31, 1998 included $1,232,003 as
a result of the distribution of the majority of the net sales proceeds from the
1997 sales of the restaurant properties in Avon Park, Florida and Farmington
Hills, Michigan. This special distribution was effectively a return of a
portion of the Limited Partners' investment; although, in accordance with the
Income Fund's partnership agreement, it was applied to the Limited Partners'
unpaid preferred return. As a result of the sales of the restaurant properties,
the Income Fund's total revenue was reduced during 1998 and is expected to
remain at reduced amounts in subsequent years, while the majority of the Income
Fund's operating expenses remained fixed. Therefore, distributions of net cash
flow were adjusted during 1998. No amounts distributed or to be distributed to
the Limited Partners for the years ended December 31, 1998, 1997, and 1996, are
required to be treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions.
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $116,317, $68,555, and $103,909, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$138,153 and $126,284, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, during the year ended
December 31, 1998, the Income Fund incurred $45,150 in real estate disposition
fees due to an affiliate as a result of its services in connection with the
1997 sales of the restaurant properties in Avon Park, Florida and Farmington
Hills, Michigan. The payment of such fees is deferred until the Limited
Partners have received their cumulative 10% preferred return and their adjusted
capital contributions. Other liabilities, including distributions payable,
decreased to $568,727 at December 31, 1998, from $631,126 at December 31, 1997,
primarily as a result of a decrease in distributions payable to Limited
Partners at December 31, 1998. We believe that the Income Fund has sufficient
cash on hand to meet its current working capital needs.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund owned
and leased 29 wholly owned restaurant properties, including one restaurant
property in Columbia, Missouri, which was sold in March 1999, to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the six months ended June 30, 1999 and 1998, the Income Fund earned $857,643
and $871,144, respectively, in rental income from these restaurant properties,
$437,442 and $438,324 of which was earned during the quarters ended June 30,
1999 and 1998, respectively. Rental income decreased during the six months
ended June 30, 1999, as compared to the six months ended June 30, 1998,
primarily as a result of the sale of the restaurant property in Columbia,
Missouri, as described above in "Capital Resources."
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For the six months ended June 30, 1999 and 1998, the Income Fund also owned
and leased three restaurant properties indirectly through joint venture
arrangements and six restaurant properties as tenants-in-common with our
affiliates. In connection therewith, during the six months ended June 30, 1999
and 1998, the Income Fund earned $214,763 and $214,915, respectively,
attributable to net income earned by these joint ventures, $107,524 and
$105,499 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively.
Operating expenses, including depreciation and amortization, were $346,183
and $271,866 for the six months ended June 30, 1999 and 1998, respectively, of
which $175,943 and $138,347 were incurred during the quarters ended June 30,
1999 and 1998, respectively. The increase in operating expenses during the six
months ended June 30, 1999, as compared to the six months ended June 30, 1998,
was primarily due to the Income Fund incurring $88,522 in transaction costs
relating to our retaining financial and legal advisors to assist us in
evaluating and negotiating the Acquisition with APF. If the Limited Partners
reject the Acquisition, the Income Fund will bear the portion of the
transaction costs based upon the percentage of "For" votes and we will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
During the six months ended June 30, 1998, the Income Fund recorded
deferred, subordinated real estate disposition fees of $45,150 payable to CNL
Fund Advisors, Inc. relating to the 1997 sales of the restaurant properties in
Avon Park, Florida and Farmington Hills, Michigan. Initially, the Income Fund
considered reinvesting the sales proceeds in additional restaurant properties
and therefore did not include these amounts in the determination of the gain on
sale for financial reporting purposes during 1997. However, during the six
months ended June 30, 1998, the Income Fund declared a special distribution of
net sales proceeds from these restaurant properties payable to the Limited
Partners. Accordingly, the Income Fund recorded these subordinated real estate
disposition fees during the six months ended June 30, 1998. The payment of
these fees is subordinated to the Limited Partners receiving their cumulative
10 percent preferred return and their adjusted capital contribution. No such
fees were recorded during the six months ended June 30, 1999.
As a result of the sale of the restaurant property in Columbia, Missouri, as
described above in "Capital Resources," the Income Fund recognized a gain of
$192,752 for financial reporting purposes during the six months ended June 30,
1999. No restaurant properties were sold during the six months ended June 30,
1998.
The Years Ended December 31, 1998, 1997 and 1996
During 1996 and 1997, the Income Fund owned and leased 36 wholly owned
restaurant properties, including seven restaurant properties sold during 1997.
During 1998, the Income Fund owned and leased 29 wholly owned restaurant
properties. In addition, during 1998, 1997, and 1996, the Income Fund was a co-
venturer in three separate joint ventures that each owned and leased one
restaurant property. During 1996, the Income Fund and an affiliate owned and
leased one restaurant property as tenants-in-common, during 1997, the Income
Fund owned and leased four restaurant properties with affiliates as tenants-in-
common, and during 1998, the Income Fund owned and leased six restaurant
properties with affiliates, as tenants-in-common. As of December 31, 1998, the
Income Fund owned, either directly, as tenants-in-common with affiliates, or
through joint venture arrangements, 38 restaurant properties, which are, in
general, subject to long-term triple-net leases. The leases of the restaurant
properties provide for minimum base annual rental amounts, payable in monthly
installments, ranging from approximately $8,300 to $222,800. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount to be paid annually. In addition, certain leases provide for increases
in the annual base rent during the lease term.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $1,773,925, $2,024,119, and $2,224,500, respectively, in rental income
from the Income Fund's wholly owned restaurant properties described above. The
decrease in rental income during 1998, as compared to 1997, is primarily
attributable to a decrease in rental income as a result of the sales of seven
restaurant properties during 1997. The Income Fund reinvested the majority of
the net sales proceeds from the 1997 sales of several restaurant
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properties in restaurant properties held as tenants-in-common with certain of
our affiliates resulting in an increase in equity in earnings of joint
ventures, as described below. Rental income earned from wholly owned restaurant
properties is expected to remain at reduced amounts as a result of the Income
Fund reinvesting the net sales proceeds in restaurant properties held as
tenants-in-common with certain of our affiliates, and distributing net sales
proceeds to the Limited Partners, as described above in "Capital Resources."
Rental income for 1997, as compared to 1996, decreased primarily as the
result of the sales of seven restaurant properties during 1997. The decrease in
rental income was partially offset by an increase during 1997 due to the fact
that rental payments began in July 1997 under the new lease for the restaurant
property in Lombard, Illinois, as described above in "Capital Resources."
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $51,029, $68,920, and $79,313, respectively, in contingent rental
income. The decrease in contingent rental income for 1998 and 1997, each as
compared to the previous year, is primarily due to the 1997 sales of several
restaurant properties, the leases of which required the payment of contingent
rental income.
For the years ended December 31, 1998, 1997, and 1996 , the Income Fund also
earned $431,974, $389,915, and $130,996, respectively, attributable to net
income earned by joint ventures in which the Income Fund is a co-venturer. The
increase in net income earned by joint ventures during 1998 and 1997, each as
compared to the previous year, is primarily attributable to the fact that
during 1998 and 1997, the Income Fund reinvested a portion of the net sales
proceeds from the 1997 sales of restaurant properties, in two and five
restaurant properties, respectively, with certain of our affiliates as tenants-
in-common. The increase in net income earned by joint ventures during 1998 is
partially offset by, and the increase during 1997, as compared to 1996, is
primarily attributable to, the fact that in January 1997, Show Low Joint
Venture, in which the Income Fund owns a 64 percent interest, recognized a gain
of approximately $360,000 for financial reporting purposes from the sale of its
restaurant property, as described above in "Capital Resources," above. Show Low
Joint Venture reinvested the majority of the net sales proceeds in an
additional restaurant property in June 1997.
During the year ended December 31, 1998, two of the Income Fund's lessees,
Golden Corral Corporation and Restaurant Management Services, Inc., each
contributed more than ten percent of the Income Fund's total rental income,
including the Income Fund's share of rental income from three restaurant
properties owned by joint ventures and six restaurant properties owned with
affiliates as tenants-in-common. As of December 31, 1998, Golden Corral
Corporation was the lessee under leases relating to six restaurants and
Restaurant Management Services, Inc. was the lessee under leases relating to
four restaurants. It is anticipated that, based on the minimum annual rental
payments required by the leases, these two lessees will continue to contribute
more than ten percent of the Income Fund's total rental income during 1999. In
addition, during the year ended December 31, 1998, two restaurant chains,
Golden Corral, and Popeyes, each accounted for more than ten percent of the
Income Fund's total rental and mortgage interest income, including the Income
Fund's share of the rental income from three restaurant properties owned by
joint ventures and six restaurant properties owned with affiliates as tenants-
in-common. In 1999, it is anticipated that these two Restaurant Chains each
will continue to account for more than ten percent of the total rental income
to which the Income Fund is entitled under the terms of its leases. Any failure
of these lessees or Restaurant Chains could materially affect the Income Fund's
income if the Income Fund is not able to release the restaurant properties in a
timely manner.
Operating expenses, including depreciation and amortization expense, were
$558,525, $598,098, and $588,923 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998, as
compared to 1997, is primarily due to a decrease in depreciation expense as a
result of the sales of several restaurant properties during 1997. The decrease
is partially offset by an increase in general operating and administrative
expenses as a result of the Income Fund incurring certain repairs relating to
the restaurant property in Lombard, Illinois. The Income Fund has entered into
a new lease for this restaurant property and does not anticipate incurring such
expenses in the future periods.
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The decrease in operating expenses during 1998, as compared to 1997, is also
partially offset by an increase as a result of the Income Fund incurring
$16,208 in transaction costs relating to our retaining financial and legal
advisors to assist us in evaluating and negotiating the Acquisition.
The decrease in operating expenses during 1998, as compared to 1997, and the
increase during 1997, as compared to 1996, is partially due to the fact that
during 1997, the Income Fund recorded bad debt expense for past due rental
amounts relating to the restaurant property in Eagan, Minnesota, due to
financial difficulties of the tenant. This restaurant property was sold in June
1997, as described above in "Capital Resources." The increase in operating
expenses during 1997, as compared to 1996, was also attributable to an increase
in accounting and administrative expenses associated with operating the Income
Fund and its restaurant properties. The increase in operating expenses during
1997, as compared to 1996, was partially offset by a decrease in depreciation
expense which resulted from the sale of the seven restaurant properties during
1997, as described above in "Capital Resources."
During the year ended December 31, 1998, the Income Fund recorded deferred,
subordinated real estate disposition fees of $45,150 payable to CNL Fund
Advisors, Inc. relating to the 1997 sales of the properties in Avon Park,
Florida and Farmington Hills, Michigan. Initially, the Income Fund considered
reinvesting the sales proceeds in additional properties and therefore did not
include these amounts in the determination of the gain on sale for financial
reporting purposes during 1997. However, during the year ended December 31,
1998, the Income Fund declared a special distribution of net sales proceeds
from these properties payable to the Limited Partners. Accordingly, the Income
Fund recorded these subordinated real estate disposition fees during the year
ended December 31, 1998. The payment of these fees is subordinated to the
Limited Partners receiving their cumulative 10% preferred return and their
adjusted capital contribution.
As a result of the sales of several restaurant properties, the Income Fund
recognized gains totalling $1,476,124 during the year ended December 31, 1997,
for financial reporting purposes. In addition, in connection with the sale of
the restaurant properties in Farmington Hills, Michigan, the Income Fund also
received $214,000 as a lease termination fee from the former tenant in
consideration of the Income Fund's releasing the tenant from its obligation
under the terms of the leases. No such transactions occurred during the years
ended December 31, 1998 and 1996.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we believe mitigate the adverse effect
of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists
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of a network of personal computers and servers built using hardware and
software from mainstream suppliers. The non-information technology systems of
our affiliates are primarily facility related and include building security
systems, elevators, fire suppressions, HVAC, electrical systems and other
utilities. Our affiliates have no internally generated programmed software
coding to correct, because substantially all of the software utilized by us and
our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
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The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
S-37
<PAGE>
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-38
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-22
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
S-39
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,732,540 and
$3,631,359, respectively............................. $12,186,046 $12,835,304
Investment in joint ventures.......................... 4,326,459 4,353,427
Mortgage note receivable.............................. -- 6,872
Cash and cash equivalents............................. 842,128 889,891
Restricted cash....................................... 683,770 --
Receivables, less allowance for doubtful accounts of
$56,630 and $55,435, respectively.................... 108,847 122,560
Prepaid expenses...................................... 8,628 4,801
Lease costs, less accumulated amortization of $16,353
and $14,889, respectively............................ 4,210 5,674
Accrued rental income................................. 185,562 174,382
----------- -----------
$18,345,650 $18,392,911
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 73,729 $ 4,621
Escrowed real estate taxes payable.................... 3,368 8,065
Distributions payable................................. 515,629 515,629
Due to related parties................................ 164,293 183,303
Rents paid in advance and deposits.................... 24,161 40,412
----------- -----------
Total liabilities................................. 781,180 752,030
Commitment and Contingencies (Note 4)
Partners' capital..................................... 17,564,470 17,640,881
----------- -----------
$18,345,650 $18,392,911
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases..... $437,442 $438,324 $857,643 $871,144
Interest and other income............... 22,201 19,785 35,872 42,739
-------- -------- -------- --------
459,643 458,109 893,515 913,883
-------- -------- -------- --------
Expenses:
General operating and administrative.... 24,557 34,944 60,381 64,870
Professional services................... 13,467 19,924 16,984 25,640
State and other taxes................... 185 167 15,711 14,732
Depreciation and amortization........... 81,536 83,312 164,585 166,624
Transaction costs....................... 56,198 -- 88,522 --
-------- -------- -------- --------
175,943 138,347 346,183 271,866
-------- -------- -------- --------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and
Building, and Real Estate Disposition
Fees..................................... 283,700 319,762 547,332 642,017
Equity in Earnings of Joint Ventures...... 107,524 105,499 214,763 214,915
Gain on Sale of Land and Building......... -- -- 192,752 --
Real Estate Disposition Fees.............. -- -- -- (45,150)
-------- -------- -------- --------
Net Income................................ $391,224 $425,261 $954,847 $811,782
======== ======== ======== ========
Allocation of Net Income:
General partners........................ $ 3,911 $ 4,252 $ 8,239 $ 8,569
Limited partners........................ 387,313 421,009 946,608 803,213
-------- -------- -------- --------
$391,224 $425,261 $954,847 $811,782
======== ======== ======== ========
Net Income Per Limited Partner Unit....... $ 7.75 $ 8.42 $ 18.93 $ 16.06
======== ======== ======== ========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000 50,000
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 390,900 $ 373,111
Net income......................................... 8,239 17,789
----------- -----------
399,139 390,900
----------- -----------
Limited partners:
Beginning balance.................................. 17,249,981 18,828,538
Net income......................................... 946,608 1,715,950
Distributions ($20.63 and $65.89 per limited
partner unit, respectively)....................... (1,031,258) (3,294,507)
----------- -----------
17,165,331 17,249,981
----------- -----------
Total partners' capital.............................. $17,564,470 $17,640,881
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........... $ 976,678 $1,088,196
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building........... 677,678 --
Investment in joint ventures...................... -- (834,888)
Decrease (Increase) in restricted cash............ (677,678) 2,457,670
Collections on mortgage note receivable........... 6,817 --
----------- ----------
Net cash provided by investing activities....... 6,817 1,622,782
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (1,031,258) (2,341,628)
----------- ----------
Net cash used in financing activities........... (1,031,258) (2,341,628)
----------- ----------
Net Increase in Cash and Cash Equivalents............. (47,763) 369,350
Cash and Cash Equivalents at Beginning of Period...... 889,891 470,194
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 842,128 $ 839,544
=========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period............................ $ -- $ 45,150
=========== ==========
Distributions declared and unpaid at end of period.. $ 515,629 $ 515,625
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
II, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Buildings on Operating Leases:
In March 1999, the Partnership sold its property in Columbia, Missouri, to a
third party for $682,500 and received net sales proceed of $677,678, resulting
in a gain of $192,752 for financial reporting purposes. This property was
originally acquired by the Partnership in November 1987 and had a cost of
approximately $511,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $166,500 in excess of its original purchase price.
3. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $677,678 from the sale of the
property in Columbia, Missouri, plus accrued interest of $6,092 were being held
in an interest-bearing escrow account pending the release of funds to acquire
an additional property.
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,196,634 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for three reverse stock split which occurred on June 3, 1999) in the previous
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $23,548,652 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited
F-5
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
partners at the special meeting approve the Merger, APF will own the Properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund II, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund II, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 13, 1999, except for Note 12 for which the date is March 11, 1999 and
Note 13 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $12,835,304 $13,164,568
Investment in joint ventures.......................... 4,353,427 3,568,155
Mortgage note receivable.............................. 6,872 42,734
Cash and cash equivalents............................. 889,891 470,194
Restricted cash....................................... -- 2,470,175
Receivables, less allowance for doubtful accounts of
$55,435 and $83,254.................................. 122,560 80,577
Prepaid expenses...................................... 4,801 5,510
Lease costs, less accumulated amortization of $14,889
and $11,520.......................................... 5,674 9,043
Accrued rental income................................. 174,382 148,103
----------- -----------
$18,392,911 $19,959,059
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,621 $ 7,170
Accrued and escrowed real estate taxes payable........ 8,065 4,656
Distributions payable................................. 515,629 594,000
Due to related parties................................ 183,303 126,284
Rents paid in advance and deposits.................... 40,412 25,300
----------- -----------
Total liabilities..................................... 752,030 757,410
Partners' capital..................................... 17,640,881 19,201,649
----------- -----------
$18,392,911 $19,959,059
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,773,925 $2,024,119 $2,224,500
Contingent rental income................... 51,029 68,920 79,313
Interest and other income.................. 80,486 64,900 21,075
---------- ---------- ----------
1,905,440 2,157,939 2,324,888
---------- ---------- ----------
Expenses:
General operating and administrative....... 160,220 137,924 131,628
Professional services...................... 34,731 21,576 26,634
Bad debt expense........................... -- 27,965 --
Real estate taxes.......................... -- 410 4,647
State and other taxes...................... 14,733 10,403 4,255
Depreciation and amortization.............. 332,633 399,820 421,759
Transaction costs.......................... 16,208 -- --
---------- ---------- ----------
558,525 598,098 588,923
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and
Buildings, Real Estate Disposition Fees, and
Lease Termination Income.................... 1,346,915 1,559,841 1,735,965
Equity in Earnings of Joint Ventures......... 431,974 389,915 130,996
Gain on Sale of Land and Buildings........... -- 1,476,124 --
Real Estate Disposition Fees................. (45,150) -- --
Lease Termination Income..................... -- 214,000 --
---------- ---------- ----------
Net Income................................... $1,733,739 $3,639,880 $1,866,961
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 17,789 $ 30,736 $ 18,670
Limited partners........................... 1,715,950 3,609,144 1,848,291
---------- ---------- ----------
$1,733,739 $3,639,880 $1,866,961
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 34.32 $ 72.18 $ 36.97
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $162,000 $161,705 $25,000,000 $(20,317,377) $16,130,302 $(2,689,822) $18,446,808
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,670 -- -- 1,848,291 -- 1,866,961
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 162,000 180,375 25,000,000 (22,693,377) 17,978,593 (2,689,822) 17,937,769
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 30,736 -- -- 3,609,144 -- 3,639,880
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 162,000 211,111 25,000,000 (25,069,377) 21,587,737 (2,689,822) 19,201,649
Distributions to
limited partners
($65.89 per limited
partner unit)......... -- -- -- (3,294,507) -- -- (3,294,507)
Net income............. -- 17,789 -- -- 1,715,950 -- 1,733,739
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $162,000 $228,900 $25,000,000 $(28,363,884) $23,303,687 $(2,689,822) $17,640,881
======== ======== =========== ============ =========== =========== ===========
</TABLE>
F-10
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 1,796,989 $ 2,054,519 $ 2,295,531
Distributions from joint ventures..... 482,671 147,995 164,718
Cash paid for expenses................ (227,335) (80,744) (130,042)
Interest received..................... 83,366 36,142 17,524
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,135,691 2,157,912 2,347,731
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................ -- 4,659,078 --
Proceeds received from tenant in
connection with termination of
leases............................... -- 214,000 --
Additions to land and buildings on
operating leases..................... -- (29,526) (11,107)
Investment in joint ventures.......... (835,969) (2,136,289) --
Return of capital from joint venture.. -- 124,440 --
Collections on mortgage note
receivable........................... 35,183 -- --
Decrease (increase) in restricted
cash................................. 2,457,670 (2,457,670) 25,000
Payment of lease costs................ -- (4,507) (1,930)
Other................................. -- -- (25,000)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................ 1,656,884 369,526 (13,037)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate
general partner...................... -- 721,000 203,900
Repayment of loans from corporate
general partner...................... -- (721,000) (203,900)
Distributions to limited partners..... (3,372,878) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,372,878) (2,376,000) (2,376,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 419,697 151,438 (41,306)
Cash and Cash Equivalents at Beginning
of Year................................ 470,194 318,756 360,062
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 889,891 $ 470,194 $ 318,756
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,733,739 $ 3,639,880 $ 1,866,961
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... -- 27,965 --
Depreciation.......................... 329,264 395,837 417,776
Amortization.......................... 3,369 3,983 3,983
Gain on sale of land and buildings.... -- (1,476,124) --
Lease termination income.............. -- (214,000) --
Equity in earnings of joint ventures,
net of distributions................. 50,697 (241,920) 33,722
Increase in receivables............... (28,799) (4,166) (8,803)
Decrease (increase) in prepaid
expenses............................. 709 (691) (1,570)
Increase in accrued rental income..... (26,279) (30,746) (33,234)
Decrease in other assets.............. -- -- 1,750
Increase (decrease) in accounts
payable and accrued expenses......... 860 (2,304) 4,014
Increase in due to related parties.... 57,019 81,206 35,824
Increase (decrease) in rents paid in
advance and deposits................. 15,112 (21,008) 27,308
----------- ----------- -----------
Total adjustments.................... 401,952 (1,481,968) 480,770
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,135,691 $ 2,157,912 $ 2,347,731
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted as consideration
in sale of land and building.......... $ -- $ 42,000 $ --
=========== =========== ===========
Deferred real estate disposition fees
incurred and unpaid at end of period.. $ 45,150 $ -- $ --
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 515,629 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund II, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using the operating method. Under the operating
method, land and building leases are recorded at cost, revenue is recognized as
rentals are earned and depreciation is charged to operations as incurred.
Buildings are depreciated on the straight-line method over their estimated
useful lives of 30 years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce a constant
periodic rent over the lease term commencing on the date the property is placed
in service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease, or events or changes
in circumstance indicate that the tenant will not lease the property through
the end of the lease term, the Partnership either reserves or writes-off the
cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, are removed from the accounts and gains or
losses from sales are reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, a loss will be
recorded for the amount by which the carrying value of the asset exceeds its
fair market value. Although the general partners have made their best estimate
of these factors based on current conditions, it is reasonably possible that
changes could occur in the near term which could adversely affect the general
partners' estimate of net cash flows expected to be generated from its
properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for uncollectible accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Kirkman Road
Joint Venture, Holland Joint Venture and Show Low Joint Venture, and the
properties in Arvada, Colorado; Mesa, Arizona; Smithfield, North Carolina;
Vancouver, Washington; Overland Park, Kansas; and Memphis, Tennessee, each of
F-12
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
which is held as tenants-in-common with affiliates, are accounted for using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method. When a property is sold or a lease is
terminated, the related lease cost, if any, net of accumulated amortization is
removed from the accounts and charged against income.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage.
The lease options generally allow tenants to renew the leases for two to
four successive five-year periods subject to the same terms and conditions as
the initial lease. Most leases also allow the tenant to purchase the property
at fair market value after a specified portion of the lease has elapsed.
F-13
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 6,608,400 $ 6,608,400
Buildings.......................................... 9,858,263 9,858,263
----------- -----------
16,466,663 16,466,663
Less accumulated depreciation...................... (3,631,359) (3,302,095)
----------- -----------
$12,835,304 $13,164,568
=========== ===========
</TABLE>
In June 1997, the Partnership sold its property in Eagan, Minnesota, to the
tenant, for $668,033 and received net sales proceeds of $665,882, of which
$42,000 were in the form of a promissory note, resulting in a gain of $158,251
for financial reporting purposes. This property was originally acquired by the
Partnership in August 1987 and had a cost of approximately $601,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $64,800 in excess of its
original purchase price. In October 1997, the Partnership used the net sales
proceeds to acquire a property in Mesa, Arizona, as tenants-in-common (see Note
4).
In addition, during 1997, the Partnership sold its properties in
Jacksonville, Plant City and Avon Park, Florida; its property in Mathis, Texas
and two properties in Farmington Hills, Michigan to third parties for aggregate
sales prices of $4,162,006 and received aggregate net sales proceeds (net of
$18,430, which represents amounts due to the former tenant for prorated rent)
of $4,035,196, resulting in aggregate gains of $1,317,873 for financial
reporting purposes. These six properties were originally acquired by the
Partnership during 1987 and had aggregate costs of approximately $3,338,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold these six properties for approximately $714,400, in the
aggregate, in excess of their original aggregate purchase prices. During 1997,
the Partnership reinvested approximately $1,512,400 of these net sales proceeds
in a property in Vancouver, Washington, and a property in Smithfield, North
Carolina, as tenants-in-common with affiliates of the General Partners (see
Note 4). In January 1998, the Partnership reinvested a portion of these net
sales proceeds in a property in Overland Park, Kansas, and a property in
Memphis, Tennessee, as tenants-in-common with affiliates of the General
Partners (see Note 4). In connection with the sale of both of the Farmington
Hills, Michigan properties, the Partnership also received $214,000 as a lease
termination fee from the former tenant in consideration of the Partnership's
releasing the tenant from its obligation under the terms of the leases.
Some of the leases provide for escalating guaranteed minimum rents
throughout the lease terms. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $26,279,
$30,746, and $33,234, respectively, of such income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,617,078
2000............................................................. 1,545,876
2001............................................................. 1,561,629
2002............................................................. 1,394,850
2003............................................................. 1,146,347
Thereafter....................................................... 5,112,565
-----------
$12,378,345
===========
</TABLE>
F-14
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Investment in Joint Ventures:
The Partnership has a 50 percent interest, a 49 percent interest and a 64
percent interest in the profits and losses of Kirkman Road Joint Venture,
Holland Joint Venture and Show Low Joint Venture, respectively. The remaining
interests in Holland Joint Venture and Show Low Joint Venture are held by
affiliates of the general partners. The Partnership also has a 33.87% interest
in a property in Arvada, Colorado, with an affiliate of the general partners,
as tenants-in-common. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate. Amounts relating to its investment are included in investment in
joint ventures.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 64
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the property for approximately $306,500 in excess of its original purchase
price. In June 1997, Show Low Joint Venture reinvested $782,413 of the net
sales proceeds in a Darryl's property in Greensboro, North Carolina. As of
December 31, 1997, the Partnership had received approximately $124,400
representing a return of capital for its pro-rata share of the uninvested net
sales proceeds. As of December 31, 1998, the Partnership owned a 64 percent
interest in the profits and losses of the joint venture.
In October 1997, the Partnership used the net sales proceeds from the sale
of the property in Eagan, Minnesota (see Note 3) to acquire a property in Mesa,
Arizona, as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned an approximate 58 percent interest in
this property.
In December 1997, the Partnership used the net sales proceeds from the sale
of one of the properties in Farmington Hills, Michigan, to acquire a property
in Smithfield, North Carolina, as tenants-in-common with an affiliate of the
general partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1998, the Partnership owned a 47 percent interest
in this property.
In addition, in December 1997, the Partnership used the net sales proceeds
from the sale of the property in Plant City, Florida, to acquire a property in
Vancouver, Washington, as tenants-in-common with affiliates of the general
partners. The Partnership accounts for its investment in this property using
the equity method since the Partnership shares control with affiliates, and
amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1998, the Partnership owned an approximate 37
percent interest in this property.
F-15
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, in January 1998, the Partnership used the net sales proceeds
from the sales of the properties in Jacksonville, Florida and Mathis, Texas, to
acquire a 39.39% and a 13.38% interest in a property in Overland Park, Kansas,
and a property in Memphis, Tennessee, respectively, as tenants-in-common with
affiliates of the general partners. The Partnership accounts for its
investments in these properties using the equity method since the Partnership
shares control with affiliates, and amounts relating to its investments are
included in investment in joint ventures.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint Venture
and the Partnership and affiliates, as tenants-in-common in six separate
tenancy-in-common arrangements, each own and lease one property to an operator
of national fast-food or family-style restaurants. The following presents the
combined, condensed financial information for the joint ventures and the six
properties held as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accu-
mulated depreciation.............................. $ 8,410,940 $7,091,781
Net investment in direct financing leases.......... 2,121,822 518,399
Cash............................................... 37,128 56,815
Receivables........................................ 1,570 4,685
Accrued rental income.............................. 207,239 102,913
Other assets....................................... 1,069 418
Liabilities........................................ 32,229 31,673
Partners' capital.................................. 10,747,539 7,743,338
Revenues........................................... 1,254,276 399,579
Gain on sale of land and building.................. -- 360,002
Net income......................................... 1,051,988 687,021
</TABLE>
The Partnership recognized income totalling $431,974, $389,915, and $130,996
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
5. Mortgage Note Receivable:
In connection with the sale in June 1997 of its property in Eagan,
Minnesota, the Partnership accepted a promissory note in the amount of $42,000.
The promissory note bears interest at a rate of 10.50% per annum and is
collateralized by personal property. Initially, the note was to be collected in
18 monthly installments of interest only and thereafter, the entire principal
balance shall become due. During 1998, the note was amended to require six
monthly installments of $7,368, including interest, commencing on July 1, 1998.
As of December 31, 1998 and 1997, the mortgage note receivable balance was
$6,872 and $42,734, including accrued interest of $56 and $734, respectively.
6. Restricted Cash:
As of December 31, 1997, remaining net sales proceeds of $2,470,175 from the
sales of several properties (see Note 3) including accrued interest of $12,505,
were being held in interest-bearing escrow accounts pending the release of
funds by the escrow agent to acquire additional properties on behalf of the
Partnership and to distribute net sales proceeds to the limited partners. In
1998, the funds were released from escrow to the Partnership and were used to
acquire two additional properties with affiliates of the general partners and
to make a special distribution to the limited partners (see note 4 and note 8).
F-16
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Receivables:
In March 1996, the Partnership accepted a promissory note from the former
tenant of the property in Gainesville, Texas, in the amount of $96,502,
representing past due rental and other amounts, which had been included in
receivables and for which the Partnership had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense by
the Partnership. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11 percent per annum, commencing on June 1,
1996. Due to the uncertainty of the collectibility of this note, the
Partnership established an allowance for doubtful accounts and is recognizing
income as collected. As of December 31, 1998 and 1997, the balances in the
allowance for doubtful accounts of $55,330 and $74,590, respectively, including
accrued interest of $2,654 in 1998 and 1997, represent the uncollected amounts
under this promissory note.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first on a pro rata basis to partners with positive balances
in their capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,294,507, $2,376,000, and
$2,376,000. Distributions for the year ended December 31, 1998, included
$1,232,003 as a result of the distribution of net sales proceeds from the 1997
sales of properties in Avon Park, Florida and Farmington Hills, Michigan. This
amount was applied toward the limited partners' cumulative 10% Preferred
Return. No distributions have been made to the general partners to date.
F-17
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,733,739 $3,639,880 $1,866,961
Depreciation for financial reporting
purposes in excess of depreciation for
tax reporting purposes................ 17,510 19,440 20,922
Gain on sale of land and buildings for
financial reporting purposes (in
excess of) less than gain for tax
reporting purposes.................... 335,644 (638,739) --
Equity in earnings of joint ventures
for tax reporting purposes less than
equity in earnings of joint ventures
for financial reporting purposes...... (32,934) (146,161) (1,240)
Capitalization of transaction costs for
tax reporting purposes................ 16,208 -- --
Allowance for doubtful accounts........ (27,819) (42,782) 25,225
Accrued rental income.................. (26,279) (30,746) (33,234)
Rents paid in advance.................. 18,112 (21,008) 22,508
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,034,181 $2,779,884 $1,901,142
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's Properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures and the properties held as tenants-in-
common with affiliates or competitive fees for comparable services. In
addition, these fees will be incurred and will be payable only after the
limited partners receive their aggregate, noncumulative 10% Preferred Return.
Due to the fact that these fees are noncumulative, if the limited partners do
not receive their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of such
threshold no property management fees were incurred during the years ended
December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-18
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. Payment of the real estate disposition fee is subordinated to receipt by
the limited partners of their aggregate, cumulative 10% Preferred Return, plus
their adjusted capital contributions. For the year ended December 31, 1998, the
Partnership incurred $45,150 in deferred, subordinated, real estate disposition
fees as a result of the 1997 sales of properties in Avon Park, Florida and
Farmington Hills, Michigan. No deferred, subordinated, real estate disposition
fees were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $86,009, $78,139 and $79,624 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership acquired a property in Mesa, Arizona, as
tenants-in-common with an affiliate of the general partners, for a purchase
price of $630,554 from CNL BB Corp., also an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to this property in order
to facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the Partnership's percentage of
interest in the costs incurred by CNL BB Corp. to acquire and carry the
property, including closing costs.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $ 76,326 $ 59,608
Accounting and administrative services................. 61,827 66,676
Deferred, subordinated real estate disposition fee..... 45,150 --
-------- --------
$183,303 $126,284
======== ========
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnerships' total rental
income (including the Partnership's share of rental income from joint ventures
and the properties held as tenants-in-common with affiliates) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $485,839 $408,333 $403,875
Restaurant Management Services, Inc.............. 252,292 251,480 N/A
</TABLE>
In addition, the following schedule presents total rental and mortgage
interest income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental and mortgage interest income
(including the Partnership's share of rental income from joint ventures and
properties held as tenants-in-common with affiliates) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $485,839 $408,333 $403,875
Popeyes Famous Fried Chicken Restaurants........ 252,292 251,480 N/A
Wendy's Old Fashioned Hamburger Restaurants..... N/A 381,567 421,165
Denny's......................................... N/A N/A 388,050
KFC............................................. N/A 278,348 358,463
</TABLE>
F-19
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental, mortgage interest, and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,393,267 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $23,548,652 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,196,634 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. (" CFS") and CNL Financial Corporation ("CFC") and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $3,369,856 (A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0
Other Investments....... 16,197,812 0 16,197,812 0 0
Investment in Joint
Ventures............... 1,081,046 0 1,081,046 0 0
Cash and Cash
Equivalents............ 18,764,033 0 (A) 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0
Receivables (net
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income... 5,875,698 0 5,875,698 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486
Goodwill................ 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0
Distributions Payable... 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981
Income Tax Payable...... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................ 149,000,000 3,369,856 (A) 152,369,856 351,869 0
Deferred Income......... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0
Minority Interest....... 644,611 0 644,611 0 0
Common Stock............ 373,484 0 373,484 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated
Distributions in excess
of Net Earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital....... 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Liabilities and
Equity................ $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical
CNL Combining Historical
Financial Pro Forma Combined CNL Income Pro Forma Adjusted
Corp. Adjustments APF Fund II, Ltd. Adjustments Pro Forma
------------ ------------ -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $12,186,046 $ 4,317,515 (B2) $ 589,440,420
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 0 1,101,604 (B2) 133,281,553
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 0 0 353,874,178
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 4,326,459 763,463 (B2) 6,170,968
Cash and Cash
Equivalents............ 1,767,517 (9,955,008)(B1) 11,548,873 842,128 (1,936,992)(B2) 10,169,009
(285,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 683,770 0 5,172,501
Receivables (net
allowances)
/Due from Related
Party.................. 1,125,933 (6,614,629)(C) 9,247,098 108,847 (164,293)(E) 9,191,652
Accrued Rental Income... 0 0 5,875,698 185,562 (185,562)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 12,838 (12,838)(B2) 13,173,857
Goodwill................ 0 43,244,651 (B1) 43,244,651 0 0 43,244,651
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $304,738,561 $ 24,099,222 $1,170,209,834 $18,345,650 $ 3,597,897 $1,192,153,381
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 77,097 $ 0 $ 5,181,400
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 515,629 0 515,629
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 164,293 (164,293)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 24,161 0 1,641,528
Minority Interest....... 0 0 644,611 0 0 644,611
Common Stock............ 0 61,500 (B1) 434,984 0 11,824 (B2) 446,808
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 21,314,836 (B2) 814,251,051
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,163)(B1) (88,647,103) 0 0 (88,647,103)
(73,820,587)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 17,564,470 (17,564,470)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,099,222 $1,170,209,834 $18,345,650 $ 3,597,897 $1,192,153,381
============ ============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 44,680,267
==============
Shares Outstanding...... 44,680,848
==============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ---------- ---------- -----------
Total Revenue.......... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
and Provision for
Losses on Properties .. $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Cash Distributions
Declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund II, Ltd. Adjustments Pro Forma
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $ 857,643 $ 6,490 (j) $31,821,647
Fees................... (9,812,516)(b),(c) 2,616,185 0 (22,198)(k) 2,593,987
Interest and Other
Income................ 144,014 (d) 16,269,383 35,872 0 16,305,255
----------- ----------- ---------- --------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $ 893,515 $ (15,708) $50,720,889
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 77,365 (43,945)(l),(m) 9,613,322
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 15,711 4,596 (o) 485,273
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 163,120 105,533 (p) 4,937,806
Amortization........... 1,081,116 (h) 1,090,852 1,465 0 1,092,317
Transaction Costs...... 0 483,005 88,522 0 571,527
----------- ----------- ---------- --------- -----------
Total Expenses......... (3,350,643) 26,825,947 346,183 66,184 27,238,314
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
and Provision for
Losses on Properties... $(6,317,859) $23,017,135 $ 547,332 $ (81,892) $23,482,575
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 214,763 (25,660)(q) 220,344
Gain (Loss) on Sale of
Properties............ 0 (201,843) 192,752 0 (9,091)
Provision For Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (6,317,859) 22,306,011 954,847 (107,552) 23,153,306
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)... $(4,792,119) $22,306,011 $ 954,847 $(107,552) $23,153,306
=========== =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 19.10 $ n/a $ 0.52
=========== =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 351.29 $ n/a $ 16.25
=========== =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 20.63 $ n/a $ 0.76
=========== =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.89x
=========== =========== ========== ========= ===========
Cash Distribution
Declared............... $ 4,689,252 (s) $33,165,402 $1,031,258 $(129,714)(s) $34,066,946
=========== =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,182,384 44,680,267 (r)
=========== =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,182,384 44,680,848
=========== =========== ========== ========= ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 33,129,661 $ 22,951,799(a) $ 56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
------------ ------------ ------------ ------------ ---------- -----------
Total Revenue.......... 42,187,037 22,951,799 65,138,836 29,049,079 7,193,142 22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
------------ ------------ ------------ ------------ ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gains on
Securitization,
Provision for Losses on
Properties and Other
Expenses............... $ 32,778,080 $ 16,704,852 $ 49,482,932 $ 17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision for Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
------------ ------------ ------------ ------------ ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
------------ ------------ ------------ ------------ ---------- -----------
Net Earnings (Losses)... $ 32,152,408 $ 16,704,852 $ 48,857,260 $ 10,656,379 $ (468,133) $ 427,134
============ ============ ============ ============ ========== ===========
Earnings per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ============ ============ ============ ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ============ ============ ============ ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ============ ============ ============ ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
============ ============ ============ ============ ========== ===========
Cash Distributions
Declared............... $ 39,449,149 $ 11,546,314(t) $ 50,995,463 $ n/a $ n/a $ n/a
============ ============ ============ ============ ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,571,552 34,219,771 n/a n/a n/a
============ ============ ============ ============ ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
============ ============ ============ ============ ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Pro Historical
Forma CNL Income Pro Forma Adjusted
Adjustments Combined APF Fund II, Ltd. Adjustments Pro Forma
------------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $ 56,081,460 $1,824,954 $ 12,979 (j) $57,919,393
Fees................... (32,715,768)(b),(c) 3,226,263 0 (27,846)(k) 3,198,417
Interest and Other
Income................ 207,144 (d) 32,221,925 80,486 0 32,302,411
------------- ------------ ---------- ----------- -----------
Total Revenue.......... (32,508,624) 91,529,648 1,905,440 (14,867) 93,420,221
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 194,951 (61,147)(l),(m) 16,073,360
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 14,733 7,358 (o) 589,537
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 329,264 211,066 (p) 10,488,669
Amortization........... 2,162,233 (h) 2,326,234 3,369 0 2,329,603
Transaction Costs...... 0 157,054 16,208 0 173,262
------------- ------------ ---------- ----------- -----------
Total Expenses......... (9,240,715) 51,495,162 558,525 157,277 52,210,964
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on
Securitization,
Provision for Losses on
Properties and Other
Expenses............... $ (23,267,909) $ 40,034,486 $1,346,915 $ (172,144) $41,209,257
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 431,974 (51,319)(q) 366,517
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 (45,150) 0 (45,150)
Provision for Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------- ------------ ---------- ----------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,267,909) 43,103,165 1,733,739 (223,463) 44,613,441
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------- ------------ ---------- ----------- -----------
Net Earnings (Losses)... $ (16,369,475) $ 43,103,165 $1,733,739 $ (223,463) $44,613,441
============= ============ ========== =========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 34.67 $ n/a $ 1.07
============= ============ ========== =========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 352.82 $ n/a $ 16.37
============= ============ ========== =========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 65.89 $ n/a $ 1.50
============= ============ ========== =========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.03x
============= ============ ========== =========== ===========
Cash distirbutions
declared............... $ 9,378,504(t) $ 60,373,967 $3,294,507 $(1,491,412)(t) $62,177,062
============= ============ ========== =========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,369,771 n/a 1,182,384 41,552,155 (s)
============= ============ ========== =========== ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,182,384 44,670,311
============= ============ ========== =========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441(a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179(b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (36,946) (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------- ------------ ----------- --------- -----------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------- ------------ ----------- --------- -----------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562(f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Aqcuisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------- ------------ ----------- --------- -----------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------- ------------ ----------- --------- -----------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,310,077) 12,889,760 713,308 962,573 2,526,078
------------- ------------- ------------ ----------- --------- -----------
Cash at end of year..... $ 18,764,033 $ 14,462,105 $ 33,226,138 $ 333,295 $ 639,036 $ 1,767,517
============= ============= ============ =========== ========= ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Fund II, Pro Forma Adjusted
Adjustments Combined APF Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,792,119)(a) $ 22,306,011 $ 954,847 $ (107,552)(a) $ 23,153,306
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,771,655 163,120 105,533 (b) 5,043,308
Amortization expense... 1,081,116 (c) 1,990,869 1,465 0 1,992,334
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 26,968 25,660 (d) 77,748
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 (192,752) 0 9,091
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 8,887 0 (2,193,073)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (3,827) 0 (324,252)
Decrease in net
investment in direct
financing leases...... 0 721,624 0 0 721,624
Increase in accrued
rental income......... 0 (1,915,785) (11,180) 0 (1,926,965)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 64,411 0 (599,067)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 (19,010) 0 566,717
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (16,251) 0 650,468
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ---------- ---------- -------------
Total adjustments...... 1,081,116 (75,908,696) 21,831 131,193 (75,755,672)
------------ ------------- ---------- ---------- -------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 976,678 23,641 (52,602,366)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 677,678 0 4,373,742
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 6,817 0 231,190
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 (677,678) 0 (677,678)
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- ---------- ---------- -------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) 6,817 0 (111,727,709)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,031,258) 129,714(g) (34,186,754)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ---------- ---------- -------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,031,258) 129,714 179,361,931
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (47,763) 153,355 15,031,856
Cash at beginning of
year................... (12,087,266) 5,004,453 889,891 (691,658) 5,202,686
------------ ------------- ---------- ---------- -------------
Cash at end of year..... $(16,035,269) $ 19,930,717 $ 842,128 $ (538,303) $ 20,234,542
============ ============= ========== ========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments..... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities........... 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities........... (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,546,314)(j) (50,995,463) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities........... 313,835,541 (8,176,458) 305,659,083 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash............... 75,613,060 (110,310,077) (34,697,017) 449,308 (335,688) 1,845,986
Cash at beginning of
year.................. 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year.... $ 123,199,837 $(110,310,077) $ 12,889,760 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund II, Ltd. Adjustments Pro Forma
------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,369,475)(a) $ 43,103,165 $1,733,739 $ (223,463)(a) $ 44,613,441
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 329,264 211,066 (b) 10,687,826
Amortization expense... 2,162,233 (c) 4,476,317 3,369 4,479,686
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 50,697 51,319 (d) 84,576
Loss(gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 0 0 1,009,576
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease(increase) in
other receivables..... 0 (2,543,413) (28,799) 0 (2,572,212)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease(increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 709 0 7,955
Decrease in net
investment in direct
financing leases...... 0 1,971,634 0 0 1,971,634
Increase in accrued
rental income......... 0 (2,187,652) (26,279) 0 (2,213,931)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 0 846,680 860 0 847,540
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 57,019 0 (76,345)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 15,112 0 451,955
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ---------- ---------- -------------
Total adjustments...... 1,821,335 13,351,140 401,952 262,385 14,015,477
------------ ------------- ---------- ---------- -------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 56,454,305 2,135,691 38,922 58,628,918
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 0 0 2,385,941
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) (835,969) 0 (1,810,665)
Acquisition of
businesses............ (9,955,008)(f) (9,955,008) 0 (1,936,992)(g) (12,177,000)
(285,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 35,183 0 327,173
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 2,457,670 0 2,457,670
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 0 0 200,000
------------ ------------- ---------- ---------- -------------
Net cash provided
by(used in) investing
activities............ 11,839,378 (388,711,264) 1,656,884 (2,221,992) (389,276,372)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,738,455) (3,372,878) 1,491,412 (j) (71,619,921)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ---------- ---------- -------------
Net cash provided
by(used in) financing
activities............ (9,378,504) 287,432,282 (3,372,878) 1,491,412 285,550,816
Net increase(decrease)
in cash................ (12,087,266) (44,824,677) 419,697 (691,658) (45,096,638)
Cash at beginning of
year................... 0 49,829,130 470,194 0 50,299,324
------------ ------------- ---------- ---------- -------------
Cash at end of year..... $(12,087,266) $ 5,004,453 $ 889,891 $ (691,658) $ 5,202,686
============ ============= ========== ========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred January 1, 1998. The pro forma information is unaudited and is not
necessarily indicative of the consolidated operating results which would have
occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,151,062 $50,803,946 $23,548,652 $156,503,660
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $21,326,660 $144,326,660
Cash Consideration...... -- -- 285,000 285,000
APF Transaction Costs... 6,151,062 3,803,946 1,936,992 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $82,151,062 $50,803,946 $23,548,652 $156,503,660
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $17,564,470 $ 36,030,032
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 4,317,515 4,317,515
Net investment in
direct financing
leases............... -- -- 1,101,604 1,101,604
Investment in joint
ventures............. -- -- 763,463 763,463
Accrued rental
income............... -- -- (185,562) (185,562)
Intangibles and other
assets............... -- (2,575,792) (12,838) (2,588,630)
Goodwill* ............ -- 43,244,651 -- 43,244,651
Excess purchase
price................ 73,820,587 -- -- 73,820,587
----------- ----------- ----------- ------------
Total Allocation.... $82,151,062 $50,803,946 $23,548,652 $156,503,660
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,820,587 was expensed at June 30, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $43,244,651
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC) - Class A......... 8,600
Common Stock (CFA, CFS, CFC) - Class B......... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)..... 12,568,974
Retained Earnings.............................. 5,883,163
Accumulated distributions in excess of
earnings...................................... 73,820,587
Goodwill for CFC/CFS (Intangibles and other
assets)....................................... 43,244,651
CFC/CFS Organizational Costs/Other Assets.... 2,575,792
Cash to pay APF transaction costs............ 9,955,008
APF Common Stock............................. 61,500
APF Capital in Excess of Par Value........... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital............................... 17,564,470
Land and buildings on operating leases......... 4,317,515
Net investment in direct financing leases...... 1,101,604
Investment in joint ventures................... 763,463
Accrued rental income........................ 185,562
Intangibles and other assets................. 12,838
Cash to pay APF Transaction costs............ 1,936,992
Cash consideration to Income Fund............ 285,000
APF Common Stock............................. 11,824
APF Capital in Excess of Par Value........... 21,314,836
(To record acquisition of the Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $164,293 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
through July 31, 1999 had been acquired and leased on January 1,
1998. No pro forma adjustments were made for any properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (689,425)
Secured equipment lease fees............................. (67,967)
Advisory fees............................................ (126,788)
Reimbursement of administrative costs.................... (382,728)
Acquisition fees......................................... (4,452,252)
Underwriting fees........................................ (54,248)
Administrative, executive and guarantee fees............. (532,389)
Servicing fees........................................... (572,728)
Development fees......................................... (38,853)
Management fees.......................................... (1,681,870)
-----------
Total.................................................. $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which
were deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,681,870)
Administrative executive and guarantee fees.............. (126,788)
Servicing fees........................................... (572,728)
Advisory fees............................................ (532,389)
-----------
$(2,913,775)
===========
</TABLE>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,081,116
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $6,490 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ 0
Reimbursement of administrative costs....................... (22,198)
--------
$(22,198)
========
</TABLE>
(l) Represents the elimination of $22,198 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $21,747 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $4,596 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $105,533 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $25,660 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1999.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $207,144
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs......................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,851,004)
Administrative executive and guarantee fees.............. (1,233,043)
Servicing fees........................................... (1,269,357)
Advisory fees............................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,163,233
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $12,979 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ 0
Reimbursement of administrative costs....................... (27,846)
--------
$(27,846)
========
</TABLE>
(l) Represents the elimination of $27,846 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $33,301 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,358 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $211,066 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $51,319 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund II, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund II, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund II, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
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1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND II, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund II, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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<PAGE>
(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,393,267 fully paid and nonassessable APF Common
Shares (1,196,634 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $21,809,611, based on Valuation Associations'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,606,733 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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<PAGE>
terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 50,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,393,267 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $239,327 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND II, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND III, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund III, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general
partners of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in
the completion of the Acquisition may conflict with yours as a
Limited Partner of the Income Fund and with their own as general
partners of your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a
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static number of restaurant properties on a triple-net basis, APF has the
ability to offer a complete range of restaurant property services to operators
of national and regional restaurant chains, from triple-net leasing and
mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,041,451 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
of the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $783.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,041,451 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition, will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $950, $950 and $1,391, respectively, to you per $10,000
investment. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $159 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such
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Income Funds and increasing the number of APF Shares or notes that would be
allocable to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,219 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
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APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.93%. If only your Income Fund is acquired as of that date, APF's debt
service ratio would have been 3.41x and its ratio of debt-to-total assets would
have been 35.35%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant
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property is in a market in which APF has not invested before, APF will have
relatively little experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience, services
and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or that
of its franchisor or vendors, to adequately address year 2000 issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of June
30, 1999, your Income Fund had no tenants under bankruptcy protection.
Therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999, would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for the same period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income
S-7
<PAGE>
taxes. Unless APF is entitled to relief under specific statutory provisions, it
could not elect to be taxed as a REIT for four taxable years following the year
during which it was disqualified. Therefore, if APF loses its REIT status, the
funds available for distribution to you, as an APF stockholder, would be
reduced substantially for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited less
Partner Distributions Estimated Value
Investments of Net Sales Number of Estimated of APF Shares
less Proceeds per APF Value of APF Estimated Value per Average
Distributions $10,000 Shares Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$22,253,502 $8,901 1,041,451 $20,829,020 $258,000 $20,571,020 $8,228
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$25,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
S-8
<PAGE>
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)...................................................... $ 15,885
Appraisals and Valuation(2)........................................ 4,950
Fairness Opinions(3)............................................... 30,000
Solicitation Fees(4)............................................... 11,908
Printing and Mailing(5)............................................ 62,588
Accounting and Other Fees(6)....................................... 31,280
--------
Subtotal......................................................... $156,611
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7).......................... 50,032
Legal Closing Fees(8).............................................. 24,713
Partnership Liquidation Costs(9)................................... 26,644
--------
Subtotal......................................................... 101,389
--------
Total.............................................................. $258,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your
Income Fund's pro-rata portion of these fees was determined based
on the ratio of the value of the APF Share consideration payable to
your Income Fund, based on the exchange value, to the total value
of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
S-9
<PAGE>
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,399,998. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$841,245. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of your Income Fund's total assets as
of June 30, 1999 to the total assets of all of the Income Funds as
of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,313,596. Your Income Fund's pro-rata portion of
these fees was determined based on the ratio of the value of the
APF Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your
Income Fund's pro-rata portion of these fees was determined based
on the ratio of your Income Fund's total assets as of June 30, 1999
to the total assets of all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to
be $698,901. Your Income Fund's pro-rata portion of these costs was
determined based on the ratio of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 66 2/3% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
S-10
<PAGE>
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We and
members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999, a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners following the Acquisition":
<TABLE>
<CAPTION>
Six
Months
Ended
Year Ended December 31, June
------------------------- 30,
1996 1997 1998 1999
------- -------- -------- -------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the General
Partners and Affiliates:
General Partner Distributions............. -- -- -- --
Accounting and Administrative Services.... $85,906 $87,056 $89,756 $43,913
Broker/Dealer Commissions................. -- -- -- --
Due Diligence and Marketing Support Fees.. -- -- -- --
Acquisition Fees.......................... -- -- -- --
Asset Management Fees..................... -- -- -- --
Real Estate Disposition Fees(1)........... -- 15,150 53,400 --
------- -------- -------- -------
Total historical........................ $85,906 $102,206 $143,156 $43,913
Pro Forma Distributions to Be Paid to the
General Partners following the Acquisition:
Cash Distributions on APF Shares(2)....... -- -- -- --
Salary Compensation....................... -- -- -- --
------- -------- -------- -------
Total pro forma......................... -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
-------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $736 $587 $719 $949 $ 689 $388 $215
Distributions from Sales of
Properties................... -- -- -- -- 591 -- --
Distributions from Return of
Capital(1)................... 214 363 231 1 111 12 99
---- ---- ---- ---- ------ ---- ----
Total....................... $950 $950 $950 $950 $1,391 $400 $314
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have little or no
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg
S-14
<PAGE>
Mason that the APF Share consideration payable to each Income Fund is fair from
a financial point of view, we believe the Acquisition is fair regardless of the
number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Funds, Legg
Mason did not address or render any opinion with respect to other aspects of
the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
.the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
.any other matters with respect to any specific individual partner or class
of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Funds, we prepared a comparative valuation analysis,
which supported our determination that the Acquisition is in the best interest
of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund III,
Ltd. .................. 22,253,502 8,901 8,228 8,214 7,652 8,445
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$25,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
S-15
<PAGE>
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all of
your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement for
your Income Fund prohibits the Income Fund from incurring indebtedness,
the only liabilities the Income Fund has are liabilities with respect to
its ongoing business operations. In the event that your Income Fund is
acquired by APF, we would be relieved of our legal obligation to satisfy
the liabilities of the acquired Income Fund.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated Gain/(Loss) per
Average $10,000 Original
Limited Partner Investment
--------------------------
<S> <C>
CNL Income Fund III, Ltd. .......................... $783
</TABLE>
S-17
<PAGE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
S-18
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-19
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,083,168 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,348,591)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,319,911)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,319,911)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,794,171)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund III, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 864,162 $ 1,168 (j) $31,822,844
Fees............. 2,616,185 0 (25,928)(k) 2,590,257
Interest and
Other Income..... 16,269,383 54,332 0 16,323,715
------------ ---------- ------------------ ------------
Total Revenue... $49,843,082 $918,494 $ (24,760) $50,736,816
Expenses:
General and
Administrative... 9,579,902 78,194 (46,034)(l),(m) 9,612,062
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 13,541 4,000 (o) 482,507
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 134,840 73,537 (p) 4,877,530
Amortization..... 1,092,904 0 0 1,092,904
Transaction
Costs............ 483,005 82,113 0 565,118
------------ ---------- ------------------ ------------
Total Expenses.. 26,827,999 308,688 31,503 27,168,190
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,015,083 $ 609,806 $ (56,263) $23,568,626
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 74,880 (15,326)(q) 90,795
Gain (Loss) on
Sale of
Properties....... (201,843) 293,512 0 91,669
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,303,959 978,198 (71,589) 23,210,568
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $22,303,959 $ 978,198 $ (71,589) $23,210,568
============ ========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252(s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $23,966,490 (u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $30,923,976 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund III, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 26 n/a 607
============== =========== ==================== =================
Earnings per
share/unit...... $ n/a $ 19.56 $ n/a $ 0.52
============== =========== ==================== =================
Book value per
share/unit...... $ n/a $ 316.97 $ n/a $ 16.24
============== =========== ==================== =================
Dividends per
share/unit...... $ n/a $ 20.00 $ n/a $ 0.76
============== =========== ==================== =================
Ratio of
earnings to
Fixed Charges... n/a n/a n/a 2.89x
============== =========== ==================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,000,000 $ (215,750)(s) $ 33,949,652
============== =========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,028,551 44,526,434(r)
============== =========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 1,028,551 44,527,015
============== =========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,612,983 $11,601,730 $4,218,211 (u2) $ 710,632,924
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 18,690 $ (163,474)(x) $ 9,102,314
Investment in
joint ventures.. $ 1,081,046 $ 2,150,281 $ 594,275 (u2) $ 3,825,602
Total assets.... $1,170,077,102 $16,750,545 $2,543,616 (u2),(x) $1,189,371,263
Total
liabilities/minority
interest........ $ 465,485,738 $ 902,075 $ (163,474)(x) $ 466,224,339
Total equity.... $ 704,591,364 $15,848,470 $2,707,090 (u2) $ 723,146,924
</TABLE>
S-21
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
------------
Total.................................................... $(8,599,248)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................ $ 144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
------------
$(2,913,775)
============
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,083,168
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
S-22
<PAGE>
(j) Represents $1,168 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (25,928)
--------
$(25,928)
========
</TABLE>
(l) Represents the elimination of $25,928 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $20,106 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $4,000 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $73,357 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $15,326
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from July
1, 1999 through July 31, 1999 as if these properties had been acquired
on June 30, 1999. Based on historical results through July 31, 1999,
all interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma adjustments
to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair value of
Consideration
Received............... $82,283,794 $50,886,031 $20,535,735 $153,705,560
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $18,555,560 $141,555,560
Cash Consideration...... -- -- 258,000 258,000
APF Transaction Costs... 6,283,794 3,886,031 1,722,175 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $82,283,794 $50,886,031 $20,535,735 $153,705,560
=========== =========== =========== ============
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical............. $ 8,330,475 $10,135,087 $15,848,470 $ 34,314,032
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 3,360,730 3,360,730
Net investment in
direct financing
leases................ -- -- 857,482 857,482
Investment in joint
ventures.............. -- -- 594,275 594,275
Accrued rental income.. -- -- (86,038) (86,038)
Intangibles and other
assets................ -- (2,575,792) (39,184) (2,614,976)
Goodwill*.............. -- 43,326,736 -- 43,326,736
Excess purchase price.. 73,953,319 -- -- 73,953,319
----------- ----------- ----------- ------------
Total Allocation..... $82,283,794 $50,886,031 $20,535,735 $153,705,560
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,953,319 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $43,326,736 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A.............. 8,600
Common Stock (CFA, CFS, CFC)--Class B.............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)......... 12,568,974
Retained Earnings.................................. 5,883,163
Accumulated distributions in excess of earnings.... 73,953,319
Goodwill for CFC/CFS (Intangibles and other
assets)........................................... 43,326,736
CFC/CFS Organizational Costs/Other Assets.......... 2,575,792
Cash to pay APF transaction costs.................. 10,169,825
APF Common Stock................................... 61,500
APF Capital in Excess of Par Value................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital.................................. 15,848,470
Land and buildings on operating leases............. 3,360,730
Net investment in direct financing leases.......... 857,482
Investment in joint ventures....................... 594,275
Accrued rental income.............................. 86,038
Intangibles and other assets....................... 39,184
Cash to pay APF Transaction costs.................. 1,722,175
Cash consideration to Income Funds................. 258,000
APF Common Stock................................... 10,286
APF Capital in Excess of Par Value................. 18,545,274
(To record acquisition of Income Fund)
</TABLE>
(v)Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w)Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(x)Represents the elimination by the Income Fund of $163,474 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND III, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
III, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 993,374 $ 954,260 $ 1,786,254 $ 2,023,495 $ 2,452,797 $ 2,358,235 $ 2,511,833
Net income (2).......... 978,198 1,271,494 1,736,883 2,391,835 1,814,657 1,482,515 1,858,605
Cash distributions
declared (3)........... 1,000,000 2,477,747 3,477,747 2,376,000 2,376,000 2,376,000 2,376,000
Net income per unit
(2).................... 19.38 25.20 34.44 47.47 35.93 29.37 36.80
Cash distributions
declared per unit (3).. 20.00 49.55 69.55 47.52 47.52 47.52 47.52
GAAP book value per
unit................... 316.97 328.10 317.41 352.22 351.91 363.13 381.00
Weighted average number
of Limited
Partner units
outstanding............ 50,000 50,000 50,000 50,000 50,000 50,000 50,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $16,750,545 $17,250,632 $16,701,732 $18,479,002 $18,608,907 $19,065,305 $19,945,765
Total partners'
capital................ 15,848,470 16,404,883 15,870,272 17,611,136 17,595,301 18,156,644 19,050,129
</TABLE>
- --------
(1) Revenues include equity in earnings of the unconsolidated joint venture and
minority interest in income and losses of the consolidated joint ventures.
(2) Net income for the six months ended June 30, 1998 and the year ended
December 31, 1998, includes gain on sale of land and buildings of $596,586
and $497,321, respectively, and for the year ended December 31, 1998, as
impairment in carrying value of net investment in direct financing lease,
of $25,821. Net income for the years ended December 31, 1997 and 1995,
includes a provision for loss on land and building of $32,819 and $207,844,
respectively. Net income for the year ended December 31, 1997, includes
gain on sale of land and buildings of $1,027,590.
(3) Distributions for the six months ended June 30 1998, and the year ended
December 31, 1998, include a special distribution to the Limited Partners
of $1,477,747 as a result of the distribution of net sales proceeds from
restaurant properties sales.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND III, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on June
1, 1987, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of selected national and regional fast-food restaurant
chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 26 restaurant properties
which included interests in three restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and three restaurant properties owned
with affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund
generated cash from operations, including cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses, of $958,915 and $936,758, respectively. The increase in
cash from operations for the six months ended June 30, 1999 is primarily a
result of changes in the Income Fund's working capital and changes in income
and expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In January 1999, the Income Fund reinvested the majority of the net sales
proceeds from the 1998 sale of a Po Folks restaurant property in Hagerstown,
Maryland, along with a portion of the amounts collected in 1998 under the
promissory note accepted in connection with the 1997 sale of the restaurant
property in Roswell, Georgia, in a Burger King restaurant property in
Montgomery, Alabama, at an approximate cost of $939,900.
In April 1999, the Income Fund sold its restaurant property in Flagstaff,
Arizona, to the tenant for $1,103,127 and received net sales proceeds of
$1,091,192, resulting in a gain of $285,350 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in October
1988 and had a cost of approximately $993,500, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $97,700 in excess of its original
purchase price. As of June 30, 1999, the net sales proceeds were being held in
an interest bearing escrow account pending the release of funds by the escrow
agent to acquire an additional restaurant property. The Income Fund anticipates
this transaction, or a portion thereof, will be structured to qualify as a
like-kind exchange transaction for federal income tax purposes.
In June 1999, the Income Fund sold its Denny's restaurant property in
Hagerstown, Maryland, to the tenant for $710,000 and received net sales
proceeds of $700,977, resulting in a gain of $8,162 for financial reporting
purposes. The Income Fund intends to reinvest the remaining net sales proceeds
in an additional restaurant property. The Income Fund anticipates that it will
distribute amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, if any, at a level reasonably assumed by the us, resulting
from the sale.
Currently, rental income from the Income Fund's restaurant properties and
net sales proceeds from the sale of a restaurant property, pending reinvestment
in an additional restaurant property, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts at
commercial banks, certificates of deposits, and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At June 30,
1999, the Income Fund had $1,757,137 invested in such short-term investments,
as compared to
S-26
<PAGE>
$2,047,140 at December 31, 1998. The decrease in cash and cash equivalents
during the six months ended June 30, 1999, is primarily attributable to the
reinvestment of net sales proceeds in a restaurant property in Montgomery,
Alabama, in January 1999, as described above. The Income Fund expects to use
the funds remaining at June 30, 1999 to pay distributions and other liabilities
and to invest in an additional restaurant property.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1998, 1997 and 1996, the Income Fund
generated cash from operations, which includes cash received from tenants,
distributions from joint ventures and interest received, less cash paid for
expenses, of $1,821,296, $2,021,689, and $2,091,754. The decrease in cash from
operations during 1998 and 1997, each as compared to the previous year, is
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital during
each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In January 1996, the Income Fund entered into a promissory note with the
corporate general partner for a loan in the amount of $86,200 in connection
with the operations of the Income Fund. The loan was uncollateralized, bore
interest at a rate of prime plus 0.25% per annum and was due on demand. The
Income Fund repaid the loan in full, along with approximately $660 in interest,
to the corporate general partner. In addition, during 1996 and 1997, the Income
Fund entered into various promissory notes with the corporate general partner
for loans totalling $575,200 and $117,000, respectively, in connection with the
operations of the Income Fund. The loans were uncollateralized, non-interest
bearing and due on demand. The Income Fund had repaid the loans in full to the
corporate general partner as of December 31, 1997.
In January 1997, the Income Fund sold its restaurant property in Chicago,
Illinois, to a third party, for $505,000 and received net sales proceeds of
$496,418, resulting in a gain of $3,827 for financial reporting purposes. The
Income Fund used $452,000 of the net sales proceeds to pay liabilities of the
Income Fund, including quarterly distributions to the Limited Partners. The
balance of the funds was used to pay past due real estate taxes on this
restaurant property incurred by the Income Fund as a result of the former
tenant declaring bankruptcy. The Income Fund distributed amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, if any, at a
level reasonably assumed by us, resulting from the sale.
In March 1997, the Income Fund sold its restaurant property in Bradenton,
Florida, to the tenant, for $1,332,154 and received net sales proceeds of
$1,305,671, resulting in a gain of $361,368 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in June
1988 and had a cost of approximately $1,080,500, excluding acquisition fees and
miscellaneous acquisition expense; therefore, the Income Fund sold the
restaurant property for approximately $229,500 in excess of its original
purchase price. In June 1997, the Income Fund reinvested approximately
$1,276,000 of the net sales proceeds received in a restaurant property in
Fayetteville, North Carolina. The Income Fund used the remaining net sales
proceeds for other Income Fund purposes. The transaction, or a portion thereof,
relating to the sale of the restaurant property in Bradenton, Florida, and the
reinvestment of the proceeds in a restaurant property in Fayetteville, North
Carolina, qualified as a like-kind exchange transaction for federal income tax
purposes. The
S-27
<PAGE>
Income Fund distributed amounts sufficient to enable the Limited Partners to
pay federal and state income taxes, if any, at a level reasonably assumed by
us, resulting from the sale.
In April 1997, the Income Fund sold its restaurant property in Kissimmee,
Florida, to a third party for $692,400 and received net sales proceeds of
$673,159, resulting in a gain of $271,929 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in March
1988 and had a cost of approximately $474,800, excluding acquisition fees and
miscellaneous acquisition expense; therefore, the Income Fund sold the
restaurant property for approximately $196,400 in excess of its original
purchase price. In July 1997, the Income Fund reinvested approximately $511,700
of these net sales proceeds in a restaurant property located in Englewood,
Colorado, as tenants-in-common with one of our affiliates. In connection
therewith, the Income Fund and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to each co-venturer's percentage interest. As of
December 31, 1997, the Income Fund owned a 33 percent interest in the
restaurant property. In January 1998, the Income Fund reinvested the remaining
net sales proceeds in an IHOP restaurant property in Overland Park, Kansas,
with certain of our affiliates, as tenants-in-common. The transaction, or a
portion thereof, relating to the sale of the restaurant property in Kissimmee,
Florida, and the reinvestment of a portion of the proceeds in an IHOP
restaurant property in Englewood, Colorado, qualified as a like-kind exchange
transaction for federal income tax purposes. The Income Fund distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, if any, at a level reasonably assumed by us, resulting from the
sale.
In April 1996, the Income Fund received $51,400 as partial settlement in a
right of way taking relating to a parcel of land of the restaurant property in
Plant City, Florida. In April 1997, the Income Fund received the remaining
proceeds of $73,600 finalizing the sale of the land parcel. In connection
therewith, the Income Fund recognized a gain of $94,320 for financial reporting
purposes.
In addition, in June 1997, the Income Fund sold its restaurant property in
Roswell, Georgia, to a third party for $985,000 and received net sales proceeds
of $942,981, resulting in a gain of $237,608 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in June
1988 and had a cost of approximately $775,200, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $167,800 in excess of its original
purchase price. In connection therewith, the Income Fund received $257,981 in
cash and accepted the remaining sales proceeds in the form of a promissory note
in the principal sum of $685,000, collateralized by a mortgage on the
restaurant property. During 1998, the Income Fund collected the full amount of
the outstanding mortgage note receivable balance of $678,730. In December 1997,
the Income Fund reinvested a portion of the net sales proceeds in a restaurant
property located in Miami, Florida, as tenants-in-common with one of our
affiliates. In connection therewith, the Income Fund and the affiliate entered
into an agreement whereby each co-venturer will share in the profits and losses
of the restaurant property in proportion to each co-venturer's percentage
interest. As of December 31, 1998, the Income Fund owned a 9.84% interest in
the restaurant property. The Income Fund used the remaining net sales proceeds
for other Income Fund purposes. The Income Fund distributed amounts sufficient
to enable the Limited Partners to pay federal and state income taxes, if any,
at a level reasonably assumed by us, resulting from the sale.
In October 1997, the Income Fund sold its restaurant property in Mason City,
Iowa, to the tenant for $218,790 and received net sales proceeds of $216,528,
resulting in a gain of $58,538 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in March 1988
and had a cost of approximately $190,300, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $26,700 in excess of its original
purchase price. In January 1998, the Income Fund reinvested the net sales
proceeds in a restaurant property in Overland Park, Kansas, with certain of our
affiliates, as tenants-in-common. The transaction, or a portion thereof,
relating to the sale of the restaurant property in Mason City, Iowa, and the
reinvestment of the proceeds in a restaurant property in Overland Park, Kansas,
with affiliates as tenants-in-common, qualified as a like-kind exchange
transaction for federal income tax purposes. The Income Fund distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, if any, at a level reasonably assumed by us, resulting from the
sale.
S-28
<PAGE>
In January 1998, the Income Fund sold its restaurant property in Fernandina
Beach, Florida, to the tenant, for $730,000 and received net sales proceeds of
$724,172 resulting in a gain of $242,129 for financial reporting purposes. In
addition, in January 1998, the Income Fund sold its restaurant property in
Daytona Beach, Florida, to the tenant, for $1,050,000 and received net sale
proceeds of $1,006,501, resulting in a gain of $267,759 for financial reporting
purposes. These properties were originally acquired by the Income Fund in May
1988 and August 1988, respectively, and had a total cost of approximately
$1,464,200, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Income Fund sold the restaurant properties for approximately
$266,500 in excess of their original purchase price. In connection with the
sale of these restaurant properties, the Income Fund incurred deferred,
subordinated, real estate disposition fees of $53,400. The Income Fund
distributed $1,477,747 of the net sales proceeds as a special distribution to
the Limited Partners and used the remaining proceeds for other Income Fund
purposes. The Income Fund distributed amounts sufficient to enable the Limited
Partners to pay federal and state income taxes, if any, at a level reasonably
assumed by us, resulting from these sales.
In February 1998, the Income Fund also sold its restaurant property in Punta
Gorda, Florida, to a third party, for $675,000 and received net sales proceeds
of $665,973, resulting in a gain of $73,485 for financial reporting purposes.
In May 1998, the Income Fund contributed the net sales proceeds in a joint
venture arrangement as described below. The Income Fund distributed amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any, at a level reasonably assumed by us.
As described above, in May 1998, the Income Fund entered into a joint
venture, RTO Joint Venture, with one of our affiliates, to construct and hold
one restaurant property. As of December 31, 1998, the Income Fund had
contributed $676,952 to purchase land and pay for construction relating to the
joint venture. Construction was completed and rent commenced in December 1998.
The Income Fund holds a 46.88% interest in the profits and losses of the joint
venture.
In June 1998, the Income Fund sold its restaurant property in Hagerstown,
Maryland, to a third party, for $825,000 and received net sales proceeds of
$789,639, resulting in gain of $13,213 for financial reporting purposes. In
January 1999, the Income Fund reinvested the majority of the net sales proceeds
in a restaurant property in Montgomery, Alabama. The Income Fund intends to use
the remaining net sales proceeds to pay distributions to the Limited Partners
and for other Income Fund purposes. The Income Fund distributed amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any, at a level reasonably assumed by us.
In September 1998, the Income Fund entered into a new lease agreement for
the Golden Corral restaurant property in Stockbridge, Georgia. In connection
therewith, the Income Fund funded $150,000 in renovation costs.
In December 1998, the Income Fund sold its restaurant property in Hazard,
Kentucky, to a third party for $435,000 and received net sales proceeds of
$432,625, resulting in a loss of $99,265 for financial reporting purposes. In
January 1999, the Income Fund reinvested the net sales proceeds in a restaurant
property in Montgomery, Alabama.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowings from us, however, the Income Fund
may borrow, in our discretion, for the purpose of maintaining the operations of
the Income Fund. The Income Fund will not encumber any of the restaurant
properties in connection with any borrowings or advances. The Income Fund also
will not borrow under circumstances which would make the Limited Partners
liable to creditors of the Income Fund. Certain of our affiliates from time to
time incur certain operating expenses on behalf of the Income Fund for which
the Income Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, distribution to Limited Partners
S-29
<PAGE>
or use for the payment of Income Fund liabilities, are invested in money market
accounts or other short-term highly liquid investments such as demand deposit
accounts at commercial banks, CDs and money market accounts with less than a
30-day maturity date pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1998, the
Income Fund had $2,047,140 invested in such short-term investments as compared
to $493,118 at December 31, 1997. The increase in cash and cash equivalents is
primarily attributable to the fact that cash and cash equivalents at December
31, 1998, included the remaining net sales proceeds relating to the sale of
several restaurant properties pending reinvestment in additional restaurant
properties, and the note receivable as described above. As of December 31,
1998, the average interest rate earned on the rental income deposited in demand
deposit accounts at commercial banks was approximately two percent annually.
The funds remaining at December 31, 1998, will be used for investment in an
additional restaurant property and for the payment of distributions and other
liabilities.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current and
anticipated future cash from operations, and for the six months ended June 30,
1998, proceeds received from the sales of two restaurant properties, the Income
Fund declared distributions to Limited Partners of $1,000,000 and $2,477,747
for the six months ended June 30, 1999 and 1998, respectively, or $500,000 for
each of the quarters ended June 30, 1999 and 1998. This represents
distributions of $20.00 and $49.55 per unit for the six months ended June 30,
1999 and 1998, respectively, or $10.00 per unit for each of the quarters ended
June 30, 1999 and 1998. Distributions for the six months ended June 30, 1998
included $1,477,747 as a result of the distribution of net sales proceeds from
the sale of the restaurant properties in Fernandina Beach and Daytona Beach,
Florida. No distributions were made to us for the quarters and six months ended
June 30, 1999 and 1998. No amounts distributed to the Limited Partners for the
six months ended June 30, 1999 and 1998 are required to be or have been treated
by the Income Fund as a return of capital for purposes of calculating the
Limited Partners' return on their adjusted capital contributions. The Income
Fund intends to continue to make distributions of cash available for
distribution to the Limited Partners on a quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $767,772 at June 30, 1999 from $695,755 at December 31, 1998
primarily as a result of the Income Fund accruing transaction costs relating to
the Acquisition. We believe that the Income Fund has sufficient cash on hand to
meet its current working capital needs.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases for the Income Fund's restaurant properties are generally
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on a triple-net basis, it is not anticipated that a permanent reserve for
maintenance and repairs will be established at this time. To the extent,
however, that the Income Fund has insufficient funds for such purposes, we will
contribute to the Income Fund an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.
Based on current and anticipated cash from operations and a portion of the
sales proceeds received from the sale of restaurant properties during 1998 and
1997, the Income Fund declared distributions to the Limited Partners of
$3,477,747 for the year ended December 31, 1998 and $2,376,000 for each of the
years ended December 31, 1997 and 1996. This represents distributions of $69.55
per unit for the year ended December 31, 1998 and $47.52 per unit for each of
the years ended December 31, 1997 and 1996. Distributions for 1998 included
$1,477,747 as a result of the distribution of net sales proceeds from the sale
of the restaurant properties in Fernandina Beach and Daytona Beach, Florida.
This special distribution was effectively a return of a portion of the Limited
Partners' investment, although, in accordance with the Income Fund's
partnership agreement, it was applied to the Limited Partner's unpaid
cumulative 10% preferred return. The reduced number of restaurant properties
for which the Income Fund receives rental payments, as well as ongoing
operations, reduced the Income Fund's revenues in 1998 and is expected to
reduce the Income Fund's revenues in subsequent years. The decrease in Income
Fund revenues, combined with the fact that a significant portion of the Income
Fund's expenses are fixed in nature, resulted in a decrease in cash
distributions to the Limited Partners during 1998. No amounts distributed to
the Limited Partners for the years ended December 31, 1998, 1997, or 1996 are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners return on their adjusted
capital contributions.
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $95,798, $71,681, and $108,900, respectively, for certain
operating expenses. At December 31, 1998 and 1997, the Income Fund owed $84,337
and $82,238, respectively, to affiliates for such amounts and accounting and
administrative services. In addition, during the year ended December 31, 1998
and 1997, the Income Fund incurred $53,400 and $15,150, respectively, in real
estate disposition fees due to an affiliate as a result of services provided in
connection with the sale of the restaurant properties in Chicago, Illinois;
Daytona Beach and Fernandina Beach, Florida. The payment of such fees is
deferred until the Limited Partners have received the sum of their cumulative
10% preferred return and their adjusted capital contributions. Other
liabilities, including distributions payable, decreased to $542,868 at December
31, 1998, from $631,861 at December 31, 1997. The decrease in amounts payable
to other parties was primarily attributable to a decrease in distributions
payable to the Limited Partners at December 31, 1998. We believe that the
Income Fund has sufficient cash on hand to meet its current working capital
needs.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 26
wholly-owned restaurant properties, including four restaurant properties, which
were sold in 1998 and during the six months ended June 30, 1999, the Income
Fund and its consolidated joint venture owned and leased 23 wholly owned
restaurant properties, including two restaurant properties which were sold in
1999, to operators of fast-food and family-style restaurant chains. In
connection therewith, during the six months ended June 30, 1999 and 1998, the
Income Fund earned $834,744 and $807,010, respectively, in rental income from
operating leases and earned income from direct financing leases from these
restaurant properties, $407,898 and $352,019 of which was earned during the
quarters ended June 30, 1999 and 1998, respectively. The increase in rental and
earned income during the quarter and six months ended June 30, 1999 as compared
to the quarter and six months ended June 30, 1998, is due to the fact that,
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during the quarter and six months ended June 30, 1998, the Income Fund
terminated its lease with the tenant of the restaurant property in Canton
Township, Michigan. Therefore, during the quarter and six months ended June 30,
1998, the Income Fund wrote-off approximately $59,000 in accrued rental income
relating to this restaurant property, representing non-cash accounting
adjustments since inception of the lease relating to the straight lining of
future scheduled rent increases in accordance with generally accepted
accounting principles. No such amounts were written off during the quarter and
six months ended June 30, 1999.
The increase in rental and earned income during the quarter and six months
ended June 30, 1999, was partially offset by a decrease of approximately
$26,100 and $69,700, respectively, as a result of the sale of several
restaurant properties during 1998 and 1999. This decrease was partially offset
by an increase in rental and earned income of approximately $24,300 and
$41,600, respectively during the quarter and six months ended June 30, 1999,
due to the fact that during January 1999, the Income Fund reinvested a portion
of net sales proceeds in an additional restaurant property, as described above
in "Capital Resources." However, rental and earned income are expected to
remain at reduced amounts as a result of distributing a portion of the net
sales proceeds to Limited Partners during 1998 from two of the restaurant
properties sold during 1998.
For the six months ended June 30, 1999 and 1998, the Income Fund owned and
leased three restaurant properties indirectly through joint venture
arrangements and three restaurant properties as tenants-in-common with our
affiliates. In connection therewith, during the six months ended June 30, 1999
and 1998, the Income Fund earned income of $83,457 and $41,274, respectively,
$41,998 and $18,523 of which was earned during the quarters ended June 30, 1999
and 1998, respectively. The increase in net income earned by joint ventures
during the quarter and six months ended June 30, 1999, is due to the fact that
in May 1998, the Income Fund reinvested net sales proceeds from sales of
restaurant properties during 1998, in RTO Joint Venture, with one of our
affiliates.
In addition, during the six months ended June 30, 1999 and 1998, the Income
Fund earned $54,332 and $80,671, respectively, in interest and other income,
$37,862 and $39,489 of which was earned during the quarters ended June 30, 1999
and 1998, respectively. The decrease in interest and other income during the
six months ended June 30, 1999, as compared to the six months ended June 30,
1998, is primarily attributable to a decrease in interest income as a result of
the fact that in July 1998, the Income Fund collected the full balance of a
mortgage note receivable related to the restaurant property in Roswell,
Georgia, that the Income Fund had accepted in conjunction with the sale of a
restaurant property in a prior year.
Operating expenses, including depreciation and amortization expense, were
$308,688 and $279,352 for the six months ended June 30, 1999 and 1998,
respectively, of which $157,899 and $146,800 were incurred for the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was primarily due to the fact that
the Income Fund incurred approximately $51,200 and $82,100 in transaction costs
during the quarter and six months ended June 30, 1999, respectively, relating
to our retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition with APF. If the Limited Partners reject the
Acquisition, the Income Fund will bear the portion of the transaction costs
based upon the percentage of "For" votes and we will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.
The increase in operating expenses for the quarter and six months ended June
30, 1999, was partially offset by a decrease in operating expenses due to the
fact that, during 1998, the Income Fund recognized real estate tax expense
relating to the Po Folks restaurant property in Hagerstown, Maryland, based on
the fact that payment by the former tenant was doubtful. The Income Fund sold
this restaurant property in June 1998. The increase in operating expenses also
was offset by a decrease in operating expenses during the quarter and six
months ended June 30, 1999, as a result of a decrease in depreciation expense
due to the sale of several restaurant properties during the six months ended
June 30, 1999 and 1998.
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As a result of the sales of two restaurant properties during the quarter and
six months ended June 30, 1999, as described above in "Capital Resources," the
Income Fund recognized total gains of $293,512 for financial reporting
purposes. In addition, as a result of the sales of one and four restaurant
properties during the quarter and six months ended June 30, 1998, the Income
Fund recognized total gains of $13,213 and $596,586, respectively.
The Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1996, the Income Fund and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 30
wholly owned restaurant properties and during 1997, the Income Fund and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 32
wholly owned restaurant properties, including five restaurant properties which
were sold during 1997. During 1998, the Income Fund owned and leased 27 wholly
owned restaurant properties, including five restaurant properties which were
sold during 1998. In addition, during the years ended December 31, 1996, 1997
and 1998, the Income Fund was a co-venturer in two separate joint ventures that
each owned and leased one restaurant property and during 1997 and 1998, the
Income Fund owned and leased two restaurant properties, with certain of our
affiliates, as tenants-in-common. During 1998, the Income Fund and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased one
additional restaurant property, with certain of our affiliates, as tenants-in-
common and was a co-venturer in a joint venture that owned and leased one
restaurant property. As of December 31, 1998, the Income Fund owned, either
directly or through joint venture arrangements, 27 restaurant properties which
are, in general, subject to long-term, triple-net leases. The leases of the
restaurant properties provide for minimum base annual rental amounts, payable
in monthly installments, ranging from approximately $23,000 to $191,900. The
majority of the leases provide for percentage rent based on sales in excess of
a specified amount. In addition, some leases provide for increases in the
annual base rent during the lease term.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
and its consolidated joint venture, Tuscawilla Joint Venture, earned
$1,554,852, $1,930,486, and $2,273,850, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease
in rental and earned income during 1998 and 1997, each as compared to the
previous year, is partially attributable to a decrease of approximately
$350,300 and $219,700, respectively, as a result of the sales of restaurant
properties during 1998 and 1997, as described above in "Capital Resources."
During 1998 and 1997, the decrease in rental income was partially offset by an
increase of approximately $69,100 and $86,200, respectively, due to the
reinvestment of a portion of these net sales proceeds during 1997, in a rental
restaurant property in Fayetteville, North Carolina, as described above in
"Capital Resources."
The decrease in rental and earned income during 1997, as compared to 1996,
is partially attributable to the fact that during 1997, the Income Fund entered
into a new lease with a new tenant for the Denny's restaurant property in
Hagerstown, Maryland, and in connection therewith, recognized as income
approximately $118,700 for which the Income Fund had previously established an
allowance for doubtful accounts relating to the Denny's and Po Folks restaurant
properties in Hagerstown, Maryland. During 1997, the Income Fund established an
allowance for doubtful accounts for these amounts due to the uncertainty of the
collectibility of these amounts. We are pursuing collection of past due amounts
relating to this restaurant property and will recognize any such amounts as
income if collected.
Rental and earned income during 1998, 1997, and 1996, remained at reduced
levels due to the fact that the Income Fund did not receive any rental income
relating to the Po Folks restaurant property in Hagerstown, Maryland. In June
1998, the Income Fund sold the restaurant property to a third party, as
described above in "Capital Resources." In January 1999, the Income Fund
reinvested the majority of the net sales proceeds in a restaurant property in
Montgomery, Alabama and intends to use the remaining net sales proceeds for
other Income Fund purposes.
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In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is partially attributable to the fact that, during 1998 and
1997, the Income Fund increased its allowance for doubtful accounts by
approximately $74,400 and $15,400, respectively, for accrued rental income
amounts previously recorded, due to the fact that future scheduled rent
increases are recognized on a straight-line basis over the term of the lease in
accordance with generally accepted accounting principles, relating to the
restaurant property in Canton Township, Michigan, due to financial difficulties
the tenant was experiencing. During 1998, the tenant vacated the restaurant
property and ceased operations and the Income Fund wrote off all such accrued
rental income amounts and is currently seeking either a replacement tenant or
purchaser for this restaurant property.
The decrease during 1998, as compared to 1997, is also partially
attributable to the fact that during 1998, the Income Fund terminated the lease
with the tenant of the restaurant property in Hazard, Kentucky, and wrote off
approximately $29,500 of accrued rental income recognized since inception
relating to the straight lining of future scheduled rent increases, in
accordance with generally accepted accounting principles. In addition, the
decrease during 1998 is partially attributable to the Income Fund reserving
approximately $41,400 in accrued rental income, or non-cash accounting
adjustment relating to the straight-lining of future scheduled rent increases
over the term of the lease in accordance with generally accepted accounting
principles.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $98,915, $157,648, and $157,993, respectively, in contingent rental
income. The decrease in contingent rental income during 1998, as compared to
1997, is primarily attributable to the sales of restaurant properties during
1998 and 1997, for which the leases required the payment of contingent rental
income.
In addition, during 1998, 1997, and 1996, the Income Fund earned $127,064,
100,816, and $26,496, respectively, in interest and other income. The increase
in interest and other income during 1998 and 1997, was partially attributable
to the interest earned on the net sales proceeds relating to the sales of
restaurant properties during 1998 and 1997, temporarily invested in short-term
highly liquid investments pending reinvestment of such amounts in additional
restaurant properties or the use of such amounts for other Income Fund
purposes. In addition, interest and other income increased by approximately
$33,700 during 1997, as a result of the interest earned on the mortgage note
receivable accepted in connection with the sale of the restaurant property in
Roswell, Georgia, in June 1997. The increase in interest and other income
during 1997, was also attributable to the Income Fund recognizing $15,000 in
other income due to the fact that the purchase and sale agreement between the
Income Fund and a third party for the Po Folks restaurant property located in
Hagerstown, Maryland, was terminated. Based on the agreement, the deposits
received in connection with the purchase and sale agreement were retained as
other income by the Income Fund due to the termination of the agreement.
The Income Fund recognized income of $22,708, a loss of $148,170, and income
of $11,740 for the years ended December 31, 1998, 1997, and 1996, respectively,
attributable to net income and net loss earned by unconsolidated joint ventures
in which the Income Fund is a co-venturer. The loss during 1997 was due to the
fact that during 1997, the operator of the restaurant property owned by
Titusville Joint Venture vacated the restaurant property and ceased operations.
In conjunction therewith, during 1997, Titusville Joint Venture, in which the
Income Fund owns a 73.4% interest, established an allowance for doubtful
accounts of approximately $27,000 for past due rental amounts. No such
allowance was established during 1996. During 1998, the joint venture wrote off
all uncollected balances and ceased collection efforts. The joint venture wrote
off unamortized lease costs of $23,500 in 1997 due to the tenant vacating the
restaurant property. In addition, during 1997, the joint venture established an
allowance for loss on land and building for its restaurant property in
Titusville, Florida, of approximately $147,000. During 1998, the joint venture
increased the allowance for loss on land and building by approximately $125,300
for financial reporting purposes. The allowance represents the difference
between the restaurant property's carrying value at December 31, 1998 and the
current estimate of the net realizable value at December 31, 1998 for the
restaurant property. Titusville Joint Venture is currently seeking either a
replacement tenant or purchaser for this restaurant property. The increase in
income earned from joint ventures during 1998, is partially attributable to,
and the decrease during 1997, as compared to 1996, is partially offset by, an
increase in net income earned by joint ventures due to the fact that the Income
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Fund reinvested a portion of the net sales proceeds it received from the 1997
and 1998 sales of several restaurant properties, in three restaurant properties
with certain of our affiliates as tenants-in-common and one restaurant property
through a joint venture arrangement with one of our affiliates in 1997 and
1998.
During the year ended December 31, 1998, one lessee of the Income Fund and
its consolidated joint venture, Golden Corral Corporation, contributed more
than ten percent of the Income Fund's total rental income, including rental
income from the Income Fund's consolidated joint venture and the Income Fund's
share of the rental income from restaurant properties owned by unconsolidated
joint ventures and restaurant properties owned with affiliates as tenants-in-
common. As of December 31, 1998, Golden Corral Corporation was the lessee under
leases relating to five restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, this lessee will continue to
contribute more than ten percent of the Income Fund's total rental income
during 1999. In addition, during the year ended December 31, 1998, three
restaurant chains, Golden Corral, Pizza Hut, and KFC, each accounted for more
than ten percent of the Income Fund's total rental income, including rental
income from the Income Fund's consolidated joint venture and the Income Fund's
share of the rental income from restaurant properties owned by unconsolidated
joint ventures and restaurant properties owned with affiliates as tenants-in-
common. It is anticipated that Golden Corral, Pizza Hut, and KFC each will
continue to account for more than ten percent of total rental income to which
the Income Fund is entitled under the terms of the leases. Any failure of
Golden Corral Corporation or any of these restaurant chains could materially
affect the Income Fund's income, if the Income Fund is not able to re-lease
these restaurant properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$520,871, $626,431, and $638,140 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998, as
compared to 1997, and 1997, as compared to 1996, was partially attributable to
a decrease in depreciation expense as a result of the sales of restaurant
properties in 1998 and 1997.
The decrease in operating expenses during 1998, as compared to 1997, is
partially attributable to, and the decrease during 1997, as compared to 1996,
is partially offset by, an increase in operating expenses during 1997, due to
the fact that the Income Fund recognized real estate tax expense of
approximately $40,200 and bad debt expense of approximately $32,400, relating
to the Denny's and Po Folks restaurant properties in Hagerstown, Maryland.
These amounts relate to prior year amounts due from the former tenant that the
current tenant of this restaurant property had agreed to pay, as described
above in "Capital Resources." However, the Income Fund recorded these amounts
as expenses during 1997, due to the fact that payment of these amounts by the
current tenant was doubtful. We intend to pursue collection of past due amounts
relating to this restaurant property and will recognize any such amounts as
income if collected. In June 1998, the Income Fund sold the Po Folks restaurant
property to a third party if the Income Fund is unable to re-lease these
restaurant properties in a timely manner.
The decrease during 1998, as compared to 1997, is partially offset by the
fact that the Income Fund incurred $14,227 in transaction costs related to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition.
As a result of the restaurant properties sales during 1998 and 1997, and the
sale of parcel of land in Plant City, Florida, as described above in "Capital
Resources," the Income Fund recognized gains on sale of land and buildings
totalling $497,321 and $1,027,590 during the years ended December 31, 1998 and
1997, respectively. No restaurant properties were sold during 1996. In
addition, during the years ended December 31, 1998 and 1997, the Income Fund
recorded an allowance for loss on land and building and impairment in carrying
value of net investment in direct financing lease of $25,821 and $32,819,
respectively, relating to the Denny's and Po Folks restaurant properties in
Hagerstown, Maryland. The allowance represents the difference between the
carrying value of the restaurant properties at December 31, 1998 and 1997, and
the net realizable value of the restaurant properties based on the current
estimated net realizable value of each restaurant property at December 31, 1998
and 1997, respectively.
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The Income Fund's leases as of December 31, 1998, are triple-net leases and,
in general, contain provisions that we believe mitigate the adverse effect of
inflation. Such provisions include clauses requiring the payment of percentage
rent based on certain restaurant sales above a specified level and/or automatic
increases in base rent at specified times during the term of the lease.
Management expects that increases in restaurant sales volumes due to inflation
and real sales growth should result in an increase in rental income, for
certain restaurant properties, over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
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As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
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The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-38
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-23
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-24
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended
December 31, 1998........................................................ F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-34
</TABLE>
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,637,561 and $2,738,895,
respectively.......................................... $10,472,484 $11,418,836
Net investment in direct financing leases, less
allowance for impairment in carrying value of $25,821
in 1998............................................... 1,129,246 887,071
Investment in joint ventures........................... 2,150,281 2,157,147
Cash and cash equivalents.............................. 1,757,137 2,047,140
Restricted cash........................................ 1,097,485 --
Receivables, less allowance for doubtful accounts of
$6,158 and $153,598................................... 18,690 89,519
Prepaid expenses....................................... 9,830 6,751
Accrued rental income, less allowance for doubtful
accounts of $41,380 in 1998........................... 86,038 65,914
Other assets........................................... 29,354 29,354
----------- -----------
$16,750,545 $16,701,732
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 71,146 $ 2,072
Escrowed real estate taxes payable..................... 12,538 15,217
Distributions payable.................................. 500,000 500,000
Due to related party................................... 163,474 152,887
Rents paid in advance.................................. 20,614 25,579
----------- -----------
Total liabilities.................................... 767,772 695,755
Commitments and Contingencies (Note 5)
Minority interests..................................... 134,303 135,705
Partners' capital...................................... 15,848,470 15,870,272
----------- -----------
$16,750,545 $16,701,732
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1999 1998 1999 1998
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................ $297,471 $318,276 $680,349 $ 739,401
Earned income from direct financing
leases............................ 110,427 33,743 154,395 67,609
Contingent rental income........... 26,437 21,053 29,418 33,886
Interest and other income.......... 37,862 39,489 54,332 80,671
-------- -------- -------- ----------
472,197 412,561 918,494 921,567
-------- -------- -------- ----------
Expenses:
General operating and
administrative.................... 29,310 38,942 64,032 70,722
Professional services.............. 10,874 20,446 14,162 25,056
Real estate taxes.................. -- 3,306 -- 7,535
State and other taxes.............. 924 204 13,541 11,720
Depreciation and amortization...... 65,560 83,902 134,840 164,319
Transaction costs.................. 51,231 -- 82,113 --
-------- -------- -------- ----------
157,899 146,800 308,688 279,352
-------- -------- -------- ----------
Income Before Minority Interest in
Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures, and
Gain on Sale of Land and Buildings.. 314,298 265,761 609,806 642,215
Minority Interest in Income of
Consolidated Joint Venture.......... (4,232) (4,236) (8,577) (8,581)
Equity in Earnings of Unconsolidated
Joint Ventures...................... 41,998 18,523 83,457 41,274
Gain on Sale of Land and Buildings... 293,512 13,213 293,512 596,586
-------- -------- -------- ----------
Net Income........................... $645,576 $293,261 $978,198 $1,271,494
======== ======== ======== ==========
Allocation of Net Income:
General partners................... $ 5,883 $ 2,932 $ 9,209 $ 11,490
Limited partners................... 639,693 290,329 968,989 1,260,004
-------- -------- -------- ----------
$645,576 $293,261 $978,198 $1,271,494
======== ======== ======== ==========
Net Income Per Limited Partner Unit.. $ 12.79 $ 5.81 $ 19.38 $ 25.20
======== ======== ======== ==========
Weighted Average Number of Limited
Partner Units Outstanding........... 50,000 50,000 50,000 50,000
======== ======== ======== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Year Ended
Six Months Ended December
June 30, 31,
1999 1998
---------------- -----------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 354,638 $ 339,611
Net income..................................... 9,209 15,027
----------- -----------
363,847 354,638
----------- -----------
Limited partners:
Beginning balance.............................. 15,515,634 17,271,525
Net income..................................... 968,989 1,721,856
Distributions ($20.00 and $69.55 per limited
partner unit, respectively)................... (1,000,000) (3,477,747)
----------- -----------
15,484,623 15,515,634
----------- -----------
Total partners' capital.......................... $15,848,470 $15,870,272
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............ $ 958,915 $ 936,758
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings........... 1,792,169 3,214,616
Additions to land and building on operating lease.. (326,996) --
Investment in direct financing lease............... (612,920) --
Investment in joint venture........................ -- (801,682)
Collections on note receivable..................... -- 6,557
Decrease (increase) in restricted cash............. (1,091,192) 245,377
---------- ----------
Net cash provided by (used in) investing
activities...................................... (238,939) 2,664,868
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,000,000) (2,571,747)
Distributions to holders of minority interests..... (9,979) (10,099)
---------- ----------
Net cash used in financing activities............ (1,009,979) (2,581,846)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... (290,003) 1,019,780
Cash and Cash Equivalents at Beginning of Period....... 2,047,140 493,118
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,757,137 $1,512,898
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period............................. $ -- $ 53,400
========== ==========
Distributions declared and unpaid at end of period... $ 500,000 $ 500,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
III, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 69.07% interest in Tuscawilla Joint Venture
using the consolidation method. Minority interests represents the minority
joint venture partners' proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
2. Land and Buildings on Operating Leases:
In January 1999, the Partnership reinvested the majority of the net sales
proceeds from the 1998 sale of a Pro Folks property in Hagerstown, Maryland,
along with amounts collected in 1998, under a promissory note accepted in
connection with the 1997 sale of a Property in Roswell, Georgia in a Burger
King property in Montgomery, Alabama. The Property had an approximate cost of
$939,900. In accordance with Statement of Financial Accounting Standards No.
13, "Accounting for Leases," the land portion of this property was classified
as an operating lease while the building portion was classified as a direct
financing lease.
In April 1999, the Partnership sold its property in Flagstaff, Arizona, to
the tenant, for $1,103,127 and received net sales proceeds of $1,091,192,
resulting in a gain of $285,350 for financial reporting purposes. This property
was originally acquired by the Partnership in October 1998 and had a cost of
approximately $993,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $97,700 in excess of its original purchase price (see Note 4).
In June 1999, the Partnership sold its Denny's property in Hagerstown,
Maryland to the tenant, for $710,000 and received net sales proceeds of
$700,977, resulting in a gain of $8,162 for financial reporting purposes (see
Note 3).
3. Net Investment in Direct Financing Leases:
In June 1999, the Partnership sold its Denny's property in Hagerstown,
Maryland, for which the building portion had been classified as a direct
financing lease. In connection therewith, the gross investment (minimum lease
payments receivable and estimated residual value) and unearned income relating
to this property were removed from the accounts and the gain from the sale
relating to this property was reflected in income (see Note 2).
F-5
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
4. Restricted Cash:
As of June 30, 1999, net sales proceeds of $1,091,192 from the sale of the
property in Flagstaff, Arizona, plus accrued interest of $6,293, were being
held in interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property on behalf of the Partnership.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 7,041,451 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $20,535,734 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradeable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
these additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund III, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund III, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 14, 1999, except for Note 13 for which the date is March 11, 1999
and Note 14 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $11,418,836 $14,635,583
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 887,071 926,862
Investment in joint ventures........................... 2,157,147 1,179,762
Mortgage note receivable............................... -- 681,687
Cash and cash equivalents.............................. 2,047,140 493,118
Restricted cash........................................ -- 251,879
Receivables, less allowance for doubtful accounts of
$153,598 and $154,469................................. 89,519 102,420
Prepaid expenses....................................... 6,751 14,361
Lease costs, less accumulated amortization of $12,000
and $2,762............................................ -- 9,238
Accrued rental income, less allowance for doubtful
accounts of $41,380 and $15,384....................... 65,914 154,738
Other assets........................................... 29,354 29,354
----------- -----------
$16,701,732 $18,479,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,072 $ 5,219
Accrued and escrowed real estate taxes payable......... 15,217 11,897
Distributions payable.................................. 500,000 594,000
Due to related parties................................. 152,887 97,388
Rents paid in advance and deposits..................... 25,579 20,745
----------- -----------
Total Liabilities.................................... 695,755 729,249
Minority interest...................................... 135,705 138,617
Partners' capital...................................... 15,870,272 17,611,136
----------- -----------
$16,701,732 $18,479,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,523,980 $1,859,911 $2,184,460
Adjustments to accrued rental income.... (103,830) -- --
Earned income from direct financing
leases................................. 134,702 70,575 89,390
Contingent rental income................ 98,915 157,648 157,993
Interest and other income............... 127,064 100,816 26,496
---------- ---------- ----------
1,780,831 2,188,950 2,458,339
---------- ---------- ----------
Expenses:
General operating and administrative.... 137,245 140,886 147,840
Professional services................... 36,591 27,314 50,064
Bad debt expense........................ -- 32,360 924
Real estate taxes....................... 11,966 47,165 1,973
State and other taxes................... 12,249 9,924 11,973
Depreciation and amortization........... 308,593 368,782 425,366
Transaction costs....................... 14,227 -- --
---------- ---------- ----------
520,871 626,431 638,140
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings (Loss) of Unconsolidated Joint
Ventures, Gain on Sale of Land and
Buildings and Provision for Loss on Land
and Building and Impairment in Carrying
Value of Net Investment in Direct
Financing Lease.......................... 1,259,960 1,562,519 1,820,199
Minority Interest in Income of
Consolidated Joint Venture............... (17,285) (17,285) (17,282)
Equity in Earnings (Loss) of
Unconsolidated Joint Ventures............ 22,708 (148,170) 11,740
Gain on Sale of Land and Buildings........ 497,321 1,027,590 --
Provision for Loss on Land and Building
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (25,821) (32,819) --
---------- ---------- ----------
Net Income................................ $1,736,883 $2,391,835 $1,814,657
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 15,027 $ 18,306 $ 18,147
Limited partners........................ 1,721,856 2,373,529 1,796,510
---------- ---------- ----------
$1,736,883 $2,391,835 $1,814,657
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 34.44 $ 47.47 $ 35.93
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $161,500 $141,658 $25,000,000 $(18,397,640) $14,116,024 $(2,864,898) $18,156,644
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,147 -- -- 1,796,510 -- 1,814,657
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 161,500 159,805 25,000,000 (20,773,640) 15,912,534 (2,864,898) 17,595,301
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,306 -- -- 2,373,529 -- 2,391,835
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 161,500 178,111 25,000,000 (23,149,640) 18,286,063 (2,864,898) 17,611,136
Distributions to
limited partners
($69.55 per limited
partner unit)......... -- -- -- (3,477,747) -- -- (3,477,747)
Net income............. -- 15,027 -- -- 1,721,856 -- 1,736,883
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $161,500 $193,138 $25,000,000 $(26,627,387) $20,007,919 $(2,864,898) $15,870,272
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............. $ 1,768,910 $ 2,268,568 $ 2,226,794
Distributions from unconsolidated joint
ventures.............................. 142,001 19,647 31,670
Cash paid for expenses................. (202,117) (325,067) (175,148)
Interest received...................... 112,502 58,541 8,438
----------- ----------- -----------
Net cash provided by operating
activities........................... 1,821,296 2,021,689 2,091,754
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings............................. 3,647,241 3,023,357 --
Deposit received on sale of land
parcel................................ -- -- 51,400
Additions to land and buildings........ (150,000) (1,272,960) --
Investment in joint ventures........... (1,096,678) (703,667) --
Collections on mortgage note
receivable............................ 678,730 6,270 --
Decrease (increase) in restricted
cash.................................. 245,377 (245,377) --
Decrease (increase) in other assets.... -- 2,135 (2,135)
----------- ----------- -----------
Net cash provided by investing
activities........................... 3,324,670 809,758 49,265
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from loans from corporate
general partner....................... -- 117,000 661,400
Repayment of loans from corporate
general partner....................... -- (117,000) (661,400)
Distributions to holder of minority
interest.............................. (20,197) (20,080) (20,082)
Distributions to limited partners...... (3,571,747) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,591,944) (2,396,080) (2,396,082)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 1,554,022 435,367 (255,063)
Cash and Cash Equivalents at Beginning
of Year................................ 493,118 57,751 312,814
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 2,047,140 $ 493,118 $ 57,751
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,736,883 $ 2,391,835 $ 1,814,657
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense....................... -- 32,360 924
Depreciation........................... 299,355 368,182 424,766
Amortization........................... 9,238 600 600
Minority interest in income of
consolidated joint venture............ 17,285 17,285 17,282
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 119,293 167,817 19,930
Gain on sale of land and buildings..... (497,321) (1,027,590) --
Provision for loss on land and building
and impairment in carrying value of
net investment in direct financing
lease................................. 25,821 32,819 --
Decrease (increase) in receivables..... (7,936) 182,433 (216,117)
Decrease in net investment in direct
financing leases...................... 13,970 12,056 7,331
Decrease (increase) in prepaid
expenses.............................. 7,610 (7,463) (1,297)
Decrease (increase) in accrued rental
income................................ 88,824 (40,000) (32,667)
Increase (decrease) in accounts payable
and accrued expenses.................. 173 (71,844) (4,732)
Increase (decrease) in due to related
parties............................... 2,099 (20,621) 48,944
Increase (decrease) in rents paid in
advance and deposits.................. 6,002 (16,180) 12,133
----------- ----------- -----------
Total adjustments..................... 84,413 (370,146) 277,097
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 1,821,296 $ 2,021,689 $ 2,091,754
=========== =========== ===========
Supplemental Schedule on Non-Cash
Investing and Financing Activities:
Mortgage note accepted as consideration
in sale of land and building.......... $ -- $ 685,000 $ --
=========== =========== ===========
Deferred real estate disposition fee
incurred and unpaid at end of year.... $ 53,400 $ 15,150 $ --
=========== =========== ===========
Distributions declared and unpaid at
end of year........................... $ 500,000 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund III, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food restaurant
chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for doubtful accounts are decreased accordingly.
F-12
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Investment in Joint Ventures--The Partnership accounts for its 69.07%
interest in Tuscawilla Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partners' proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
The Partnership's investment in Titusville Joint Venture, RTO Joint Venture,
and a property in each of Englewood, Colorado, Miami, Florida, and Overland
Park, Kansas held as tenants-in-common with affiliates, is accounted for using
the equity method since the Partnership shares control with affiliates of the
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method. Lease
costs are written off during the period in which a lease is terminated.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior year's financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases generally are classified as operating
leases; however, a few of the leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the
F-13
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
building portions of the property leases are accounted for as direct financing
leases while the land portion of these leases are operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $ 5,926,601 $ 7,325,960
Buildings....................................... 8,231,130 10,891,910
----------- -----------
14,157,731 18,217,870
Less accumulated depreciation................... (2,738,895) (3,341,624)
----------- -----------
11,418,836 14,876,246
Less allowance for loss on land and building.... -- (240,663)
----------- -----------
$11,418,836 $14,635,583
=========== ===========
</TABLE>
As of January 1, 1996, the Partnership had recorded an allowance for loss on
land and building in the amount of $207,844 for financial reporting purposes
for the Po Folks property in Hagerstown, Maryland. In addition, during 1997,
the Partnership increased the allowance for loss on land and building by an
additional $32,819 for such property.
The aggregate allowance represented the difference between the property's
carrying value at December 31, 1997, and the estimated net realizable value of
the property based on the anticipated sales price relating to this property.
The Partnership sold this property during the year ended December 31, 1998, as
described below.
In January 1997, the Partnership sold its property in Chicago, Illinois, to
a third party, for $505,000 and received net sales proceeds of $496,418,
resulting in a gain of $3,827 for financial reporting purposes. The Partnership
used $452,000 of the net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the limited partners. The balance of the
fund were used to pay past due real estate taxes relating to this property
incurred by the Partnership as a result of the former tenant declaring
bankruptcy.
In March 1997, the Partnership sold its property in Bradenton, Florida, to
the tenant, for $1,332,154 and received net sales proceeds of $1,305,671,
resulting in a gain of $361,368 for financial reporting purposes. This property
was originally acquired by the Partnership in June 1988 and had a cost of
approximately $1,080,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $229,500 in excess of its original purchase price. In June 1997,
the Partnership reinvested approximately $1,276,000 of the net sales proceeds
received in a property in Fayetteville, North Carolina.
In April 1997, the Partnership sold its property in Kissimmee, Florida, to a
third party, for $692,400 and received net sales proceeds of $673,159,
resulting in a gain of $271,929 for financial reporting purposes. This property
was originally acquired by the Partnership in March 1988 and had a cost of
approximately $474,800, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property
F-14
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
for approximately $196,400 in excess of its original purchase price. In July
1997, the Partnership reinvested approximately $511,700 of these net sales
proceeds in a property located in Englewood, Colorado, as tenants-in-common
with an affiliate of the general partners (see Note 5).
In April 1996, the Partnership received $51,400 as partial settlement in a
right of way taking relating to a parcel of land of the property in Plant City,
Florida. In April 1997, the Partnership received the remaining proceeds of
$73,600 finalizing the sale of the land parcel. In connection therewith, the
Partnership recognized a gain of $94,320 for financial reporting purposes.
In addition, in June 1997, the Partnership sold its property in Roswell,
Georgia, to a third party for $985,000 and received net sales proceeds of
$942,981, resulting in a gain of $237,608 for financial reporting purposes.
This property was originally acquired by the Partnership in June 1988 and had a
cost of approximately $775,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $167,800 in excess of its original purchase price. In connection
therewith, the Partnership received $257,981 in cash and accepted the remaining
sales proceeds in the form of a promissory note in the principal sum of
$685,000. During 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance of $678,730 (see Note 6). In
addition, in December 1997, the Partnership reinvested approximately $192,000
of the net sales proceeds in a property located in Miami, Florida, as tenants-
in-common, with an affiliate of the general partners (see Note 5).
In October 1997, the Partnership sold its property in Mason City, Iowa, to
the tenant for $218,790 and received net sales proceeds of $216,528, resulting
in a gain of $58,538 for financial reporting purposes. This property was
originally acquired by the Partnership in March 1988 and had a cost of
approximately $190,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $26,700 in excess of its original purchase price. In January
1998, the Partnership reinvested the net sales proceeds in a property in
Overland Park, Kansas, with affiliates of the general partners, as tenants-in-
common (see Note 5).
During the year ended December 31, 1998, the Partnership sold its properties
in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and Hagerstown,
Maryland, for a total of $3,280,000 and received net sales proceeds of
$3,214,616, resulting in a total gain of $596,586 for financial reporting
purposes. In connection with the sales of the properties in Daytona Beach and
Fernandina Beach, Florida, the Partnership incurred deferred, subordinated,
real estate disposition fees of $53,400 (see Note 11).
In September 1998, the Partnership entered into a new lease agreement for
the Golden Corral property located in Stockbridge, Georgia. In connection
therewith, the Partnership funded $150,000 in renovation costs.
In addition, during the year ended December 31, 1998, the Partnership sold
its property in Hazard, Kentucky to a third party for $435,000, and received
net sales proceeds of $432,625, resulting in a loss of $99,265 for financial
reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $88,824 (net of $25,996 in
reserves and $103,830 in write-offs), income during 1997 of $40,000 (net of
$15,384 in reserves) and income of $32,667 during 1996, of such rental income.
F-15
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,478,029
2000........................................................... 1,478,029
2001........................................................... 1,482,555
2002........................................................... 1,459,600
2003........................................................... 1,186,149
Thereafter..................................................... 6,731,050
-----------
$13,815,412
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease term. In addition, this table does not include any amounts for future
contingent rentals which may be received on the lease based on a percentage of
the tenants' gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Minimum lease payments receivable.................. $2,042,847 $2,191,519
Estimated residual value........................... 239,432 239,432
Less unearned income............................... (1,369,387) (1,504,089)
---------- ----------
912,892 926,862
Less allowance for impairment in carrying value of
investment in direct financing lease.............. (25,821) --
---------- ----------
Net investment in direct financing leases.......... $ 887,071 $ 926,862
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 148,672
2000............................................................ 148,672
2001............................................................ 148,672
2002............................................................ 148,672
2003............................................................ 148,672
Thereafter...................................................... 1,299,487
----------
$2,042,847
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or contingent rental payments that may become due in future periods
(see Note 3).
During 1998, the Partnership recorded an allowance for impairment in
carrying value of net investment in direct financing lease of $25,821 for
financial reporting purposes relating to the property in Hagerstown, Maryland,
due to financial difficulties the tenant is experiencing. The allowance
represents the difference between the carrying value of the property at
December 31, 1998, and the current estimated net realizable value for this
property.
F-16
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
5. Investment in Joint Ventures:
The Partnership has a 73.4% interest in the profits and losses of Titusville
Joint Venture which is accounted for using the equity method. The remaining
interest in the Titusville Joint Venture is held by an affiliate of the
Partnership which has the same general partners.
In July 1997, the Partnership acquired a property in Englewood Colorado, as
tenants-in-common with an affiliate of the general partners. The Partnership
accounts for its investment in this property using the equity method since the
Partnership shares control with an affiliate, and amounts relating to its
investment are included in investment in joint ventures. As of December 31,
1998, the Partnership owned a 33 percent interest in this property.
In addition, in December 1997, the Partnership acquired a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 9.84% interest in this property.
In January 1998, the Partnership acquired a property located in Overland
Park, Kansas, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 25.87% interest in this property.
In May 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. As of December 31, 1998, the Partnership had
contributed $676,952 to purchase land and pay for construction relating to the
joint venture. Construction was completed and rent commenced in December 1998.
The Partnership holds a 46.88% interest in the profits and losses of this joint
venture at December 31, 1998. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with an affiliate.
Titusville Joint Venture, RTO Joint Venture, and the Partnership and
affiliates, as tenants-in-common in three separate tenancy-in-common
arrangements, each own and lease one property to operators of national fast-
food or family-style restaurants. The following presents the joint venture's
condensed financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building................................. $3,598,641 $3,152,962
Net investment in direct financing leases.......... 3,418,537 1,003,680
Cash............................................... 19,254 16,481
Receivables........................................ 1,241 --
Accrued rental income.............................. 66,668 11,621
Other assets....................................... 2,679 1,480
Liabilities........................................ 59,453 18,722
Partners' capital.................................. 7,047,567 4,167,502
Revenues........................................... 604,672 82,837
Provision for loss on land and building............ 125,251 147,100
Net income (loss).................................. 404,446 (157,912)
</TABLE>
F-17
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Partnership recognized income of $22,708 and $11,740 for the years ended
December 31, 1998 and 1996, respectively, and recognized a loss totaling
$148,170, for the year ended December 31, 1997, relating to investment in joint
ventures.
6. Mortgage Note Receivable:
In connection with the sale of the property in Roswell, Georgia, in June
1997, the Partnership accepted a promissory note in the principal sum of
$685,000 collateralized by a mortgage on the property. The Partnership
collected the full amount of the outstanding mortgage note, including interest,
during the year ended December 31, 1998.
The mortgage note receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----- --------
<S> <C> <C>
Principal balance............................................ $ -- $678,730
Accrued interest receivable.................................. -- 2,957
----- --------
$ -- $681,687
===== ========
</TABLE>
7. Receivables:
During 1996, the Partnership terminated its lease with the former tenant of
its properties in Hagerstown, Maryland. In connection therewith, the
Partnership wrote off approximately $238,300 included in receivables relating
to both the Denny's and Po Folks properties in Hagerstown, Maryland, and the
related allowance for doubtful accounts. In October 1996, the Partnership
entered into a lease agreement with a new tenant to operate the Denny's
property and accepted a promissory note from the current tenant whereby
$25,000, which had been included in receivables for past due rents from the
former tenant, was converted to a loan receivable held by the Partnership to
facilitate the asset purchase agreement between the former and current tenants.
The promissory note bears interest at a rate of ten percent per annum, is being
collected in 36 equal monthly installments of $807 and commenced in October
1996. Receivables at December 31, 1998 and 1997, include $7,109 and $16,318,
respectively, including accrued interest of $142 and $164, respectively,
relating to the promissory note.
8. Restricted Cash:
As of December 31, 1997, net sales proceeds of $245,377 from the sale of the
property in Bradenton, Florida and Mason City, Iowa, plus accrued interest of
$6,502, were being held in interest-bearing escrow accounts pending the release
of funds by the escrow agent to acquire additional properties on behalf of the
Partnership. During the year ended December 31, 1998, these funds were released
by the escrow agent and were used to acquire additional properties.
9. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
F-18
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their cumulative
10% Preferred Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,477,747 and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $2,376,000. Distributions for the year ended
December 31, 1998, including $1,477,747 as a result of distributions of net
sales proceeds from the sale of the properties in Fernandina Beach and Daytona
Beach, Florida. This amount was applied toward the limited partners' cumulative
10% Preferred Return. No distributions have been made to the general partners
to date.
F-19
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $1,736,883 $2,391,835 $1,814,657
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes........................ (17,075) (21,782) (9,754)
Allowance for loss on land and building and
impairment in carrying value of net
investment in direct financing lease...... 25,821 32,819 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 13,970 12,056 7,330
Gain on sale of land for tax reporting
purposes.................................. -- -- 20,724
Gain on sale of land and buildings for
financial reporting purposes in excess of
gain on sale for tax reporting purposes... (115,137) (689,281) --
Equity in earnings of joint ventures for
tax reporting purposes in excess of (less
than) equity in earnings of joint ventures
for financial reporting purposes.......... 59,725 140,707 (1,329)
Allowance for doubtful accounts............ (871) 84,326 (283,135)
Accrued rental income...................... 88,824 (40,000) (32,667)
Capitalization of transaction costs for tax
reporting purposes........................ 14,227 -- --
Rents paid in advance...................... 6,002 (16,680) 12,133
Minority interest in timing differences of
consolidated joint venture................ (35) (133) (162)
---------- ---------- ----------
Net income for federal income tax
purposes.................................. $1,812,334 $1,893,867 $1,527,797
========== ========== ==========
</TABLE>
11. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
management fee of one-half of one percent of the Partnership assets under
management (valued at cost) annually. The property management fee is limited to
one percent of the sum of gross operating revenues from joint ventures or
competitive fees for comparable services. In addition, these fees will be
incurred and will be payable only after the limited partners receive their
aggregate, noncumulative 10% Preferred Return. Due to the fact that these fees
are noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no property management fees will be due or
payable for such year. As a result of such threshold, no property management
fees were incurred during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties, based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-20
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sales. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate, cumulative 10% Preferred Return, plus
their adjusted capital contributions. During the years ended December 31, 1998
and 1997, the Partnership incurred $53,400 and $15,150, respectively, in
deferred, subordinated real estate disposition fees as a result of the
Partnership's sale of the properties in Daytona Beach and Fernandina Beach,
Florida, and the Property in Chicago, Illinois, respectively. No deferred,
subordinated real estate disposition fees were incurred for the year ended
December 31, 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $89,756, $87,056, and $85,906 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership.......... $ 41,888 $38,492
Accounting and administrative services...................... 42,449 43,746
Deferred, subordinated real estate disposition fee.......... 68,550 15,150
-------- -------
$152,887 $97,388
======== =======
</TABLE>
12. Concentration of Credit Risk:
For the years ended December 31, 1998, 1997, and 1996, rental income from
Golden Corral Corporation was $454,380, $474,553, and $490,196, respectively,
representing more than ten percent of the Partnership's total rental and earned
income (including the Partnership's share of rental and earned income from
joint ventures and the properties held as tenants-in-common with affiliates).
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $454,380 $474,553 $490,196
KFC........................................... 277,508 261,415 254,646
Pizza Hut..................................... 211,507 255,055 292,795
Taco Bell..................................... N/A 250,140 254,395
Perkins....................................... N/A N/A 276,114
Denny's....................................... N/A 229,537 355,123
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-21
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
13. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,082,901 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $20,535,734 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
14. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 13 being adjusted to 1,041,451 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
financial information of the Income Fund, the Advisor and CNL Restaurant
Financial Services Group (shown separately as CNL Financial Services, Inc.
("CFS") and CNL Financial Corporation ("CFC")) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, the Advisor and CNL Restaurant Financial Services Group.
The pro forma balance sheet assumes that the Acquisition occurred on June 30,
1999, and the pro forma consolidated statements of earnings and statements of
cash flows assume that the acquisition of properties by APF from January 1,
1998 through July 31, 1999, the acquisition of the Advisor, the CNL Restaurant
Financial Services Group and the Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ----------- ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation)......... $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0 $ 0
Net Investment in
Direct Financing
Leases................ 132,179,949 0 132,179,949 0 0 0
Mortgages and Notes
Receivable............ 63,351,507 0 63,351,507 0 0 290,522,671
Other Investments...... 16,197,812 0 16,197,812 0 0 6,361,082
Investment In Joint
Ventures.............. 1,081,046 0 1,081,046 0 0 0
Cash and Cash
Equivalents........... 18,764,033 0 18,764,033 333,295 639,036 1,767,517
Restricted
Cash/Certificates of
Deposit............... 2,006,690 0 2,006,690 0 0 2,482,041
Receivables (net
allowances)/Due from
Related Party......... 649,972 0 649,972 8,668,738 5,417,084 1,125,933
Accrued Rental Income.. 5,875,698 0 5,875,698 0 0 0
Other Assets........... 12,551,632 0 12,551,632 405,214 313,486 2,479,317
Goodwill............... 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ =========== ============ ========== ========== ============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969 $ 2,013,172
Accrued Construction
Costs Payable......... 9,745,014 0 9,745,014 0 0 0
Distributions Payable.. 0 0 0 0 0 0
Due to Related
Parties............... 1,444,444 0 1,444,444 0 500,981 30,170,185
Income Tax Payable..... 0 0 0 51,466 16,906 274,485
Line of Credit/Notes
payable............... 149,000,000 3,369,856(A) 152,369,856 351,869 0 267,685,382
Deferred Income........ 2,466,355 0 2,466,355 0 0 0
Rents Paid in Advance.. 1,617,367 0 1,617,367 0 0 0
Minority Interest...... 644,611 0 644,611 0 0 0
Common Stock........... 373,484 0 373,484 0 0 0
Common Stock--Class A.. 0 0 0 6,400 2,000 200
Common Stock--Class B.. 0 0 0 3,600 724 501
Additional Paid-in-
capital............... 669,997,715 0 669,997,715 3,328,376 5,303,503 3,937,095
Accumulated
distributions in
excess of net
earnings.............. (15,169,373) 0 (15,169,373) 4,992,099 233,523 657,541
Partners' Capital...... 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ =========== ============ ========== ========== ============
Wtd. Avg. Shares
Outstanding 37,347,883
============
Shares Outstanding 37,348,464
============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted Pro
Adjustments APF Fund III, Ltd. Adjustments Forma
------------ -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation)......... $ 0 $ 572,936,859 $10,472,484 $ 3,360,730 (B2) $ 586,770,073
Net Investment in
Direct Financing
Leases................ 0 132,179,949 1,129,246 857,482 (B2) 134,166,677
Mortgages and Notes
Receivable............ 0 353,874,178 0 0 353,874,178
Other Investments...... 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures.............. 0 1,081,046 2,150,281 594,275 (B2) 3,825,602
Cash and Cash
Equivalents........... (10,169,825)(B1) 11,334,056 1,757,137 (1,722,175)(B2) 11,111,018
(258,000)(B2)
Restricted
Cash/Certificates of
Deposit............... 0 4,488,731 1,097,485 0 5,586,216
Receivables (net
allowances)/Due from
Related Party......... (6,614,629)(C) 9,247,098 18,690 (163,474)(E) 9,102,314
Accrued Rental Income.. 0 5,875,698 86,038 (86,038)(B2) 5,875,698
Other Assets........... (2,575,792)(B1) 13,173,857 39,184 (39,184)(B2) 13,173,857
Goodwill............... 43,326,736 (B1) 43,326,736 0 0 43,326,736
------------ -------------- ----------- ------------ --------------
Total Assets........... $ 23,966,490 $1,170,077,102 $16,750,545 $ 2,543,616 $1,189,371,263
============ ============== =========== ============ ==============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities... $ 0 $ 5,104,303 $ 83,684 $ 0 $ 5,187,987
Accrued Construction
Costs Payable......... 0 9,745,014 0 0 9,745,014
Distributions Payable.. 0 0 500,000 0 500,000
Due to Related
Parties............... (6,614,629)(C) 25,500,981 163,474 (163,474)(E) 25,500,981
Income Tax Payable..... (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable............... 0 420,407,107 0 0 420,407,107
Deferred Income........ 0 2,466,355 0 0 2,466,355
Rents Paid in Advance.. 0 1,617,367 20,614 0 1,637,981
Minority Interest...... 0 644,611 134,303 0 778,914
Common Stock........... 61,500 (B1) 434,984 0 10,286 (B2) 445,270
Common Stock--Class A.. (8,600)(B1) 0 0 0 0
Common Stock--Class B.. (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital............... 122,938,500 (B1) 792,936,215 0 18,545,274 (B2) 811,481,489
(12,568,974)(B1)
Accumulated
distributions in
excess of net
earnings.............. (5,883,163)(B1) (88,779,835) 0 0 (88,779,835)
(73,953,319)(B1)
342,857 (D)
Partners' Capital...... 0 0 15,848,470 (15,848,470)(B2) 0
------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $ 23,966,490 $1,170,077,102 $16,750,545 $ 2,543,616 $1,189,371,263
============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding........... 44,526,434
==============
Shares Outstanding..... 44,527,015
==============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ----------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
------------ ---------- ----------- ---------- --------- ----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
------------ ---------- ----------- ---------- --------- ----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... 23,564,432 2,089,441 25,653,873 3,877,654 42,804 $ (239,337)
Equity Earnings of
joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision For Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
------------ ---------- ----------- ---------- --------- ----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
------------ ---------- ----------- ---------- --------- ----------
Net Earnings (Losses)... $ 22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
============ ========== =========== ========== ========= ==========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ==========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ==========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ==========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
============ ========== =========== ========== ========= ==========
Cash Distributions
Declared............... $ 28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
============ ========== =========== ========== ========= ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
============ ========== =========== ========== ========= ==========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
============ ========== =========== ========== ========= ==========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund III, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $ 864,162 $ 1,168 (j) $31,822,844
Fees................... (9,812,516)(b),(c) 2,616,185 0 (25,928)(k) 2,590,257
Interest and Other
Income................ 144,014 (d) 16,269,383 54,332 0 16,323,715
----------- ----------- ---------- ---------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $ 918,494 $ (24,760) $50,736,816
Expenses:
General and
Administrative ....... (774,311)(e) 9,579,902 78,194 (46,034)(l),(m) 9,612,062
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 13,541 4,000 (o) 482,507
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 134,840 73,537 (p) 4,877,530
Amortization........... 1,083,168 (h) 1,092,904 0 0 1,092,904
Transaction Costs...... 0 483,005 82,113 0 565,118
----------- ----------- ---------- ---------- -----------
Total Expenses......... (3,348,591) 26,827,999 308,688 31,503 27,168,190
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,319,911) $23,015,083 $ 609,806 $ (56,263) $23,568,626
Equity Earnings of
joint
Ventures/Minority
Interest.............. 0 31,241 74,880 (15,326)(q) 90,795
Gain (Loss) on Sale of
Properties............ 0 (201,843) 293,512 0 91,669
Provision For Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/ (Provision)
for Federal Income
Taxes.................. (6,319,911) 22,303,959 978,198 (71,589) 23,210,568
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $(4,794,171) $22,303,959 $ 978,198 $ (71,589) $23,210,568
=========== =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 19.56 $ n/a $ 0.52
=========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 316.97 $ n/a $ 16.24
=========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 20.00 $ n/a $ 0.76
=========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.89x
=========== =========== ========== ========== ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,000,000 $ (215,750)(s) $33,949,652
=========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,028,551 44,526,434 (r)
=========== =========== ========== ========== ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,028,551 44,527,015
=========== =========== ========== ========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,547,345(t) $50,996,494 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,572,228 34,220,447 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund III, Ltd. Adjustments Pro Forma
------------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $1,653,767 $ 2,336 (j) $57,737,563
Fees................... (32,715,768)(b),(c) 3,226,263 0 (30,542)(k) 3,195,721
Interest and Other
Income................ 207,144 (d) 32,221,925 127,064 0 32,348,989
------------ ----------- ---------- ----------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $1,780,831 $ (28,206) $93,282,273
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 185,802 (68,010)(l),(m) 16,057,348
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 12,249 6,404 (o) 586,099
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 299,355 147,074 (p) 10,394,768
Amortization........... 2,166,337 (h) 2,330,338 9,238 0 2,339,576
Transaction Costs...... 0 157,054 14,227 0 171,281
------------ ----------- ---------- ----------- -----------
Total Expenses......... (9,236,611) 51,499,266 520,871 85,468 52,105,605
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... $(23,272,013) $40,030,382 $1,259,960 $ (113,674) $41,176,668
Equity in Earnings of
Joint
Venture/Minority
Interest.............. 0 (14,138) 5,423 (30,652)(q) (39,367)
Gain (Loss) on Sale of
Properties............ 0 0 497,321 0 497,321
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Losses on
Properties............ 0 (611,534) (25,821) 0 (637,355)
------------ ----------- ---------- ----------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (23,272,013) 43,099,061 1,736,883 (144,326) 44,691,618
Benefit/(Provision) for
Federal Income
Taxes................. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- ----------- -----------
Net Earnings (Losses)... $(16,373,579) $43,099,061 $1,736,883 $ (144,326) $44,691,618
============ =========== ========== =========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 34.74 $ n/a $ 1.08
============ =========== ========== =========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 317.41 $ n/a $ 16.36
============ =========== ========== =========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 69.55 $ n/a $ 1.50
============ =========== ========== =========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.03x
============ =========== ========== =========== ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,374,998 $3,477,747 $(1,909,248)(t) $61,943,497
============ =========== ========== =========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,370,447 n/a 1,028,551 41,398,998 (s)
============ =========== ========== =========== ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,028,551 44,516,478
============ =========== ========== =========== ===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (36,946) (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,311,108) 12,888,729 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,461,074 $ 33,225,107 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund III, Ltd. Adjustments Pro Forma
------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss).......................... $ (4,794,171)(a) $ 22,303,959 $ 978,198 $(71,589)(a) $ 23,210,568
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 0 4,774,655 134,840 73,537 (b) 4,983,032
Amortization expense...................... 1,083,168 (c) 1,992,921 0 0 1,992,921
Minority interest in income of
consolidated joint venture............... 0 17,610 8,577 0 26,187
Equity in earnings of joint ventures, net
of distributions......................... 0 25,120 6,866 15,326 (d) 47,312
Loss (gain) on sale of land, buildings,
and net investment in direct financing
leases................................... 0 201,843 (293,512) 0 (91,669)
Provision for loss on land, buildings, and
direct financing leases.................. 0 444,047 0 0 444,047
Gain on securitization.................... 0 0 0 0 0
Net cash proceeds from securitization of
notes receivable......................... 0 0 0 0 0
Decrease (increase) in other receivables.. 0 (2,201,960) 64,536 0 (2,137,424)
Increase in accrued interest income
included in notes receivable............. 0 0 0 0 0
Decrease (increase) in accrued interest on
mortgage note receivable................. 0 (183,569) 0 0 (183,569)
Investment in notes receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes receivable........... 0 9,662,971 0 0 9,662,971
Increase in restricted cash............... 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from related party........ 0 (111,832) 0 0 (111,832)
Decrease (increase) in prepaid expenses... 0 (320,425) (3,079) 0 (323,504)
Decrease in net investment in direct
financing leases......................... 0 721,624 10,596 0 732,220
Increase in accrued rental income......... 0 (1,915,785) (20,124) 0 (1,935,909)
Decrease (increase) in intangibles and
other assets............................. 0 (88,794) 0 0 (88,794)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities... 0 (663,478) 66,395 0 (597,083)
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition, and stock issuance costs
paid on behalf of the entity............. 0 585,727 10,587 0 596,314
Decrease in accrued interest.............. 0 ( 57,986) 0 0 (57,986)
Increase in rents paid in advance and
deposits................................. 0 666,719 (4,965) 0 661,754
Increase (decrease) in deferred rental
income................................... 0 1,276,472 0 0 1,276,472
------------ ------------- ---------- -------- -------------
Total adjustments......................... 1,083,168 (75,906,644) (19,283) 88,863 (75,837,064)
------------ ------------- ---------- -------- -------------
Net cash provided by (used in) operating
activities............................... (3,711,003) (53,602,685) 958,915 17,274 (52,626,496)
Cash Flows from Investing Activities:
Proceeds from sale of land, buildings,
direct financing leases, and equipment... 0 3,696,064 1,792,169 0 5,488,233
Additions to land and buildings on
operating leases......................... 4,452,252 (a) (44,006,783) (326,996) (44,333,779)
Investment in direct financing leases..... 0 (44,186,644) (612,920) 0 (44,799,564)
Investment in joint venture............... 0 (117,663) 0 0 (117,663)
Acquisition of businesses................. 0 0 0 0 0
Purchase of other investments............. 0 0 0 0 0
Net loss in market value from investments
in trading securities.................... 0 0 0 0 0
Proceeds from retained interest and
securities, excluding investment income.. 0 182,607 0 0 182,607
Investment in mortgage notes receivable... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage note receivable... 0 224,373 0 0 224,373
Investment in notes receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes receivable............ 0 626,959 0 0 626,959
Decrease in restricted cash............... 0 0 (1,091,192) 0 (1,091,192)
Increase in intangibles and other assets.. 0 (3,198,326) 0 0 (3,198,326)
Investment in certificates of deposit..... 0 0 0 0 0
Other..................................... 0 0 0 0 0
------------ ------------- ---------- -------- -------------
Net cash provided by (used in) investing
activities............................... 4,452,252 (111,734,526) (238,939) 0 (111,973,465)
Cash Flows from Financing Activities:
Subscriptions received from stockholders.. 0 231,306 0 0 231,306
Contributions from limited partners....... 0 0 0 0 0
Contributions from holder of minority
interest................................. 0 366,289 0 0 366,289
Reimbursement of acquisition and stock
issuance costs paid by related parties on
behalf of the entity..................... 0 (1,258,062) 0 0 (1,258,062)
Payment of stock issuance costs........... 0 (735,785) 0 0 (735,785)
Proceeds from borrowing on line of
credit/notes payable..................... 0 245,709,283 0 0 245,709,283
Payment on line of credit/notes payable... 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of common stock...... 0 0 0 0 0
Distributions to holders of minority
interest................................. 0 (21,105) (9,979) 0 (31,084)
Distributions to stockholders/limited
partners................................. (4,689,252)(g) (33,285,210) (1,000,000) 215,750(g) (34,069,460)
Other..................................... 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ---------- -------- -------------
Net cash provided by (used in) financing
activities............................... (4,689,252) 180,263,475 (1,009,979) 215,750 179,469,246
Net increase (decrease) in cash............ (3,948,003) 14,926,264 (290,003) 233,024 14,869,285
Cash at beginning of year.................. (12,302,083) 4,788,605 2,047,140 37,527 6,873,272
------------ ------------- ---------- -------- -------------
Cash at end of year........................ $(16,250,086) $ 19,714,869 $1,757,137 $270,551 $ 21,742,557
============ ============= ========== ======== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property
Acquisition
Historical Pro Forma Historical
APF Adjustments Subtotal Advisor
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (loss)............... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation.................... 4,042,290 6,246,947 (b) 10,289,237 119,923
Amortization expense............ 11,808 0 11,808 56,003
Minority interest in income of
consolidated joint venture..... 30,156 0 30,156 0
Equity in earnings of joint
ventures, net of
distributions.................. (15,440) 0 (15,440) 0
Loss (gain) on sale of land,
building, net investment in
direct financing leases........ 0 0 0 0
Provision for loss on land,
buildings, and direct
financing leases/provision for
deferred taxes................. 611,534 0 611,534 0
Gain on securitization.......... 0 0 0 0
Net cash proceeds from
securitization of notes
receivable..................... 0 0 0 0
Decrease (increase) in other
receivables.................... 899,572 0 899,572 (3,896,090)
Increase in accrued interest
income included in notes
receivable..................... 0 0 0 0
Increase in accrued interest on
mortgage note receivable....... 0 0 0 0
Investment in notes
receivable..................... 0 0 0 0
Collections on notes
receivable..................... 0 0 0 0
Decrease in restricted cash..... 0 0 0 0
Decrease (increase) in due from
related party.................. 0 0 0 0
Increase in prepaid expenses.... 0 0 0 0
Decrease in net investment in
direct financing leases........ 1,971,634 0 1,971,634 0
Increase in accrued rental
income......................... (2,187,652) 0 (2,187,652) 0
Increase in intangibles and
other assets................... (29,477) 0 (29,477) (44,716)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities.............. 467,972 0 467,972 156,317
Increase in due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on behalf
of the entity.................. 31,255 0 31,255 0
Increase in accrued interest.... 0 0 0 0
Increase in rents paid in
advance and deposits........... 436,843 0 436,843 0
Decrease in deferred rental
income......................... 693,372 0 693,372 0
------------- ------------- ------------- -----------
Total adjustments.............. 6,963,867 6,246,947 13,210,814 (3,608,563)
------------- ------------- ------------- -----------
Net cash provided by (used in)
operating activities.......... 39,116,275 22,951,799 62,068,074 7,047,816
Cash Flows from Investing
Activities:
Proceeds from sale of land,
buildings, direct financing
leases, and equipment.......... 2,385,941 0 2,385,941 0
Additions to land and buildings
on operating leases............ (200,101,667) (3,369,856)(e) (325,187,085) (381,671)
(121,715,562)(i)
Investment in direct financing
leases......................... (47,115,435) 0 (47,115,435) 0
Investment in joint venture..... (974,696) 0 (974,696) 0
Acquisition of businesses....... 0 0 0 0
Purchase of other investments... (16,083,055) 0 (16,083,055) 0
Net loss in market value from investments in trading securities.. 0 0 0 0
Proceeds from retained interest
and securities, excluding
investment income.............. 0 0 0 0
Investment in mortgage notes
receivable..................... (2,886,648) 0 (2,886,648) 0
Collections on mortgage note
receivable..................... 291,990 0 291,990 0
Investment in equipment notes
receivable..................... (7,837,750) 0 (7,837,750) 0
Collections on equipment notes
receivable..................... 1,263,633 0 1,263,633 1,783,240
Decrease in restricted cash..... 0 0 0 0
Increase in intangibles and
other assets................... (6,281,069) 0 (6,281,069) 0
Other........................... 0 0 0 200,000
------------- ------------- ------------- -----------
Net cash provided by (used in)
investing activities.......... (277,338,756) (125,085,418) (402,424,174) 1,601,569
Cash Flows from Financing
Activities:
Subscriptions received from
stockholders................... 385,523,966 385,523,966 966,115
Contributions from limited
partners....................... 0 0 0 0
Reimbursement of acquisition and
stock issuance costs paid by
related parties on behalf of
the entity..................... (4,574,925) 0 (4,574,925) 0
Payment of stock issuance
costs.......................... (34,579,650) 0 (34,579,650) 0
Proceeds from borrowing on line
of credit/notes payable........ 7,692,040 3,369,856 (e) 11,061,896 198,296
Payment on line of credit/notes
payable........................ (8,039) 0 (8,039) 0
Retirement of shares of common
stock.......................... (639,528) 0 (639,528) 0
Distributions to holders of
minority interest.............. (34,073) 0 (34,073) 0
Distributions to
stockholders/limited partners
............................... (39,449,149) (11,547,345)(j) (50,996,494) (9,364,488)
Other........................... (95,101) 0 (95,101) 0
------------- ------------- ------------- -----------
Net cash provided by (used in)
financing activities.......... 313,835,541 (8,177,489) 305,658,052 (8,200,077)
Net increase (decrease) in cash.. 75,613,060 (110,311,108) (34,698,048) 449,308
Cash at beginning of year........ 47,586,777 0 47,586,777 264,000
------------- ------------- ------------- -----------
Cash at end of year.............. $ 123,199,837 $(110,311,108) $ 12,888,729 $ 713,308
============= ============= ============= ===========
<CAPTION>
Historical Historical
CNL CNL
Financial Financial
Services, Inc. Corp.
-------------- --------------
<S> <C> <C>
Cash Flows from Operating
Activities:
Net Income (loss)............... $ (468,133) $ 427,134
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation.................... 79,234 0
Amortization expense............ 0 2,246,273
Minority interest in income of
consolidated joint venture..... 0 0
Equity in earnings of joint
ventures, net of
distributions.................. 0 0
Loss (gain) on sale of land,
building, net investment in
direct financing leases........ 0 0
Provision for loss on land,
buildings, and direct
financing leases/provision for
deferred taxes................. 0 398,042
Gain on securitization.......... 0 (3,356,538)
Net cash proceeds from
securitization of notes
receivable..................... 0 265,871,668
Decrease (increase) in other
receivables.................... 0 453,105
Increase in accrued interest
income included in notes
receivable..................... 0 (170,492)
Increase in accrued interest on
mortgage note receivable....... 0 0
Investment in notes
receivable..................... 0 (288,590,674)
Collections on notes
receivable..................... 0 23,539,641
Decrease in restricted cash..... 0 2,504,091
Decrease (increase) in due from
related party.................. 89,839 (1,043,527)
Increase in prepaid expenses.... 7,246 0
Decrease in net investment in
direct financing leases........ 0 0
Increase in accrued rental
income......................... 0 0
Increase in intangibles and
other assets................... (20,635) (59,523)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities.............. 325,898 (103,507)
Increase in due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on behalf
of the entity.................. (164,619) 0
Increase in accrued interest.... 0 (77,968)
Increase in rents paid in
advance and deposits........... 0 0
Decrease in deferred rental
income......................... 0 0
-------------- --------------
Total adjustments.............. 316,963 1,610,591
-------------- --------------
Net cash provided by (used in)
operating activities.......... (151,170) 2,037,725
Cash Flows from Investing
Activities:
Proceeds from sale of land,
buildings, direct financing
leases, and equipment.......... 0 0
Additions to land and buildings
on operating leases............ (236,372) 0
Investment in direct financing
leases......................... 0 0
Investment in joint venture..... 0 0
Acquisition of businesses....... 0 0
Purchase of other investments... 0 0
Net loss in market value from investments in trading securities.. 0 295,514
Proceeds from retained interest
and securities, excluding
investment income.............. 0 212,821
Investment in mortgage notes
receivable..................... 0 0
Collections on mortgage note
receivable..................... 0 0
Investment in equipment notes
receivable..................... 0 0
Collections on equipment notes
receivable..................... 0 0
Decrease in restricted cash..... 0 0
Increase in intangibles and
other assets................... 0 0
Other........................... 0 0
-------------- --------------
Net cash provided by (used in)
investing activities.......... (236,372) 508,335
Cash Flows from Financing
Activities:
Subscriptions received from
stockholders................... 51,830 50,100
Contributions from limited
partners....................... 0 0
Reimbursement of acquisition and
stock issuance costs paid by
related parties on behalf of
the entity..................... 0 0
Payment of stock issuance
costs.......................... 0 0
Proceeds from borrowing on line
of credit/notes payable........ 0 413,555,624
Payment on line of credit/notes
payable........................ 0 (411,805,787)
Retirement of shares of common
stock.......................... 0 0
Distributions to holders of
minority interest.............. 0 0
Distributions to
stockholders/limited partners
............................... 0 0
Other........................... 24 (2,500,011)
-------------- --------------
Net cash provided by (used in)
financing activities.......... 51,854 (700,074)
Net increase (decrease) in cash.. (335,688) 1,845,986
Cash at beginning of year........ 1,298,261 680,092
-------------- --------------
Cash at end of year.............. 962,573 2,526,078
============== ==============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund III, Ltd. Adjustments Pro Forma
------------------------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (loss)........ $ (16,373,579)(a) $ 43,099,061 $ 1,736,883 $ (144,326)(a) $ 44,691,618
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating
activities:
Depreciation............ (340,898)(b) 10,147,496 299,355 147,074 (b) 10,593,925
Amortization expense.... 2,166,337 (c) 4,480,421 9,238 0 4,489,659
Minority interest in
income of consolidated
joint venture.......... 0 30,156 17,285 0 47,441
Equity in earnings of
joint ventures, net of
distributions.......... 0 (15,440) 119,293 30,652 (d) 134,505
Loss (gain) on sale of
land, building, net
investment
in..................... 0 0 (497,321) 0 (497,321)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes......... 0 1,009,576 25,821 0 1,035,397
Gain on securitization.. 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of notes
receivable............. 0 265,871,668 0 0 265,871,668
Decrease (increase) in
other receivables...... 0 (2,543,413) (7,936) 0 (2,551,349)
Increase in accrued
interest income
included in notes
receivable............. 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable........ 0 0 0 0 0
Investment in notes
receivable............. 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............. 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash................... 0 2,504,091 0 0 2,504,091
Decrease (increase) in
due from related
party.................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses............... 0 7,246 7,610 0 14,856
Decrease in net
investment in direct
financing leases....... 0 1,971,634 13,970 0 1,985,604
Increase in accrued
rental income.......... 0 (2,187,652) 88,824 0 (2,098,828)
Increase in intangibles
and other assets....... 0 (154,351) 0 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities...... 0 846,680 173 0 846,853
Increase in due to
related parties,
excluding reimbursement
of acquisition, and
stock issuance costs
paid on behalf of the
entity................. 0 (133,364) 2,099 0 (131,265)
Increase in accrued
interest............... 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits............... 0 436,843 6,002 0 442,845
Decrease in deferred
rental income.......... 0 693,372 0 0 693,372
------------- ------------- ----------- ----------- -------------
Total adjustments....... 1,825,439 13,355,244 84,413 177,726 13,617,383
------------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............. (14,548,140) 56,454,305 1,821,296 33,400 58,309,001
Cash Flows from Investing Activities:
Proceeds from sale of
land, buildings, direct
financing leases, and
equipment.............. 0 2,385,941 3,647,241 0 6,033,182
Additions to land and
buildings on operating
leases................. 21,794,386 (h) (304,010,742) (150,000) 0 (304,160,742)
Investment in direct
financing leases....... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture................ 0 (974,696) (1,096,678) 0 (2,071,374)
Acquisition of
businesses............. (10,169,825)(f) (10,169,825) (1,722,175)(g) (12,150,000)
0 (258,000)(g)
Purchase of other
investments............ 0 (16,083,055) 0 0 (16,083,055)
Net loss in market value
from investments in
trading securities..... 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income...... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable....... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable........ 0 291,990 678,730 0 970,720
Investment in equipment
notes receivable....... 0 (7,837,750) 0 0 (7,837,750)
Collections on equipment
notes receivable....... 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash................... 0 0 245,377 0 245,377
Increase in intangibles
and other assets....... 0 (6,281,069) 0 0 (6,281,069)
Other................... 0 200,000 0 0 200,000
------------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............. 11,624,561 (388,926,081) 3,324,670 (1,980,175) (387,581,586)
Cash Flows from Financing Activities:
Subscriptions received
from stockholders...... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners....... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity... 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs......... 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of credit/notes
payable................ 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable... 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock........... 0 (639,528) 0 0 (639,528)
Distributions to holders
of minority interest... 0 (34,073) (20,197) 0 (54,270)
Distributions to
stockholders/limited
partners............... (9,378,504)(j) (69,739,486) (3,571,747) 1,909,248(j) (71,401,985)
Other................... 0 (2,595,088) 0 0 (2,595,088)
------------- ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............. (9,378,504) 287,431,251 (3,591,944) 1,909,248 285,748,555
Net increase (decrease)
in cash................. (12,302,083) (45,040,525) 1,554,022 (37,527) (43,448,976)
Cash at beginning of
year.................... 0 49,829,130 493,118 0 50,322,248
------------- ------------- ----------- ----------- -------------
Cash at end of year...... $ (12,302,083) $ 4,788,605 $ 2,047,140 $ (37,527) $ 6,873,272
============= ============= =========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no limited partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price paid exceeds the
fair value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,283,794 $50,886,031 $20,535,735 $153,705,560
=========== =========== ============ ============
Share Consideration..... $76,000,000 $47,000,000 $ 18,555,560 $141,555,560
Cash Consideration...... -- -- 258,000 258,000
APF Transaction Costs... 6,283,794 3,886,031 1,722,175 11,892,000
----------- ----------- ------------ ------------
Total Purchase
Price.............. $82,283,794 $50,886,031 $ 20,535,735 $153,705,560
=========== =========== ============ ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $ 15,848,470 $ 34,314,032
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 3,360,730 3,360,730
Net investment in
direct financing
leases............... -- -- 857,482 857,482
Investment in joint
ventures............. -- -- 594,275 594,275
Accrued rental
income............... -- -- (86,038) (86,038)
Intangibles and other
assets............... -- (2,575,792) (39,184) (2,614,976)
Goodwill*............. -- 43,326,736 -- 43,326,736
Excess purchase
price................ 73,953,319 -- -- 73,953,319
----------- ----------- ------------ ------------
Total Allocation.... $82,283,794 $50,886,031 $ 20,535,735 $153,705,560
=========== =========== ============ ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,953,319
was expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of $43,326,736 relating to the
acquisition of the CNL Financial Services Group is being amortized over
20 years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A........... 8,600
Common Stock (CFA, CFS, CFC)--Class B........... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of
earnings....................................... 73,953,319
Goodwill for CFC/CFS (Intangibles and other
assets)........................................ 43,326,736
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 10,169,825
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 15,848,470
Land and buildings on operating leases.......... 3,360,730
Net investment in direct financing leases....... 857,482
Investment in joint ventures.................... 594,275
Accrued rental income......................... 86,038
Intangibles and other assets.................. 39,184
Cash to pay APF Transaction costs............. 1,722,175
Cash consideration to Income Funds............ 258,000
APF Common Stock.............................. 10,286
APF Capital in Excess of Par Value............ 18,545,274
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $163,474 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which
were deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,083,168
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $1,168 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (25,928)
--------
$(25,928)
========
</TABLE>
(l) Represents the elimination of $25,928 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $20,106 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $4,000 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $73,357 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $15,326 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................. $(1,851,004)
Administrative executive and guarantee fees................. (1,233,043)
Servicing fees.............................................. (1,269,357)
Advisory fees............................................... (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill...................................... $2,166,337
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $2,336 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (30,542)
--------
$(30,542)
========
</TABLE>
(l) Represents the elimination of $30,542 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $37,468 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $6,404 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
had been issued as of January 1, 1998 and that these entities had
operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $147,074 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $30,652 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund III, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund III, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund III, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND III, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund III, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-5
<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,082,901 fully paid and nonassessable APF Common
Shares (1,041,451 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $19,123,759, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,917,099 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 50,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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<PAGE>
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,082,901 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $208,290 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND III, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND IV, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund IV, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the
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Income Funds in the Acquisition, APF expects to have total assets of
approximately $1.5 billion at the time of the consummation of the Acquisition
and will be one of the largest triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,334,008 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only
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receive the notes if you vote "Against" the Acquisition, and you elect to
receive the notes on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you vote "For" the
Acquisition, or you vote "Against" the Acquisition and do not affirmatively
select the notes on your consent form. In addition, if Limited Partners in your
Income Fund elect to receive notes in an amount greater than 15% of the
estimated value of APF Shares, based on the exchange value, to be paid to your
Income Fund, then APF has the right to decline to acquire your Income Fund. The
notes will not be listed on any exchange or automated quotation system, and a
market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $861.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,334,008 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
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Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $920, $920 and $1,211, respectively, to you per $10,000
investment. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $411 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income fund, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,231 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
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Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
In APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
S-5
<PAGE>
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.92%. If only your Income Fund were acquired as of that date, APF's debt
service ratio would have been 3.40x and its ratio of debt-to-total assets would
have been 35.18%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of other
factors, including the successful operation of their businesses. Various
factors, many of which are beyond the control of a restaurant chain, may
adversely affect the economic viability of the restaurant chain, including but
not limited to:
. national, regional and local economic conditions such as slowdowns,
employer relocations and prevailing employment conditions, which may
reduce consumer demand for the products offered by APF's customers;
S-6
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. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had a tenant of
one Boston Market restaurant property which continues to pay lease payments to
your Income Fund.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. This
aggregate loss rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
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Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited less
Partner Distributions Number of Estimated Value
Investments of Net Sales APF Estimated of APF Shares
less Proceeds per Shares Value of APF Estimated Value per Average
Distributions $10,000 Offered to Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Income Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ---------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$28,226,458 $9,409 1,334,008 $26,680,160 $333,000 $26,347,160 $8,782
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$30,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
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EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................... $ 20,309
Appraisals and Valuation(2)..................................... 6,765
Fairness Opinions(3)............................................ 30,000
Solicitation Fees(4)............................................ 15,941
Printing and Mailing(5)......................................... 89,402
Accounting and Other Fees(6).................................... 40,609
--------
Subtotal...................................................... 203,026
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)....................... 64,087
Legal Closing Fees(8)........................................... 31,655
Partnership Liquidation Costs(9)................................ 34,232
--------
Subtotal...................................................... 129,974
--------
Total........................................................... $333,000
========
</TABLE>
- --------
(1)Aggregate legal fees to be incurred by all of the Income Funds in connection
with the Acquisition is estimated to be $423,998. Your Income Fund's pro-
rata portion of these fees was determined based on the ratio of the value of
the APF Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
(2)Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3)Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4)Aggregate solicitation fees to be incurred by the Income Funds in connection
with the Acquisition is estimated to be $250,000. Your Income Fund's pro-
rata portion of these fees was determined based on the number of Limited
Partners in your Income Fund.
(5)Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6)Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7)Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was determined
based on the ratio of the value of the APF Share consideration payable to
your Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
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<PAGE>
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties. Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We
and members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
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<PAGE>
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a date not less
than 60 calendar days from the initial delivery of the solicitation materials,
or (b) such later date as we may select and as to which we give you notice. At
our discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
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<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended
------------------------ June 30,
1996 1997 1998 1999
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions........... -- -- -- --
Accounting and Administrative Services.. $85,899 $81,838 $94,365 $45,902
Broker/Dealer Commissions............... -- -- -- --
Due Diligence and Marketing Support
Fees................................... -- -- -- --
Acquisition Fees........................ -- -- -- --
Asset Management Fees................... -- -- -- --
Real Estate Disposition Fees(1)......... -- -- 45,663
------- ------- -------- -------
Total historical...................... $85,899 $81,838 $140,028 $45,902
Pro Forma Distributions to Be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares(2)..... -- -- -- --
Salary Compensation..................... -- -- -- --
------- ------- -------- -------
Total pro forma....................... -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
-------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $763 $730 $775 $568 $ 603 $271 $226
Distributions from Sales of
Properties .................. -- -- -- -- 411 -- --
Distributions from Return of
Capital(1)................... 157 190 145 352 197 129 109
---- ---- ---- ---- ------ ---- ----
Total....................... $920 $920 $920 $920 $1,211 $400 $335
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
.the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. we will be relieved from our material ongoing liabilities with respect
to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that each: (1) of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We
S-14
<PAGE>
note that because the Acquisition of any one Income Fund is not a condition of
the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
S-15
<PAGE>
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund IV,
Ltd. .................. 28,226,458 9,409 8,782 8,753 8,105 9,878
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$30,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options under, APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
S-16
<PAGE>
. As general partners of your Income Fund, we are legally liable for all
of your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement
for your Income Fund prohibits the Income Fund from incurring
indebtedness, the only liabilities the Income Fund has are liabilities
with respect to its ongoing business operations. In the event that your
Income Fund is acquired by APF, we would be relieved of our legal
obligations to satisfy the liabilities of the acquired Income Fund.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the
S-17
<PAGE>
Acquisition. The estimated taxable gain or loss, as of June 30, 1999, based on
the exchange value, for an average $10,000 original Limited Partner investment
in your Income Fund, is set forth in the table below for those Limited
Partners subject to federal income taxation. The information in the table
assumes that none of the Limited Partners in the Income Fund elected to
receive notes.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000 Original
Limited Partner Investment
----------------------------
<S> <C>
CNL Income Fund IV, Ltd............................ $861
</TABLE>
- --------
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and
at least 80 percent of the total number of shares of all other classes of
stock of the corporation. APF has represented to Shaw Pittman, APF's tax
counsel, that, following the Acquisition, the Limited Partners of the Income
Funds will not own stock possessing at least 80 percent of the total combined
voting power of all classes of APF stock entitled to vote and at least
80 percent of the total number of shares of all other classes of APF stock.
Based upon this representation, Shaw Pittman has opined that the Acquisition
will not result in the acquisition of control of APF by the Limited Partners
for purposes of section 351(a). Accordingly, the transfer of assets will
result in recognition of gain or loss by each Income Fund that is acquired by
APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner
in your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by
your Income Fund in the year of the Acquisition will be equal to the value of
the APF Shares received by your Income Fund multiplied by the ratio that the
gross profit realized by your Income Fund in the Acquisition bears to the
total contract price for your Income Fund's assets. To the extent your Income
Fund realizes depreciation recapture income under section 1245 or section 1250
of the Code, the recapture income will also be recognized by your Income Fund
in the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income
Fund's assets over the adjusted tax basis of those assets. The contract price
will equal the selling price reduced by certain qualified indebtedness
encumbering your Income Fund's assets, if any, that is assumed or taken
subject to by the Operating Partnership. The exact amount of the gain to be
recognized by your Income Fund in the year of the Acquisition will also vary
depending upon the decisions of the Limited Partners to receive APF Shares
or notes.
In general, gains or losses realized with respect to transfers of non-
dealer real estate and equipment in the Acquisition are likely to be treated
as realized from the sale of a "section 1231 asset," which is real property or
a depreciable asset used in a trade or business and held for more than one
year. Your share of gains or losses
S-18
<PAGE>
from the sale of section 1231 assets of your Income Fund would be combined with
any other section 1231 gains and losses that you recognize in that year. If the
result is a net loss, such loss is characterized as an ordinary loss. If the
result is a net gain, it is characterized as a capital gain, except that the
gain will be treated as ordinary income to the extent that you have "non-
recaptured section 1231 losses." For these purposes, the term "non-recaptured
section 1231 losses" means your aggregate section 1231 losses for the five most
recent prior years that have not been previously recaptured. However, gain
recognized on the sale of personal property will be taxed as ordinary income to
the extent of all prior depreciation deductions taken by your Income Fund prior
to sale. In general, you may only use up to $3,000 of capital losses in excess
of capital gains to offset ordinary income in any taxable year. Any excess loss
is carried forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive the notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
been liquidated and distributed APF Shares or notes, as the case may be, to
you. The taxable year of your Income Fund will end at this time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition, including gain or loss resulting from the
Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
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<PAGE>
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,079,371 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,352,388)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,316,114)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,316,114)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,790,374)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund IV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $1,089,757 $ 10,143 (j) $32,057,414
Fees............. 2,616,185 0 (26,136)(k) 2,590,049
Interest and
Other Income..... 16,269,383 16,969 0 16,286,352
------------ ---------- ------------------ ------------
Total Revenue... $49,843,082 $1,106,726 $ (15,993) $50,933,815
Expenses:
General and
Administrative... 9,579,902 106,809 (50,508)(l),(m) 9,636,203
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 15,395 5,124 (o) 485,485
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 202,745 107,509 (p) 4,979,407
Amortization..... 1,089,107 2,259 0 1,091,366
Transaction
Costs............ 483,005 104,166 0 587,171
------------ ---------- ------------------ ------------
Total Expenses.. 26,824,202 431,374 62,125 27,317,701
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,018,880 $ 675,352 $ (78,118) $23,616,114
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 146,616 (20,486)(q) 157,371
Gain (Loss) on
Sale of
Properties....... (201,843) 0 0 (201,843)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,307,756 821,968 (98,604) 23,031,120
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $22,307,756 $ 821,968 $ (98,604) $23,031,120
============ ========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared: ...... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,212,129 (u1)(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v)(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,169,615 (u1)(w)
<CAPTION>
Historical
CNL Income
Combined Fund Pro Forma Adjusted
APF IV, Ltd. Adjustments Pro Forma
-------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 38 n/a 619
============== =========== =================== =================
Earnings per
share/unit...... $ n/a $ 13.70 $ n/a $ 0.51
============== =========== =================== =================
Book value per
share/unit...... $ n/a $ 332.70 $ n/a $ 16.26
============== =========== =================== =================
Dividends per
share/unit...... $ n/a $ 20.00 $ n/a $ 0.76
============== =========== =================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.88x
============== =========== =================== =================
Cash
distributions
declared: ...... $ 33,165,402 $ 1,200,000 $ (195,541)(s) $ 34,169,861
============== =========== =================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,317,358 44,815,241(r)
============== =========== =================== =================
Shares
outstanding..... 43,498,464 n/a 1,317,358 44,815,822
============== =========== =================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $16,494,738 $5,813,445 (u2) $ 717,123,166
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 69,583 $ (160,865)(x) $ 9,155,816
Investment in
joint ventures.. $ 1,081,046 $ 3,354,395 $ 819,017 (u2) $ 5,254,458
Total assets.... $1,170,322,741 $20,904,798 $3,684,075 (u2)(x) $1,194,911,614
Total
liabilities/minority
interest........ $ 465,485,738 $ 942,830 $ (160,865)(x) $ 466,267,703
Total equity.... $ 704,837,003 $19,961,968 $3,844,940 (u2) $ 728,643,911
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation expense
of $967,179 as if restaurant properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any restaurant properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $ (689,425)
Secured equipment lease fees................................. (67,967)
Advisory fees................................................ (126,788)
Reimbursement of administrative costs........................ (382,728)
Acquisition fees............................................. (4,452,252)
Underwriting fees............................................ (54,248)
Administrative, executive and guarantee fees................. (532,389)
Servicing fees............................................... (572,728)
Development fees............................................. (38,853)
Management fees.............................................. (1,681,870)
------------
Total....................................................... $(8,599,248)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial Corp. On a
historical basis, CNL Financial Services, Inc. records all of the loan
origination fees received as revenue. For purposes of presenting pro forma
financial statements of these entities on a combined basis, these loan
origination fees are required to be deferred and amortized into revenues
over the term of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services Inc. from borrowers during the six months ended June 30,
1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................ $ 144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (126,788)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (532,389)
------------
$(2,913,775)
============
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and the
CNL Restaurant Financial Services Group resulting from agreements between
these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in footnote (u)
below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,079,371
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
S-23
<PAGE>
(j) Represents $10,143 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (26,136)
---------
$(26,136)
=========
</TABLE>
(l) Represents the elimination of $26,136 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $24,372 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund to
the Advisor.
(o) Represents additional state income taxes of $5,124 resulting from assuming
that acquisitions of restaurant properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group and
the Income Fund had been issued as of January 1, 1998 and that these
entities had operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $107,509 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $820,486 as
a result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma restaurant properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June 30,
1999. Based on historical results through July 31, 1999, all interest costs
related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
S-24
<PAGE>
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,038,155 $50,734,122 $26,259,631 $159,031,908
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $23,806,908 $146,806,908
Cash Consideration...... -- -- 333,000 333,000
APF Transaction Costs... 6,038,155 3,734,122 2,119,723 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $82,038,155 $50,734,122 $26,259,631 $159,031,908
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets--Historical.. $ 8,330,475 $10,135,087 $19,961,968 $ 38,427,530
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 4,631,683 4,631,683
Net investment in
direct financing
leases................ -- -- 1,181,763 1,181,763
Investment in joint
ventures.............. -- -- 819,017 819,017
Accrued rental income.. -- -- (290,049) (290,049)
Intangibles and other
assets................ -- (2,575,792) (44,751) (2,620,543)
Goodwill*.............. -- 43,174,827 -- 43,174,827
Excess purchase price.. 73,707,680 -- -- 73,707,680
----------- ----------- ----------- ------------
Total Allocation..... $82,038,155 $50,734,122 $26,259,631 $159,031,908
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisitions based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,707,680 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $43,174,827 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A.............. 8,600
Common Stock (CFA, CFS, CFC)--Class B.............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)......... 12,568,974
Retained Earnings.................................. 5,883,163
Accumulated distributions in excess of earnings.... 73,707,680
Goodwill for CFC/CFS (Intangibles and other
assets)........................................... 43,174,827
CFC/CFS Organizational Costs/Other Assets.......... 2,575,792
Cash to pay APF transaction costs.................. 9,772,277
APF Common Stock................................... 61,500
APF Capital in Excess of Par Value................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital.................................. 19,961,968
Land and buildings on operating leases............. 4,631,683
Net investment in direct financing leases.......... 1,181,763
Investment in joint ventures....................... 819,017
Accrued rental income.............................. 290,049
Intangibles and other assets....................... 44,751
Cash to pay APF Transaction costs.................. 2,119,723
Cash consideration to Income Funds................. 333,000
APF Common Stock................................... 13,174
APF APIC........................................... 23,793,734
(To record acquisition of Income Fund)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party payables
recorded as receivables by the Advisor, and the elimination or intercompany
balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857 from
liabilities assumed in the acquisition since the Merger Agreement requires
that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes
at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $160,865 in related party
payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Business and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND IV, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
IV, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,253,342 $ 1,024,493 $ 2,285,696 $ 2,531,385 $ 2,820,295 $ 2,871,572 $ 2,865,770
Net income (2).......... 821,968 712,597 1,821,449 1,720,668 2,347,167 2,210,339 2,310,524
Cash distributions
declared (3)........... 1,200,000 2,433,748 3,633,748 2,760,000 2,760,000 2,760,000 2,760,000
Net income per Unit
(2).................... 13.56 11.84 30.15 28.42 38.75 36.48 38.13
Cash distributions
declared per Unit (3).. 20.00 40.56 60.56 46.00 46.00 46.00 46.00
GAAP book value per
unit................... 332.70 340.52 339.00 369.20 381.63 388.14 397.30
Weighted average number
of Limited Partner
Units outstanding...... 60,000 60,000 60,000 60,000 60,000 60,000 60,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $20,904,798 $21,298,812 $21,189,833 $23,309,888 $23,730,892 $24,057,829 $24,598,179
Total partners'
capital................ 19,961,968 20,431,148 20,340,000 22,152,299 22,897,631 23,288,164 23,837,825
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the six months ended June 30, 1998 and the year ended
December 31, 1998, includes $65,172 for a provision for loss on land and
building. Net income for the year ended December 31, 1997, includes $6,652
from a loss on the sale of land and $70,337 for a provision for loss on
land and building. Net income for the six months ended June 30, 1998 and
for years ended December 31, 1998, 1996, 1995 and 1994 includes $120,915,
$226,024, $221,390, $128,547 and $128,592, respectively, from gains on the
sale of land and buildings.
(3) Distributions for the six months ended June 30, 1998, and the year ended
December 31, 1998, include a special distribution to the Limited Partners
of $1,233,748 in net sales proceeds from the sales of two restaurant
properties in 1998.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND IV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 18, 1987, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food and
family-style restaurant chains. The leases generally are triple-net leases,
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of June 30, 1999, the Income Fund owned 38
restaurant properties, which included interests in six restaurant properties
owned by joint ventures in which the Income Fund is a co-venturer and two
restaurant property owned with affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund
generated cash from operations, including cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses, of $1,127,102 and $1,154,124, respectively. The
decrease in cash from operations for the six months ended June 30, 1999 is
primarily a result of changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In January 1999, the Income Fund used $533,200 of the net sales proceeds
from the 1998 sale of the restaurant property in Naples, Florida to acquire a
restaurant property in Zephyrhills, Florida, as tenants-in-common with CNL
Income Fund XVII, Ltd., one of our affiliates. In connection therewith, the
Income Fund and the affiliate entered into an agreement whereby each co-
venturer will share in the profits and losses of the restaurant property in
proportion to its applicable percentage interest. As of June 30, 1999, the
Income Fund owned a 76 percent interest in the restaurant property in
Zephyrhills, Florida. The sale of the restaurant property in Naples, Florida
and the reinvestment of the net sales proceeds in the restaurant property in
Zephyrhills, Florida, were structured to qualify as a like-kind exchange
transaction for federal income tax purposes.
Currently, rental income from the Income Fund's restaurant properties and
net sales proceeds from the sale of restaurant properties, pending reinvestment
in additional restaurant properties, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts at
commercial banks, certificates of deposit, and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At June 30,
1999, the Income Fund had $651,282 invested in such short-term investments, as
compared to $739,382 at December 31, 1998. The funds remaining at June 30, 1999
will be used to pay distributions and other liabilities.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
S-27
<PAGE>
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
generated cash from operations, which includes cash received from tenants,
distributions from joint ventures and interest received, less cash paid for
expenses, of $2,362,320, $2,417,972, and $2,713,964. The decrease in cash from
operations for 1998 and 1997, each as compared to the previous year, is
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital.
Cash from operations during the years ended December 31, 1998, 1997, and
1996, was also affected by the following.
In October 1992, the Income Fund accepted a promissory note from the former
tenant of the restaurant property in Maywood, Illinois, for $175,000 for
amounts due relating to past due rents and real estate taxes and other expenses
the Income Fund had incurred as a result of the former tenant's having
defaulted under the terms of the lease. The note was non-interest bearing and
was payable in 36 monthly installments of $2,500 through September 1995, and
thereafter in eight monthly installments of $10,000, with the balance due and
payable on February 20, 1996. The Income Fund discounted the note to a
principal balance of $138,094 using an interest rate of ten percent. During
1995, the former tenant defaulted under the terms of the note. Because of the
financial difficulties that the former tenant was experiencing, the Income Fund
established an allowance for doubtful accounts for the full amount of unpaid
principal and interest of $111,031 relating to this note; therefore, no amounts
were included in receivables at December 31, 1996. During 1997, the Income Fund
ceased collection efforts for this note and wrote off the related allowance for
doubtful accounts.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In January 1996, the Income Fund reinvested the net sales proceeds it
received from the 1995 sale of the restaurant property in Hastings, Michigan,
along with additional funds, in a Golden Corral restaurant property located in
Clinton, North Carolina, with certain of our affiliates as tenants-in-common.
In connection therewith, the Income Fund and its affiliates entered into an
agreement whereby each co-venturer will share in the profits and losses of the
restaurant property in proportion to its applicable percentage interest. As of
December 31, 1998, the Income Fund owned a 53 percent interest in this
restaurant property.
In September 1996, the Income Fund sold its restaurant property in Tampa,
Florida, for $1,090,000 and received net sales proceeds of $1,049,550,
resulting in a gain of $221,390 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in December 1988
and had a cost of approximately $832,800, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $216,800 in excess of its original
purchase price. In December 1996, the Income Fund reinvested the majority of
the net sales proceeds in a Boston Market restaurant property, located in
Richmond, Virginia. The remaining net sales proceeds were used to pay Income
Fund liabilities.
In June 1997, the Income Fund terminated the leases with the tenant of the
restaurant properties in Portland and Winchester, Indiana. In connection
therewith, the Income Fund accepted a promissory note from the former tenant
for $32,343 for amounts relating to past due real estate taxes the Income Fund
had accrued as a result of the former tenant's financial difficulties. The
promissory note, which is uncollateralized, bears interest at a rate of ten
percent per annum, and is being collected in 36 monthly installments. As of
December 31, 1998, the Income Fund had collected the full amount of the
promissory note.
In July 1997, the Income Fund entered into new leases for the restaurant
properties in Portland and Winchester, Indiana, with a new tenant to operate
the restaurant properties as Arby's restaurants. In connection therewith, the
Income Fund agreed to fund up to $125,000 in renovation costs for each
restaurant property. As of December 31, 1998, such renovations had been
completed.
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In November 1997, the Income Fund sold its restaurant property in
Douglasville, Georgia to a third party for $402,000 and received net sales
proceeds of $378,149. This restaurant property was originally acquired by the
Income Fund in December 1994 and had a cost of approximately $363,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant property for approximately $16,900 in
excess of its original purchase price. Due to the fact that the Income Fund had
recognized accrued rental income since the inception of the lease relating to
the straight-lining of future scheduled rent increases in accordance with
generally accepted accounting principles, the Income Fund wrote off the
cumulative balance of such accrued rental income at the time of the sale of
this restaurant property, resulting in a loss of $6,652 for financial reporting
purposes. Due to the fact that the straight-lining of future rent increases
over the term of the lease is a non-cash accounting adjustment, the write off
of these amounts is a loss for financial statement purposes only. The net sales
proceeds were used to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners, and to fund the renovation costs
described above. The Income Fund distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes, if any, at a level
reasonably assumed by us, resulting from the sale.
In March 1998, the Income Fund sold its restaurant property in Fort Myers,
Florida, to a third party for $842,100 and received net sales proceeds of
$794,690, resulting in a gain of $225,902 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in December
1988 and had a cost of approximately $598,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $196,700 in excess of its original
purchase price. In addition, in March 1998, the Income Fund sold its restaurant
property in Union Township, Ohio, to an unrelated third party for $680,000 and
received net sales proceeds of $674,135, resulting in a loss of $104,987 for
financial reporting purposes. In connection with the sale of these restaurant
properties, the Income Fund incurred deferred, subordinated, real estate
disposition fees of $45,663. In April 1998, the Income Fund distributed
$1,233,748 of the net sales proceeds from these restaurant properties as a
special distribution to the Limited Partners and used the remaining net
proceeds to pay Income Fund liabilities.
In addition, in July 1998, the Income Fund sold its restaurant property in
Leesburg, Florida for $565,000 and received net sales proceeds of $523,931,
resulting in a total loss for financial reporting purposes of $135,509. Due to
the fact that at December 31, 1997, the Income Fund recorded a provision for
loss on the land and building in the amount of $70,337 for this restaurant
property, the Income Fund recognized the remaining loss of $65,172 for
financial reporting purposes at July 1998, relating to the sale. In September
1998, the Income Fund contributed the majority of the net sales proceeds from
the sale of the restaurant property in Leesburg, Florida, to a joint venture,
Warren Joint Venture, to purchase and hold one restaurant property. The Income
Fund has an approximate 36 percent interest in the profits and losses of Warren
Joint Venture and the remaining interest in this joint venture is held by one
of our affiliates.
In September 1998, the Income Fund sold its restaurant property in Naples,
Florida, to a third party for $563,000 and received net sales proceeds of
$533,598, resulting in a gain of $170,281 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in December
1988 and had a cost of approximately $410,500 excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $123,100 in excess of its original
purchase price.
In January 1999, the Income Fund invested a majority of the net sales
proceeds in a restaurant property in Zephyrhills, Florida with an affiliate of
the General Partners as tenants-in-common for a 76 percent interest in the
restaurant property. The Income Fund will account for its investment in this
restaurant property using the equity method since the Income Fund will share
control with an affiliate. We believe that the transaction, or a portion
thereof, relating to the sale of the restaurant property in Naples, Florida and
the reinvestment of the net sales proceeds will be structured to qualify as a
like-kind exchange transaction for federal income tax purposes. However, the
Income Fund will distribute amounts sufficient to enable the Limited Partners
to pay federal and state income taxes, if any, at a level reasonably assumed by
us, resulting from the sale.
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During the years ended December 31, 1997 and 1996, the Income Fund received
$294,000 and $22,300, respectively, in capital contributions from the corporate
general partner in connection with the operations of the Income Fund. No such
contributions were received during the year ended December 31, 1998.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently rental income from the Income Fund's restaurant properties and net
sales proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, distributions to Limited Partners or use for
the payment of Income Fund liabilities, are invested in money market accounts
or other short-term highly liquid investments such as demand deposit accounts
at commercial banks, CDs and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
Fund had $739,382 invested in such short-term investments, as compared to
$876,452 at December 31, 1997. The decrease in the amount invested in short-
term investments during 1998, as compared to 1997, is primarily attributable to
the payment of construction costs accrued at December 31, 1997, relating to the
Income Fund's restaurant properties in Winchester and Portland, Indiana, as
described above. The decrease was partially offset by an increase in cash due
to using a portion of the net sales proceeds from the sales of the restaurant
properties in Fort Myers, Florida, and Union Township, Ohio, for other Income
Fund purposes, as described above. As of December 31, 1998, the average
interest rate earned on the rental income deposited in demand deposit accounts
at commercial banks was approximately three percent annually. Total liabilities
at December 31, 1998, to the extent they exceed cash and cash equivalents at
December 31, 1998, will be paid from future cash from operations, and in the
event we elect to make additional contributions, from future contributions from
us.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current and
anticipated future cash from operations and, for the six months ended June 30,
1998, net sales proceeds from the sale of the restaurant properties in Fort
Myers, Florida and Union Township, Ohio, the Income Fund declared distributions
to Limited Partners of $1,200,000 and $2,433,748 for the six months ended June
30, 1999 and 1998, respectively, or $600,000 for each of the quarters ended
June 30, 1999 and 1998. This represents distributions of $20.00 and $40.56 per
unit for the six months ended June 30, 1999 and 1998, respectively, or $10.00
per unit for each of the quarters ended June 30, 1999 and 1998. Distributions
for the six months ended June 30, 1998 included $1,233,748 as a result of the
distribution of net sales proceeds from the 1998 sale of the restaurant
properties in Ft. Myers, Florida and Union Township, Ohio. No distributions
were
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made to us for the quarters and six months ended June 30, 1999 and 1998. No
amounts distributed to the Limited Partners for the six months ended June 30,
1999 and 1998 are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distribution to the Limited Partners
on a quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $942,830 at June 30, 1999 from $849,833 at December 31, 1998,
primarily as a result of the Income Fund accruing transaction costs relating to
the Acquisition. Total liabilities at June 30, 1999, to the extent they exceed
cash and cash equivalents at June 30, 1999, will be paid from future cash from
operations, and in the event we elect to make additional contributions, from
contributions from us.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases for the Income Fund's restaurant properties are generally on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based on (i) current and anticipated future cash from operations, (ii) for
the year ended December 31, 1998, net sales proceeds from the sale of the
restaurant properties in Fort Myers, Florida and Union Township, Ohio and (iii)
to a lesser extent, for the year ended December 31, 1997, additional capital
contributions received from us, the Income Fund declared distributions to the
Limited Partners of $3,633,748, $2,760,000, and $2,760,000 for the years ended
December 31, 1998, 1997, and 1996, respectively. This represents distributions
of $60.56, $46 and $46 per Unit for the years ended December 31, 1998, 1997,
and 1996, respectively. Distributions for the year ended December 31, 1998
included $1,233,748 as a result of the distribution of net sales proceeds from
the sale of the restaurant properties in Fort Myers, Florida and Union
Township, Ohio. This special distribution was effectively a return of a portion
of the Limited Partners' investment, although, in accordance with the Income
Fund's partnership agreement, it was applied to the Limited Partners' unpaid
preferred return. The reduced number of restaurant properties for which the
Income Fund receives rental payments, as well as ongoing operations, reduced
the Income Fund's revenues in 1998 and is expected to reduce the Partnership's
revenues in subsequent years. The decrease in Income Fund revenues, combined
with the fact that a significant portion of the Income Fund's expenses are
fixed in nature, resulted in a decrease in cash distributions to the Limited
Partners during 1998. No amounts distributed to the Limited Partners for the
years ended December 31, 1998, 1997, and 1996, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions.
During 1998, 1997, and 1996, certain of our affiliates, incurred on behalf
of the Income Fund $111,482, $85,702, and $114,409, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$103,315 and $88,854, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, during the year ended
December 31, 1998, the Income Fund incurred $45,663 in real estate disposition
fees due to an affiliate as a result of its services in connection with the
sale of two restaurant properties. The payment of such fees is deferred until
the Limited Partners have received the sum of their 10% preferred return and
their adjusted capital contributions. Amounts payable to other parties,
including distributions payable, decreased to $700,855 at December 31, 1998,
from $1,068,735 at December 31, 1997. The decrease in liabilities at December
31, 1998, is primarily attributable to the payment during the year ended
December 31, 1998 of construction costs accrued at December 31, 1997 for the
restaurant properties in Portland and Winchester, Indiana, in connection with
the new leases entered into in July 1997. In addition, the decrease in total
liabilities was attributable to a decrease in distributions payable to the
Limited Partners at December 31, 1998, as compared to December 31, 1997. Total
liabilities at December 31,
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1998, to the extent they exceed cash and cash equivalents at December 31, 1998,
will be paid from future cash from operations and, in the event the we elect to
make additional contributions, from future contributions from us.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund owned and leased
34 wholly owned restaurant properties, including two restaurant properties, one
in each of Union Township, Ohio and Fort Myers, Florida, which were sold in
March 1998 and during the six months ended June 30, 1999, the Income Fund owned
and leased 30 wholly owned restaurant properties, generally to operators of
fast-food and family-style restaurant chains. During the six months ended June
30, 1999 and 1998, the Income Fund earned $1,055,383 and $1,114,982,
respectively, in rental income from operating leases and earned income from the
direct financing leases from these restaurant properties, $527,724 and $543,097
of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. The decrease in rental and earned income for the quarter and six
months ended June 30, 1999 was primarily due to the sale of the restaurant
properties in Fort Myers, Florida and Union Township, Ohio in March 1998, and
the sale of the restaurant property in Naples, Florida in September 1998.
During the six months ended June 30, 1999, the Income Fund used the net sales
proceeds from the sale of the restaurant property in Naples, Florida to acquire
a restaurant property in Zephyrhills, Florida, as tenants-in-common with CNL
Income Fund XVII, Ltd., one of our affiliates. Rental and earned income are
expected to remain at reduced amounts as a result of distributing the net sales
proceeds from the 1998 sales of the restaurant properties in Fort Myers,
Florida and Union Township, Ohio to the Limited Partners.
In October 1998, the tenant of one Boston Market restaurant property filed
for bankruptcy. As of July 31, 1999, the Income Fund had continued receiving
rental payments relating to this lease. While the tenant has not rejected or
affirmed the lease, there can be no assurance that the lease will not be
rejected in the future. The lost revenues resulting from the rejection of this
lease could have an adverse effect on the results of operations of the Income
Fund if the Income Fund is not able to re-lease this restaurant property in a
timely manner.
During the six months ended June 30, 1998, the Income Fund also owned and
leased five restaurant properties indirectly through joint venture arrangements
and one restaurant property as tenants-in-common with our affiliates. During
the six months ended June 30, 1999, the Income Fund owned and leased six
restaurant properties through joint venture arrangements and two restaurant
properties as tenants-in-common with our affiliates. In connection therewith,
during the six months ended June 30, 1999 and 1998, the Income Fund recognized
income of $146,616 and a loss of $148,888, respectively, of which income of
$72,942 and a loss of $191,062 were recognized for the quarters ended June 30,
1999 and 1998, respectively. The increase in net income earned by joint
ventures is primarily due to the fact that Kingsville Real Estate Joint
Venture, in which the Income Fund owns a 68.87% interest in the profits and
losses of the joint venture, established an allowance for doubtful accounts of
approximately $50,800 and $65,900 during the quarter and six months ended June
30, 1998, respectively, in accordance with its collection policy. No such
allowance was established during the quarter and six months ended June 30,
1999. In addition, during the quarter and six months ended June 30, 1998,
Kingsville Real Estate Joint Venture established a provision for loss on land
and net investment in the direct financing lease for its restaurant property in
Kingsville, Texas for approximately $316,000. The allowance represented the
difference between the restaurant property's carrying value at June 30, 1998
and the estimated net realizable value of the restaurant property. In January
1999, Kingsville Real Estate Joint Venture entered into a new lease for this
restaurant property with a new tenant and we ceased collection efforts on the
past due amounts. The increase in net income for the quarter and six months
ended June 30, 1999 is also
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partially due to the fact that in September 1998 the Income Fund reinvested net
sales proceeds from the 1998 sale of its restaurant property in Leesburg,
Florida in Warren Joint Venture. In addition, the increase was also due to the
fact that in January 1999, the Income Fund reinvested net sales proceeds from
the 1998 sale of its restaurant property in Naples, Florida in a restaurant
property in Zephyrhills, Florida, as tenants-in-common with one of our
affiliates.
Operating expenses, including depreciation and amortization, were $431,374
and $367,639 for the six months ended June 30, 1999 and 1998, respectively, of
which $224,713 and $175,219 were incurred for the quarters ended June 30, 1999
and 1998, respectively. The increase in operating expenses for the quarter and
six months ended June 30, 1999, as compared to the quarter and six months ended
June 30, 1998, was primarily due to the fact that the Income Fund incurred
$71,148 and $104,166 for the quarter and six months ended June 30, 1999,
respectively, in transaction costs related to our retaining financial and legal
advisors to assist us in evaluating and negotiating the Acquisition with APF.
If the Limited Partners reject the Acquisition, the Income Fund will bear the
portion of the transaction costs based upon the percentage of "For" votes and
we will bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions. The increase in operating expenses for the
quarter and six months ended June 30, 1999, as compared to the quarter and six
months ended June 30, 1998, was partially offset by a decrease in depreciation
expense which resulted from the sale of four restaurant properties in 1998.
During the quarter and six months ended June 30, 1998, the Income Fund
recorded a provision for loss on land and building in the amount of $65,172 for
financial reporting purposes for the restaurant property in Leesburg, Florida.
The allowance at June 30, 1998, represented the difference between the
restaurant property's carrying value at June 30, 1998 and the net realizable
value of the restaurant property based on the net sales proceeds received in
July 1998 from the sale of the restaurant property. No such provision was
recorded for the quarter and six months ended June 30, 1999.
As a result of the sales of the restaurant properties in Fort Myers, Florida
and Union Township, Ohio, the Income Fund recognized a total gain of $120,915
for financial reporting purposes during the six months ended June 30, 1998. No
restaurant properties were sold during the six months ended June 30, 1999.
The Years Ended December 31, 1998, 1997 and 1996
During 1996, the Income Fund owned and leased 36 wholly owned restaurant
properties, including one restaurant property in Tampa, Florida, which was sold
in September 1996, during 1997, the Income Fund owned and leased 35 wholly
owned restaurant properties, including one restaurant property in Douglasville,
Georgia, which was sold in November 1997, and during 1998, the Income Fund
owned and leased 34 wholly owned restaurant properties, including four
restaurant properties which were sold in 1998. In addition, during 1998, 1997,
and 1996, the Income Fund was a co-venturer in five separate joint ventures
that each owned and leased one restaurant property and one restaurant property
with affiliates as tenants-in-common. In addition, during 1998, the Income Fund
was a co-venturer in an additional joint venture that owned and leased one
restaurant property. As of December 31, 1998, the Income Fund owned, either
directly or through joint venture arrangements, 37 restaurant properties, which
are, in general, subject to long-term, triple-net leases. The leases of the
restaurant properties provide for minimum base annual rental amounts, payable
in monthly installments, ranging from $18,100 to $135,800. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount to be paid annually. In addition, some of the leases provide that,
commencing in the sixth lease year the percentage rent will be an amount equal
to the greater of the percentage rent calculated under the lease formula or a
specified percentage ranging from one-half to two percent of the purchase
price.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $2,231,513, $2,189,386, and $2,397,691, respectively, in rental income
from operating leases and earned income from direct financing leases from its
wholly owned restaurant properties described above. The increase in rental and
earned income during 1998, as compared to 1997, was partially attributable to
the fact that during 1997, the Income Fund increased its allowance for doubtful
accounts for past due rental amounts relating to the Hardee's
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restaurant properties located in Portland and Winchester, Indiana, which were
leased by the same tenant, due to financial difficulties the tenant was
experiencing. No such allowance was recorded during 1998 due to the fact that
the Income Fund renovated both restaurant properties, as described above in
"Capital Resources" and re-leased the restaurant properties to a new tenant for
which rents commenced in October 1997. The decrease in rental and earned income
during 1997, as compared to 1996, is partially attributable to the Income Fund
increasing its allowance for doubtful accounts by approximately $28,500, for
rental income amounts relating to the Hardee's restaurant properties located in
Portland and Winchester, Indiana, as described above. Rental and earned income
also decreased by approximately $86,200 during 1997 due to the fact that the
Income Fund terminated the lease with the former tenant of the restaurant
properties in Portland and Winchester, Indiana, in June 1997, as described
above in "Capital Resources." The Income Fund re-leased these restaurant
properties in October 1997, as described above. The decrease in rental and
earned income for 1997, as compared to 1996, was slightly offset by an increase
of approximately $20,200 in rental income from the new tenant of this
restaurant property who began operating the restaurant property in October
1997, after it was renovated into an Arby's restaurant property.
Rental and earned income decreased during 1997, as compared to 1996, as a
result of the Income Fund establishing an allowance for doubtful accounts
totalling approximately $128,200 during 1997, for rental amounts relating to
the restaurant property located in Palm Bay, Florida, due to financial
difficulties the tenant was experiencing. The tenant vacated the restaurant
property in October 1997. Rental and earned income increased during 1998, as
compared to 1997, due to the fact that no such allowance was established during
1998 and the fact that the Income Fund negotiated a settlement agreement with
the former tenant's guarantor to collect some of the amounts due to the Income
Fund from the former tenant. During 1998, the Income Fund collected and
recognized as income a portion of the past due rental amounts from the former
tenant's guarantor. In addition, in February 1998, the Income Fund entered into
a new lease with a new tenant for this restaurant property.
The increase in rental and earned income for the year ended December 31,
1998 was partially offset by a decrease in rental and earned income due to the
sale of the restaurant property in Douglasville, Georgia in November 1997, the
sale of the restaurant properties in Fort Myers, Florida and Union Township,
Ohio in March 1998, and the sale of the restaurant property in Naples, Florida
in September 1998. During the year ended December 31, 1998, the Income Fund
used the net sales proceeds from the sale of the restaurant property in
Douglasville, Georgia to fund renovation costs for two restaurant properties
and for other Income Fund purposes. Rental and earned income are expected to
remain at reduced amounts as a result of distributing the net sales proceeds
from the 1998 sales of the restaurant properties in Fort Myers, Florida and
Union Township, Ohio to the Limited Partners.
In addition, rental and earned income decreased approximately $76,300 during
the year ended 1997 as compared to 1996, as a result of the sale of the
restaurant property in Tampa, Florida, in September 1996. The decrease in
rental income for 1997 was offset by an increase of approximately $118,300 in
rental income attributable to the reinvestment of the net sales proceeds in a
restaurant property in Richmond, Virginia, in December 1996.
For the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $83,377, $117,031 and $97,318, respectively, in contingent rental income
from the Income Fund's wholly owned restaurant properties. The decrease in
contingent rental income during the year ended December 31, 1998, as compared
to the year ended December 31, 1997, is partially attributable to the Income
Fund adjusting estimated contingent rental amounts accrued at December 31,
1997, to actual amounts during the year ended December 31, 1998 and is
partially attributable to a decrease in gross sales for certain restaurant
properties whose leases require the payment of contingent rental income. The
increase in contingent rental income in 1997, as compared to 1996, is primarily
attributable to an increase in gross sales for certain restaurant properties,
the leases of which require the payment of contingent rental income.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund recognized a loss of $90,144 and income of $189,747 and $277,431,
respectively, attributable to net income earned by joint
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ventures in which the Income Fund is a co-venturer. The decrease in net income
in 1998, as compared to 1997, is primarily due to the fact that Kingsville Real
Estate Joint Venture in which the Income Fund owns a 68.87% interest
established an allowance for loss on the land and net investment in the direct
financing lease for its restaurant property for approximately $316,000 during
the year ended December 31, 1998. The tenant of this restaurant property
experienced financial difficulties and ceased payment of rents under the terms
of its lease agreement. The allowance represents the difference between the
restaurant property's carrying value at December 31, 1998 and the estimated net
realizable value of the restaurant property. In addition, the joint venture
increased its allowance for doubtful accounts by approximately $130,000 during
the year ended December 31, 1998, as compared to an increase in allowance for
doubtful accounts of approximately $20,600 during the year ended December 31,
1997, for amounts due from this tenant deemed uncollectible in accordance with
its collection policy. In January 1999, Kingsville Real Estate Joint Venture
entered into a new lease for this restaurant property with a new tenant and we
ceased collection efforts on the past due amounts. The decrease in net income
for 1998, as compared to 1997, is partially offset by an increase in net income
earned by joint ventures due to the fact that in September 1998, the Income
Fund reinvested net sales proceeds from the sale of its restaurant property in
Leesburg, Florida in Warren Joint Venture.
The decrease in net income earned by these joint ventures during 1997, as
compared to 1996, is partially attributable to the fact that, during July 1997,
the operator of the restaurant property owned by Titusville Joint Venture
vacated the restaurant property and ceased operations. In conjunction
therewith, Titusville Joint Venture in which the Income Fund owns a 26.6%
interest in the profits and losses of the joint venture established an
allowance for doubtful accounts of approximately $27,000 during 1997. No such
allowance was established during 1996. In addition, the joint venture recorded
real estate tax expense of approximately $16,600 during 1997. No such real
estate taxes were incurred during 1996. In addition, the joint venture wrote
off unamortized lease costs of $23,500 in 1997 due to the tenant vacating the
restaurant property. Titusville Joint Venture ceased collection efforts on past
due amounts and the joint venture will not recognize any rental income from
this restaurant property until a new tenant is located or until the restaurant
property is sold and the proceeds from such a sale are reinvested in an
additional restaurant property. Titusville Joint Venture is currently seeking
either a replacement tenant or purchaser for this restaurant property. In
addition, during 1998 and 1997, the joint venture established an allowance for
loss on land and building for its restaurant property in Titusville, Florida,
for approximately $125,300 and $147,000, respectively, for financial reporting
purposes. The allowance represents the difference between the restaurant
property's carrying value at December 31, 1998, and the estimated net
realizable value of the restaurant property. Net income earned by joint
ventures also decreased during 1997, as compared to 1996, due to an adjustment
in estimated contingent rental amounts accrued at December 31, 1996, to actual
amounts during the year ended December 31, 1997 for the restaurant property in
Clinton, North Carolina, held as tenants-in-common.
During the year ended December 31, 1998, one of the Income Fund's lessees,
Shoney's, Inc., contributed more than ten percent of the Income Fund's total
rental income, including the Income Fund's share of the rental income from six
restaurant properties owned by joint ventures and one restaurant property owned
with affiliates as tenant-in-common. As of December 31, 1998, Shoney's, Inc.
was the lessee under leases relating to six restaurants. It is anticipated
that, based on the minimum rental payments required by the leases, Shoney's,
Inc. will continue to contribute more than ten percent of the Income Fund's
total rental income during 1999. In addition, during the year ended December
31, 1998, two restaurant chains, Shoney's and Wendy's Old Fashioned Hamburger
Restaurants, each accounted for more than ten percent of the Income Fund's
total rental income, including the Income Fund's share of the rental income
from six restaurant properties owned by joint ventures and one restaurant
property owned with affiliates as tenants-in-common. In 1999, it is anticipated
that these two restaurant chains each will continue to account for more than
ten percent of the total rental income to which the Income Fund is entitled
under the terms of the leases. Any failure of these lessees or restaurant
chains could materially affect the Income Fund's income if the Income Fund is
not able to release the restaurant properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$690,271, $733,728, and $694,518 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating
S-35
<PAGE>
expenses for 1998, as compared to 1997, and the increase in operating expenses
for 1997, as compared to 1996, was partially due to the fact that during 1997,
the Income Fund expensed approximately $25,400 in current and past due real
estate taxes for the restaurant property in Palm Bay, Florida due to the tenant
vacating the restaurant property in October 1997. The restaurant property was
re-leased and the new tenant is responsible for these expenses beginning in
December 1997. In addition, the decrease in operating expenses for 1998, as
compared to 1997, is partially due to the decrease in depreciation expense
which resulted from the sale of one restaurant property in November 1997, and
the sale of four restaurant properties in 1998.
The decrease in operating expenses for 1998, as compared to 1997, is
partially offset by an increase in operating expense for 1998 due to the fact
that the Income Fund incurred $18,286 in transaction costs related to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition. The increase in operating expenses during 1997 was
also partially due to the fact that the Income Fund recorded bad debt expense
of $12,794 from the former tenant during 1997, relating to the restaurant
properties located in Portland and Winchester, Indiana, for past due rental
income amounts. Due to the fact that the Income Fund re-leased these restaurant
properties to a new tenant in October 1997, as described above, no such expense
was recorded during 1998.
The Income Fund is responsible for the proportionate share of real estate
taxes and insurance expense for one of the two leases for the restaurant
property in Maywood, Illinois. In addition, during 1998, 1997, and 1996, the
Income Fund paid for a portion of the real estate taxes that are the
responsibility of the other tenant of the Maywood restaurant property, due to a
shortage of amounts collected from the tenant for the payment of their
proportionate share of real estate taxes.
In addition, as a result of the former tenant of the restaurant property in
Leesburg, Florida, defaulting under the terms of its lease, the Income Fund
incurred certain expenses, such as real estate taxes, insurance and maintenance
expense relating to this restaurant property during 1998, 1997, and 1996. The
Income Fund sold this restaurant property in July 1998, therefore the Income
Fund does not anticipate incurring such expenses in future periods.
As a result of the sales of four restaurant properties and one restaurant
property, the Income Fund recognized a gain of $226,024 and $221,390,
respectively, for financial reporting purposes during the years ended December
31, 1998 and 1996, respectively. In addition, as a result of the sale of the
restaurant property in Douglasville, Georgia, in November 1997, the Income Fund
recognized a loss for financial reporting purposes of $6,652 for the year ended
December 31, 1997.
During 1997, the Income Fund established an allowance for loss on land and
building in the amount of $70,337 for financial reporting purposes for the
restaurant property in Leesburg, Florida. The tenant of this restaurant
property defaulted under the terms of its lease and vacated the restaurant
property. The allowance represented the difference between the restaurant
property's carrying value at December 31, 1997, and the estimated net
realizable value for this restaurant property based on an anticipated sales
price. In July 1998, the Income Fund sold this restaurant property.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that the we believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also may cause capital appreciation of the
Income Fund's restaurant properties. Inflation and changing prices, however,
also may have an adverse impact on the sales of the restaurants and on
potential capital appreciation of the restaurant properties.
S-36
<PAGE>
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
S-37
<PAGE>
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
S-38
<PAGE>
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-39
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-22
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,947,353 and $3,744,609,
respectively.......................................... $15,283,715 $15,486,459
Net investment in direct financing leases.............. 1,211,023 1,231,482
Investment in joint ventures........................... 3,354,395 2,862,906
Cash and cash equivalents.............................. 651,282 739,382
Restricted cash........................................ -- 537,274
Receivables, less allowance for doubtful accounts of
$250,622 and $258,641, respectively................... 69,583 24,676
Prepaid expenses....................................... 13,317 9,836
Lease costs, less accumulated amortization of $23,710
and $21,450, respectively............................. 31,434 18,094
Accrued rental income.................................. 290,049 279,724
----------- -----------
$20,904,798 $21,189,833
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 85,694 $ 4,503
Accrued and escrowed real estate taxes payable......... 43,826 36,732
Distributions payable.................................. 600,000 600,000
Due to related parties................................. 160,865 148,978
Rents paid in advance and deposits..................... 52,445 59,620
----------- -----------
Total liabilities.................................... 942,830 849,833
Commitments and Contingencies (Note 3)
Partners' capital...................................... 19,961,968 20,340,000
----------- -----------
$20,904,798 $21,189,833
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- ---------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................... $496,860 $511,225 $ 993,393 $1,051,001
Earned income from direct
financing leases................. 30,864 31,872 61,990 63,981
Contingent rental income.......... 26,131 15,546 34,374 37,207
Interest and other income......... 7,051 8,347 16,969 21,192
-------- -------- ---------- ----------
560,906 566,990 1,106,726 1,173,381
-------- -------- ---------- ----------
Expenses:
General operating and
administrative................... 31,152 41,090 71,590 75,715
Professional services............. 11,364 26,397 21,364 32,645
Real estate taxes................. 8,576 -- 13,855 20,755
State and other taxes............. -- 106 15,395 15,747
Depreciation and amortization..... 102,473 107,626 205,004 222,777
Transaction costs................. 71,148 -- 104,166 --
-------- -------- ---------- ----------
224,713 175,219 431,374 367,639
-------- -------- ---------- ----------
Income Before Equity in Earnings
(Loss) of Joint Ventures and Gain
on Sale of Land and Buildings and
Provision for Loss on Land and
Building........................... 336,193 391,771 675,352 805,742
Equity in Earnings (Loss) of Joint
Ventures........................... 72,942 (191,062) 146,616 (148,888)
Gain on Sale of Land and Buildings.. -- -- -- 120,915
Provision for Loss on Land and
Building........................... -- (65,172) -- (65,172)
-------- -------- ---------- ----------
Net Income.......................... $409,135 $135,537 $ 821,968 $ 712,597
======== ======== ========== ==========
Allocation of Net Income:
General partners.................. $ 4,091 $ (66) $ 8,220 $ 2,417
Limited partners.................. 405,044 135,603 813,748 710,180
-------- -------- ---------- ----------
$409,135 $135,537 $ 821,968 $ 712,597
======== ======== ========== ==========
Net Income Per Limited Partner
Unit............................... $ 6.75 $ 2.26 $ 13.56 $ 11.84
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding.......... 60,000 60,000 60,000 60,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December
June 30, 31,
1999 1998
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 769,078 $ 756,354
Net income......................................... 8,220 12,724
----------- -----------
777,298 769,078
----------- -----------
Limited partners:
Beginning balance.................................. 19,570,922 21,395,945
Net income......................................... 813,748 1,808,725
Distributions ($20.00 and $60.56 per limited
partner unit, respectively)....................... (1,200,000) (3,633,748)
----------- -----------
19,184,670 19,570,922
----------- -----------
Total partners' capital.......................... $19,961,968 $20,340,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............ $ 1,127,102 $ 1,154,124
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings........... -- 1,468,825
Additions to land and buildings on operating
leases............................................ -- (275,000)
Investment in joint ventures....................... (533,200) --
Decrease in restricted cash........................ 533,598 --
Payment of lease costs............................. (15,600) --
----------- -----------
Net cash provided by (used in) investing
activities........................................ (15,202) 1,193,825
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,200,000) (2,523,748)
----------- -----------
Net cash used in financing activities.......... (1,200,000) (2,523,748)
----------- -----------
Net Decrease in Cash and Cash Equivalents............ (88,100) (175,799)
Cash and Cash Equivalents at Beginning of Period..... 739,382 876,452
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 651,282 $ 700,653
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ -- $ 45,663
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 600,000 $ 600,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
IV, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Investment in Joint Ventures:
In January 1999, the Partnership invested $533,200 in a property in
Zephyrhills, Florida as tenants-in-common with CNL Income Fund XVII, Ltd., an
affiliate of the general partners. As of March 31, 1999, the Partnership had a
76 percent interest in the property. The Partnership accounts for its
investment in this property using the equity method since the Partnership
shares control with an affiliate, and amounts relating to its investment are
included in investment in joint ventures.
The following presents the combined, condensed financial information for all
of the Partnership's investment in joint ventures and properties held as
tenants-in-common at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................. $5,288,090 $4,406,943
Net investment in direct financing leases, less
allowance for impairment in carrying value......... 377,724 626,594
Cash................................................ 23,087 14,025
Receivables......................................... 5,334 10,943
Accrued rental income............................... 166,304 163,773
Other assets........................................ 2,924 2,513
Liabilities......................................... 48,357 27,211
Partners' capital................................... 5,815,106 5,197,580
Revenues............................................ 305,224 368,058
Provision for loss on land and buildings and net
investment in direct financing lease............... -- (441,364)
Net income (Loss)................................... 222,901 (212,388)
</TABLE>
The Partnership recognized income totalling $146,616 and a loss totaling
$148,888 for the six months ended June 30, 1999 and 1998, respectively, of
which income of $72,942 and a loss of $191,062 were recognized for the quarters
ended June 30, 1999 and 1998, respectively, from these joint ventures.
F-5
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
3. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,334,008 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $26,259,630 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund IV, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund IV, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 18, 1999, except for the secondparagraph of Note 12 for which the date
is March 11, 1999 and Note 13 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................... $15,486,459 $18,097,997
Net investment in direct financing leases............. 1,231,482 1,269,389
Investment in joint ventures.......................... 2,862,906 2,708,012
Cash and cash equivalents............................. 739,382 876,452
Restricted cash....................................... 537,274 --
Receivables, less allowance for doubtful accounts of
$258,641 and $295,580................................ 24,676 37,669
Prepaid expenses...................................... 9,836 11,115
Lease costs, less accumulated amortization of $21,450
and $17,956.......................................... 18,094 21,588
Accrued rental income................................. 279,724 287,466
Other assets.......................................... -- 200
----------- -----------
$21,189,833 $23,309,888
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,503 $ 8,576
Accrued construction costs payable.................... -- 250,000
Accrued and escrowed real estate taxes payable........ 36,732 65,176
Distributions payable................................. 600,000 690,000
Due to related parties................................ 148,978 93,854
Rents paid in advance and deposits.................... 59,620 49,983
----------- -----------
Total liabilities................................... 849,833 1,157,589
Partners' capital..................................... 20,340,000 22,152,299
----------- -----------
$21,189,833 $23,309,888
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,104,520 $2,058,703 $2,263,677
Earned income from direct financing
leases................................... 126,993 130,683 134,014
Contingent rental income.................. 83,377 117,031 97,318
Interest and other income................. 60,950 35,221 47,855
---------- ---------- ----------
2,375,840 2,341,638 2,542,864
---------- ---------- ----------
Expenses:
General operating and administrative...... 151,775 149,808 161,714
Professional services..................... 43,609 33,439 29,289
Bad debt expense.......................... -- 12,794 --
Real estate taxes......................... 31,879 65,316 37,589
State and other taxes..................... 15,747 16,476 21,694
Depreciation and amortization............. 428,975 455,895 444,232
Transaction costs........................... 18,286 -- --
---------- ---------- ----------
690,271 733,728 694,518
---------- ---------- ----------
Income Before Equity in Earnings (Losses) of
Joint Ventures, Gain (Loss) on Sale of Land
and Buildings and Provision for Loss on
Land and Building.......................... 1,685,569 1,607,910 1,848,346
Equity in Earnings (Losses) of Joint
Ventures................................... (90,144) 189,747 277,431
Gain (Loss) on Sale of Land and Buildings... 226,024 (6,652) 221,390
Provision for Loss on Land and Building..... -- (70,337) --
---------- ---------- ----------
Net Income.................................. $1,821,449 $1,720,668 $2,347,167
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 12,724 $ 15,697 $ 22,219
Limited partners.......................... 1,808,725 1,704,971 2,324,948
---------- ---------- ----------
$1,821,449 $1,720,668 $2,347,167
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 30.15 $ 28.42 $ 38.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 60,000 60,000 60,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $241,504 $160,634 $30,000,000 $(19,687,963) $16,013,989 $(3,440,000) $23,288,164
Contributions from
general partners..... 22,300 -- -- -- -- -- 22,300
Distributions to
limited partners ($46
per limited partner
unit)................ -- -- -- (2,760,000) -- -- (2,760,000)
Net income............ -- 22,219 -- -- 2,324,948 -- 2,347,167
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 263,804 182,853 30,000,000 (22,447,963) 18,338,937 (3,440,000) 22,897,631
Contributions from
general partners..... 294,000 -- -- -- -- -- 294,000
Distributions to
limited partners ($46
per limited partner
unit)................ -- -- -- (2,760,000) -- -- (2,760,000)
Net income............ -- 15,697 -- -- 1,704,971 -- 1,720,668
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 557,804 198,550 30,000,000 (25,207,963) 20,043,908 (3,440,000) 22,152,299
Distributions to
limited partners ($61
per limited partner
unit)................ -- -- -- (3,633,748) -- -- (3,633,748)
Net income............ -- 12,724 -- -- 1,808,725 -- 1,821,449
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $557,804 $211,274 $30,000,000 $(28,841,711) $21,852,633 $(3,440,000) $20,340,000
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 2,351,732 $ 2,345,612 $ 2,588,248
Distributions from joint ventures..... 248,360 265,473 305,866
Cash paid for expenses................ (274,436) (211,213) (206,059)
Interest received..................... 36,664 18,100 25,909
----------- ----------- -----------
Net cash provided by operating
activities.......................... 2,362,320 2,417,972 2,713,964
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................. 2,526,354 378,149 1,049,550
Additions to land and buildings on
operating leases..................... (275,000) -- (1,035,516)
Investment in joint ventures.......... (493,398) -- (437,489)
Decrease (increase) in restricted
cash................................. (533,598) -- 518,150
Payment of lease costs................ -- (17,384) (2,230)
Other................................. -- 9,122 --
----------- ----------- -----------
Net cash provided by investing
activities.......................... 1,224,358 369,887 92,465
----------- ----------- -----------
Cash Flows from Financing Activities:
Contributions from general partners... -- 294,000 22,300
Distributions to limited partners..... (3,723,748) (2,760,000) (2,760,000)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,723,748) (2,466,000) (2,737,700)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (137,070) 321,859 68,729
Cash and Cash Equivalents at Beginning
of Year................................ 876,452 554,593 485,864
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 739,382 $ 876,452 $ 554,593
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,821,449 $ 1,720,668 $ 2,347,167
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation.......................... 425,481 453,397 442,065
Amortization.......................... 3,494 2,498 2,167
Equity in earnings of joint ventures,
net of distributions................. 338,504 75,726 28,435
Bad debt expense...................... -- 12,794 --
Loss (gain) on sale of land and
buildings............................ (226,024) 6,652 (221,390)
Provision for loss on land and
building............................. -- 70,337 --
Decrease in receivables............... 8,607 5,422 41,531
Decrease (increase) in prepaid
expenses............................. 1,279 (180) (1,202)
Decrease in net investment in direct
financing leases..................... 37,907 34,215 30,885
Increase in accrued rental income..... (40,515) (39,669) (21,520)
Increase (decrease) in accounts
payable and accrued expenses......... (26,960) 31,976 11,162
Increase in due to related parties.... 9,461 26,701 39,987
Increase in rents paid in advance and
deposits............................. 9,637 17,435 14,677
----------- ----------- -----------
Total adjustments.................... 540,871 697,304 366,797
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,362,320 $ 2,417,972 $ 2,713,964
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Deferred real estate disposition fees
incurred and unpaid at December 31.... $ 45,663 $ -- $ --
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 600,000 $ 690,000 $ 690,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund IV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-12
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continues to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Holland Joint
Venture, Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint Venture,
Kingsville Real Estate Joint Venture, Warren Joint Venture, and a property in
Clinton, North Carolina, held as tenants-in-common, are accounted for using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating new leases are
amortized over the terms of the new leases using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portion of one of these leases is an operating lease.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments,
F-13
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fully maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two or four
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 7,244,512 $ 8,328,572
Buildings.......................................... 11,986,556 13,684,194
----------- -----------
19,231,068 22,012,766
Less accumulated depreciation...................... (3,744,609) (3,844,432)
----------- -----------
15,486,459 18,168,334
Less allowance for loss on land and building....... -- (70,337)
----------- -----------
$15,486,459 $18,097,997
=========== ===========
</TABLE>
In July 1997, the Partnership entered into new leases for the properties in
Portland and Winchester, Indiana, with a new tenant to operate the properties
as Arby's restaurants. In connection therewith, the Partnership incurred
$125,000 in renovation costs for each property.
In November 1997, the Partnership sold its property in Douglasville, Georgia
to an unrelated third party for $402,000 and received net sales proceeds of
$378,149 (net of $2,546 which represents amounts due to the former tenant for
prorated rent). This property was originally acquired by the Partnership in
December 1994 and had a cost of approximately $363,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold
the property for approximately $16,900 in excess of its original purchase
price. Due to the fact that the Partnership had recognized accrued rental
income since the inception of the lease relating to the straight-lining of
future scheduled rent increases in accordance with generally accepted
accounting principles, the Partnership wrote off the cumulative balance of such
accrued rental income at the time of the sale of this property, resulting in a
loss of $6,652 for financial reporting purposes. Due to the fact that the
straight-lining of future rent increases over the term of the lease is a non-
cash accounting adjustment, the write off of these amounts is a loss for
financial statement purposes only.
In March 1998, the Partnership sold its property in Fort Myers, Florida, to
a third party for $842,100 and received net sales proceeds of $794,690,
resulting in a gain of $225,902 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $598,000 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$196,700 in excess of its original purchase price.
In March 1998, the Partnership sold its property in Union Township, Ohio to
a third party for $680,000 and received net sales proceeds of $674,135,
resulting in a loss of $104,987 for financial reporting purposes.
In connection with the sale of the properties described above, the
Partnership incurred deferred, subordinated, real estate disposition fees of
$45,663 (see Note 10).
In July 1998, the Partnership sold its property in Leesburg, Florida, for
$565,000 and received net sales proceeds of $523,931, resulting in a loss for
financial reporting purposes of $135,509. Due to the fact that at
F-14
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
December 31, 1997, the Partnership had recorded a provision for loss on land
and building in the amount of $70,337 for this property, the Partnership
recognized the remaining loss of $65,172 for financial reporting purposes in
July 1998, relating to the sale.
In September 1998, the Partnership sold its property in Naples, Florida, to
a third party for $563,000 and received net sales proceeds of $533,598,
resulting in a gain of $170,281 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $410,500 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the property for approximately
$123,100 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $40,515, $39,669 and
$21,520, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,975,839
2000............................................................. 1,977,929
2001............................................................. 1,947,479
2002............................................................. 1,951,578
2003............................................................. 1,759,818
Thereafter....................................................... 10,670,163
-----------
$20,282,806
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Minimum lease payments receivable................... $1,660,791 $ 1,825,690
Estimated residual values........................... 527,829 527,829
Less unearned income................................ (957,138) (1,084,130)
---------- -----------
Net investment in direct financing leases........... $1,231,482 $ 1,269,389
========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 164,899
2000.............................................................. 164,899
2001.............................................................. 164,899
2002.............................................................. 164,899
2003.............................................................. 164,899
Thereafter........................................................ 836,296
----------
$1,660,791
==========
</TABLE>
F-15
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future
periods (see Note 3).
5. Investment in Joint Ventures:
As of December 31, 1997, the Partnership had a 51 percent, a 26.6%, a 57
percent, a 96.1% and a 68.87% interest in the profits and losses of Holland
Joint Venture, Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint
Venture and Kingsville Real Estate Joint Venture, respectively, and a 53
percent interest in the profits and losses of a property in Clinton, North
Carolina, held as tenants-in-common with affiliates of the general partners.
The remaining interests in these joint ventures are held by affiliates of
the Partnership which have the same general partners. Holland Joint Venture,
Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint Venture,
Kingsville Real Estate Joint Venture and the Partnership and affiliates, as
tenants-in-common, each own and lease one property to an operator of national
fast-food or family-style restaurants.
In September 1998, the Partnership entered into a joint venture
arrangement, Warren Joint Venture, with an affiliate of the general partners,
to hold one restaurant property. As of December 31, 1998, the Partnership had
acquired a 35.71% interest in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the equity
method since the Partnership shares control with the affiliates.
The following presents the joint ventures' combined, condensed financial
information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss
on land and building............................. $4,406,943 $3,338,372
Net investment in direct financing leases less
allowance for loss on building................... 626,594 842,633
Cash.............................................. 14,025 12,331
Receivables....................................... 10,943 40,456
Accrued rental income............................. 163,773 177,567
Other assets...................................... 2,513 2,029
Liabilities....................................... 27,211 16,283
Partners' capital................................. 5,197,580 4,397,105
Revenues.......................................... 368,058 434,177
Provision for loss on land and buildings and net
investment in direct financing lease............. (441,364) (147,039)
Net income........................................ (212,388) 126,271
</TABLE>
The Partnership recognized a loss totalling $90,144 and income totalling
$189,747 and $277,431 for the years ended December 31, 1998, 1997, and 1996,
respectively, from these joint ventures.
6. Restricted Cash:
As of December 31, 1998, the net sales proceeds of $533,598 from the sale
of the property in Naples, Florida, plus accrued interest of $3,676 were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property on behalf of the Partnership.
F-16
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Receivables:
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Portland and Winchester, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $32,343 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note,
which is uncollateralized, bears interest at a rate of ten percent per annum,
and is being collected in 36 monthly installments. As of December 31, 1998, the
Partnership had collected the full amount of the promissory note.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of property, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property not in liquidation of
the Partnership is, in general, allocated first, on a pro rata basis, to
partners with positive balances in their capital accounts; and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of $3,633,748,
$2,760,000, and $2,760,000, respectively. Distributions for the year ended
December 31, 1998 included $1,233,748 as a result of the distribution of net
sales proceeds from the sale of the properties in Fort Myers, Florida and Union
Township, Ohio. This amount was applied toward the limited partners' 10%
Preferred Return. No distributions have been made to the general partners to
date.
F-17
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,821,449 $1,720,668 $2,347,167
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (8,014) (9,203) (17,764)
Allowance for loss on land and
building............................... -- 70,337 --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 37,907 34,215 30,885
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... (231,919) 44,918 (140,228)
Capitalization of transaction costs for
tax reporting purposes................. 18,286 -- --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of
joint ventures for tax reporting
purposes............................... 319,186 51,115 (25,853)
Allowance for doubtful accounts......... (36,939) 138,647 (9,933)
Accrued rental income................... (40,515) (39,669) (21,520)
Rents paid in advance................... 9,137 7,435 14,677
Other................................... 501 -- --
---------- ---------- ----------
Net income for federal income tax
purposes............................... $1,889,079 $2,018,463 $2,177,431
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director, and vice chairman of the Board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to collectively as the "Affiliate")
performed certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-18
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate 10% Preferred Return, plus their adjusted
capital contributions. For the year ended December 31, 1998, the Partnership
incurred $45,663 in deferred, subordinated, real estate disposition fees as a
result of the sales of properties. No deferred, subordinated real estate
disposition fees were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,365, $81,838 and $85,899 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Due to the Affiliate:
Expenditures incurred on behalf of the Partnership........ $ 53,363 $48,126
Accounting and administrative services.................... 49,952 40,728
Deferred, subordinated real estate disposition fee........ 45,663 --
Other....................................................... -- 5,000
-------- -------
$148,978 $93,854
======== =======
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc..................................... $413,755 $427,238 $425,390
Tampa Foods, L.P.................................. N/A N/A 291,347
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Shoney's......................................... $541,175 $557,303 $557,841
Wendy's Old Fashioned Hamburger Restaurants...... 437,896 432,585 499,305
Denny's.......................................... N/A 345,749 360,080
Taco Bell........................................ N/A 262,909 251,314
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership.
F-19
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
12. Subsequent Events:
In January 1999, the Partnership used the net sales proceeds from the sale
of the property in Naples, Florida to invest in a Property in Zephyrhills,
Florida, with an affiliate of the general partners as tenants-in-common for a
76 percent interest in the property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates. On March 11, 1999, the Partnership entered into
an Agreement and Plan of Merger with CNL American Properties Fund, Inc.
("APF"), pursuant to which the Partnership would be merged with and into a
subsidiary of APF (the "Merger"). As consideration for the Merger, APF has
agreed to issue 2,668,016 shares of its common stock, par value $0.01 per
shares (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the price paid
by APF investors in APF's most recent public offering. In order to assist the
general partners in evaluating the proposed merger consideration, the general
partners retained Valuation Associates, a nationally recognized real estate
appraisal firm, to appraise the Partnership's restaurant property portfolio.
Based on Valuation Associates' appraisal, the Partnership's property portfolio
and other assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $26,259,630 as of December 31, 1998. The APF Shares are
expected to be listed for trading on the New York Stock Exchange concurrently
with the consummation of the Merger, and, therefore, would be freely tradable
at the option of the former limited partners. At a special meeting of the
partners that is expected to be held in the third quarter of 1999, limited
partners holding in excess of 50% of the Partnership's outstanding limited
partnership interests must approve the Merger prior to consummation of the
transaction. The general partners intend to recommend that the limited partners
of the Partnership approve the Merger. In connection with their recommendation,
the general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
13. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,334,008 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ----------- ------------ ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and Building on
Operating Leases (net
of depreciation)....... $569,567,003 $3,369,856(A) $572,936,859 $ 0 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0 290,522,671
Other Investments....... 16,197,812 0 16,197,812 0 0 6,361,082
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0 0
Cash and Cash
Equivalents............ 18,764,033 0 18,764,033 333,295 639,036 1,767,517
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0 2,482,041
Receivables (net of
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084 1,125,933
Accrued Rental Income... 5,875,698 0 5,875,698 0 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486 2,479,317
Goodwill................ 0 0 0 0 0 0
------------ ---------- ------------ ---------- ---------- ------------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ ========== ============ ========== ========== ============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969 $ 2,013,172
Accrued Construction
Costs
Payable................ 9,745,014 0 9,745,014 0 0 0
Distributions Payable... 0 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981 30,170,185
Income Tax Payable...... 0 0 0 51,466 16,906 274,485
Line of Credit/Notes
Payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0 267,685,382
Deferred Income......... 2,466,355 0 2,466,355 0 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0 0
Minority Interest....... 644,611 0 644,611 0 0 0
Common Stock............ 373,484 0 373,484 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
Capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503 3,937,095
Accumulated
Distributions in Excess
of Net Earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523 657,541
Partners' Capital....... 0 0 0 0 0 0
------------ ---------- ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ ========== ============ ========== ========== ============
Weighted Average Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Fund IV, Pro Forma Adjusted
Adjustments Combined APF Ltd. Adjustments Pro Forma
------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets:
Land and Building on Operating
Leases (net of depreciation).. $ 0 $ 572,936,859 $15,283,715 $ 4,631,683 (B2) $ 592,852,257
Net Investment in Direct
Financing
Leases....................... 0 132,179,949 1,211,023 1,181,763 (B2) 134,572,735
Mortgages and Notes
Receivable................... 0 353,874,178 0 0 353,874,178
Other Investments............. 0 22,558,894 0 0 22,558,894
Investment In Joint Ventures.. 0 1,081,046 3,354,395 819,017 (B2) 5,254,458
Cash and Cash Equivalents..... (9,772,277)(B1) 11,731,604 651,282 (2,119,723)(B2) 9,930,163
(333,000)(B2)
Restricted Cash/Certificates
of
Deposit...................... 0 4,488,731 0 0 4,488,731
Receivables (net of
allowances)/Due
from Related Party........... (6,614,629)(C) 9,247,098 69,583 (160,865)(E) 9,155,816
Accrued Rental Income......... 0 5,875,698 290,049 (290,049)(B2) 5,875,698
Other Assets.................. (2,575,792)(B1) 13,173,857 44,751 (44,751)(B2) 13,173,857
Goodwill...................... 43,174,827 (B1) 43,174,827 0 0 43,174,827
------------ -------------- ----------- ------------ --------------
Total Assets................. 24,212,129 $1,170,322,741 $20,904,798 3,684,075 $1,194,911,614
============ ============== =========== ============ ==============
Liabilities and Equity:
Accounts Payable and Accrued
Liabilities.................. $ 0 $ 5,104,303 $ 129,520 $ 0 $ 5,233,823
Accrued Construction Costs
Payable...................... 0 9,745,014 0 0 9,745,014
Distributions Payable......... 0 0 600,000 0 600,000
Due to Related Parties........ (6,614,629)(C) 25,500,981 160,865 (160,865)(E) 25,500,981
Income Tax Payable............ (342,857)(D) 0 0 0 0
Line of Credit/Notes Payable.. 0 420,407,107 0 0 420,407,107
Deferred Income............... 0 2,466,355 0 0 2,466,355
Rents Paid in Advance......... 0 1,617,367 52,445 0 1,669,812
Minority Interest............. 0 644,611 0 0 644,611
Common Stock.................. 61,500 (B1) 434,984 0 13,174 (B2) 448,158
Common Stock--Class A......... (8,600)(B1) 0 0 0 0
Common Stock--Class B......... (4,825)(B1) 0 0 0 0
Additional Paid-in-Capital.... 122,938,500 (B1) 792,936,215 0 23,793,734 (B2) 816,729,949
(12,568,974)(B1)
Accumulated Distributions in
Excess of Net Earnings....... (5,883,163)(B1) (88,534,196) 0 0 (88,534,196)
(73,707,680)(B1)
342,857 (D)
Partners' Capital............. 0 0 19,961,968 (19,961,968)(B2) 0
------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity...................... $ 24,212,129 $1,170,322,741 $20,904,798 $ 3,684,075 $1,194,911,614
============ ============== =========== ============ ==============
Weighted Average Shares
Outstanding.................. 44,815,241
==============
Shares Outstanding............ 44,815,822
==============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620 $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ---------- ---------- -----------
Total Revenue.......... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337)
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Cash Distributions
Declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund IV, Ltd. Adjustments Pro Forma
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned Income............ $ 0 $30,957,514 $1,089,757 $ 10,143 (j) $32,057,414
Fees................................ (9,812,516)(b),(c) 2,616,185 0 (26,136)(k) 2,590,049
Interest and Other Income........... 144,014 (d) 16,269,383 16,969 0 16,286,352
----------- ----------- ---------- --------- -----------
Total Revenue....................... $(9,668,502) $49,843,082 $1,106,726 (15,993) $50,933,815
Expenses:
General and Administrative.......... (774,311)(e) 9,579,902 106,809 (50,508)(l),(m) 9,636,203
Management and Advisory Fees........ (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related Parties........ (743,673)(g) 34,701 0 0 34,701
Interest Expense.................... 0 10,387,206 0 0 10,387,206
State Taxes......................... 0 464,966 15,395 5,124 (o) 485,485
Depreciation--Other................. 0 116,162 0 0 116,162
Depreciation--Property.............. 0 4,669,153 202,745 107,509 (p) 4,979,407
Amortization........................ 1,079,371 (h) 1,089,107 2,259 0 1,091,366
Transaction Costs................... 0 483,005 104,166 0 587,171
----------- ----------- ---------- --------- -----------
Total Expenses...................... (3,352,388) 26,824,202 431,374 62,125 27,317,701
Operating Earnings (Losses) Before
Equity in Earnings of Joint
Ventures/Minority Interests, Gain
(Loss) on Sale of Properties, and
Provision for Losses on Properties
.................................... $(6,316,114) $23,018,880 $ 675,352 (78,118) $23,616,114
Equity in
Earnings of Joint Ventures/
Minority Interest.................. 0 31,241 146,616 (20,486)(q) 157,371
Gain (Loss) on Sale of Properties... 0 (201,843) 0 0 (201,843)
Provision for Losses on Properties.. 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- --------- -----------
Net Earnings (Losses) Before Benefit/
(Provision) for Federal Income
Taxes............................... (6,316,114) 22,307,756 821,968 (98,604) 23,031,120
Benefit/(Provision) for Federal
Income Taxes....................... 1,525,740(i) 0 0 0 0
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)................ $(4,790,374) $22,307,756 $ 821,968 (98,604) $23,031,120
=========== =========== ========== ========= ===========
Earnings Per Share/Unit.............. $ n/a $ n/a $ 13.70 n/a $ 0.51
=========== =========== ========== ========= ===========
Book Value Per Share/Unit............ $ n/a $ n/a $ 332.70 n/a $ 16.26
=========== =========== ========== ========= ===========
Dividends Per Share/Unit............. $ n/a $ n/a $ 20.00 n/a $ 0.76
=========== =========== ========== ========= ===========
Ratio of Earnings to Fixed Charges... n/a n/a n/a n/a 2.88x
=========== =========== ========== ========= ===========
Cash Distributions Declared.......... $4,689,252 (s) $33,165,402 $1,200,000 $(195,541)(s) $34,169,841
=========== =========== ========== ========= ===========
Wtd. Avg. Shares Outstanding......... 6,150,000 43,497,883 n/a 1,317,358 44,815,241 (r)
=========== =========== ========== ========= ===========
Shares Outstanding................... 6,150,000 43,498,464 n/a 1,317,358 44,815,822
=========== =========== ========== ========= ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $ 22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ------------ ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $ 22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ------------ ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties .. $32,778,080 $ 16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision for Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ------------ ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ------------ ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $ 16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== ============ =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== ============ =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $ 11,549,717(t) $50,998,866 $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,573,784 34,222,003 n/a n/a n/a
=========== ============ =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== ============ =========== =========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund IV, Ltd. Adjustments Pro Forma
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $2,314,890 $ 20,286 (j) $58,416,636
Fees................... (32,715,768)(b),(c) 3,226,263 0 (31,155)(k) 3,195,108
Interest and Other
Income................ 207,144 (d) 32,221,925 60,950 0 32,282,875
------------ ----------- ---------- ----------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $2,375,840 $ (10,869) $93,894,619
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 227,263 (71,599)(l),(m) 16,095,220
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 15,747 8,202 (o) 591,395
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 425,483 215,017 (p) 10,588,839
Amortization........... 2,158,741 (h) 2,322,742 3,492 0 2,326,234
Transaction Costs...... 0 157,054 18,286 0 175,340
------------ ----------- ---------- ----------- -----------
Total Expenses......... (9,244,207) 51,491,670 690,271 151,620 52,333,561
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties... $(23,264,417) $40,037,978 $1,685,569 $ (162,489) $41,561,058
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) (90,144) (40,972)(q) (145,254)
Gain (Loss) on Sale of
Properties............ 0 0 226,024 0 226,024
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Provision for Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- ----------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,264,417) 43,106,657 1,821,449 (203,461) 44,724,645
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- ----------- -----------
Net Earnings (Losses)... $(16,365,983) $43,106,657 $1,821,449 $ (203,461) $44,724,645
============ =========== ========== =========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 30.36 $ n/a $ 1.07
============ =========== ========== =========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 33.90 $ n/a $ 16.39
============ =========== ========== =========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 60.56 $ n/a $ 1.50
============ =========== ========== =========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.04x
============ =========== ========== =========== ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,377,370 $3,633,744 $(1,624,826)(t) $62,386,288
============ =========== ========== =========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,372,003 n/a 1,317,358 41,689,361 (s)
============ =========== ========== =========== ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,317,358 44,805,285
============ =========== ========== =========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
Issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------- ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock ......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,313,480) 24,436,074 713,308 962,573 2,526,078
------------- ------------- ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,458,702 $ 44,772,452 $ 333,295 $639,036 $ 1,767,517
============= ============= ============= =========== ========= ============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Funds IV, Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,790,374)(a) $ 22,307,756 $ 821,968 $ (98,604)(a) $ 23,031,120
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 0 4,771,655 202,745 107,509 (b) 5,084,909
Amortization expense... 1,079,371 (c) 1,989,124 2,259 0 1,991,383
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 41,711 20,486 (d) 87,317
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 0 0 201,843
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) (41,231) 0 (2,243,191)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (3,481) 0 (323,906)
Decrease in net
investment in direct
financing leases...... 0 721,624 20,459 0 742,083
Increase in accrued
rental income......... 0 (1,915,785) (10,325) 0 (1,926,110)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 88,285 0 (575,193)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
Issuance costs paid on
behalf of the entity.. 0 585,727 11,887 0 597,614
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (7,175) 0 659,544
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------ ---------- --------- ------------
Total adjustments...... 1,079,371 (75,910,441) 305,134 127,995 (75,477,312)
------------ ------------ ---------- --------- ------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,127,102 29,391 (52,446,192)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases................ 0 3,696,064 0 0 3,696,064
Additions to land and
buildings on operating
leases................ 4,452,252 (a) (44,006,783) 0 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) (533,200) 0 (650,863)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 533,598 0 533,598
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 (15,600) 0 (15,600)
------------ ------------ ---------- --------- ------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) (15,202) 0 (111,749,728)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252) (33,285,210) (1,200,000) 195,541 (34,289,669)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------ ---------- --------- ------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,200,000) 195,541 179,259,016
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (88,100) 224,932 15,063,096
Cash at beginning of
year................... (11,904,535) 5,183,781 739,382 (776,316) 5,146,847
------------ ------------ ---------- --------- ------------
Cash at end of year..... $(15,852,538) $ 20,110,045 $ 651,282 $(551,384) $ 20,209,943
============ ============ ========== ========= ============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities........... (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,549,717) (50,998,866) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities........... 313,835,541 (8,179,861) 305,655,680 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,313,480) (34,700,420) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,313,480) $ 12,886,357 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund IV, Ltd. Adjustments Pro Forma
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,365,983)(a) $ 43,106,657 $1,821,449 $ (203,461)(a) $ 44,724,645
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 425,483 215,017 (b) 10,787,996
Amortization expense... 2,158,741 (c) 4,472,825 3,492 0 4,476,317
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 338,504 40,972 (d) 364,036
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (226,024) 0 (226,024)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 0 0 1,009,576
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease (increase) in
other receivables..... 0 (2,543,413) 8,607 0 (2,534,806)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 1,279 0 8,525
Decrease in net
investment in direct
financing leases...... 0 1,971,634 37,907 0 2,009,541
Increase in accrued
rental income......... 0 (2,187,652) (40,515) 0 (2,228,167)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 846,680 (26,960) 0 819,720
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 9,461 0 (123,903)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 9,637 0 446,480
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,817,843 13,347,648 540,871 255,989 14,144,508
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 2,362,320 52,528 58,869,153
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 2,526,354 0 4,912,295
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) (275,000) 0 (304,285,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) (493,398) 0 (1,468,094)
Acquisition of
businesses............ (9,772,277)(f) (9,772,277) 0 (2,119,723)(g) (12,225,000)
(333,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 (533,598) 0 (533,598)
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 0 0 200,000
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 12,022,109 (388,528,533) 1,224,358 (2,452,723) (389,756,898)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
Limited Partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners.............. 0 (69,741,858) (3,723,748) 1,624,826 (j) (71,840,780)
Other.................. (9,378,504)(j) (2,595,088) 0 0 (2,595,088)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (9,378,504) 287,428,879 (3,723,748) 1,624,826 285,329,957
Net increase (decrease)
in cash................ (11,904,535) (44,645,349) (137,070) (775,369) (45,557,788)
Cash at beginning of
year................... 0 49,829,130 876,452 0 50,705,582
------------ ------------- ---------- ----------- -------------
Cash at end of year..... $(11,904,535) $ 5,183,781 $ 739,382 $ (775,369) $ 5,147,794
============ ============= ========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of March 31, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit
facility at June 30, 1999 to pro forma properties acquired from April 1,
1999 through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all interest
costs related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,038,155 $50,734,122 $26,259,631 $159,031,908
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $23,806,908 $146,806,908
Cash Consideration...... -- -- 333,000 333,000
APF Transaction Costs... 6,038,155 3,734,122 2,119,723 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $82,038,155 $50,734,122 $26,259,631 $159,031,908
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets -
Historical............. $ 8,330,475 $10,135,087 $19,961,968 $ 38,427,530
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 4,631,683 4,631,683
Net investment in
direct financing
leases............... -- -- 1,181,763 1,181,763
Investment in joint
ventures............. -- -- 819,017 819,017
Accrued rental
income............... -- -- (290,049) (290,049)
Intangibles and other
assets............... -- (2,575,792) (44,751) (2,620,543)
Goodwill*............. -- 43,174,827 -- 43,174,827
Excess purchase
price................ 73,707,680 -- -- 73,707,680
----------- ----------- ----------- ------------
Total Allocation.... $82,038,155 $50,734,122 $26,259,631 $159,031,908
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,707,680 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of $43,174,827 relating to the
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A........... 8,600
Common Stock (CFA, CFS, CFC)--Class B........... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of
earnings....................................... 73,707,680
Goodwill for CFC/CFS (Intangibles and other
assets)........................................ 43,174,827
CFC/CFS Organizational Costs/Other Assets...... 2,575,792
Cash to pay APF transaction costs.............. 9,772,277
APF Common Stock............................... 61,500
APF Capital in Excess of Par Value............. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 19,961,968
Land and buildings on operating leases.......... 4,631,683
Net investment in direct financing leases....... 1,181,763
Investment in joint ventures.................... 819,017
Accrued rental income.......................... 290,049
Intangibles and other assets................... 44,751
Cash to pay APF Transaction costs.............. 2,119,723
Cash consideration to Income Funds............. 333,000
APF Common Stock............................... 13,174
APF Capital in Excess of Par Value............. 23,793,734
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of
$342,857 from liabilities assumed in the acquisition since the Merger
Agreement requires that the Advisor and CNL Restaurant Financial Services
Group have no accumulated or current earnings and profits for federal
income tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $160,865 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which
were deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees........................................... $ (1,681,870)
Administrative executive and guarantee fees............... (126,788)
Servicing fees............................................ (572,728)
Advisory fees............................................. (532,389)
------------
$ (2,913,775)
============
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,079,371
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $10,143 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ --
Reimbursement of administrative costs......................... (26,136)
--------
$(26,136)
========
</TABLE>
(l) Represents the elimination of $26,136 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $24,372 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $5,124 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $107,509 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the
remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $20,486 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term of
the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during the
period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,158,741
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to qualify
as a REIT and does not expect to incur federal income taxes.
(j) Represents $20,286 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ --
Reimbursement of administrative costs......................... (31,155)
--------
$(31,155)
========
</TABLE>
(l) Represents the elimination of $31,155 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $40,444 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $8,202 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $215,017 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $40,972 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1999.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund IV, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund IV, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund IV, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND IV, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund IV, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-5
<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,668,016 fully paid and nonassessable APF Common
Shares (1,334,008 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $24,307,286, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,331,984 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 60,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,668,016 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $266,802 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND IV, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND V, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund V, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., wholly owned limited partnership through which APF conducts its
business and which we call the Operating Partnership.
Unless otherwise indicated, APF Share numbers in this consent solicitation
reflect a one-for-two reverse stock split approved by the APF stockholders on
May 27, 1999 and effective on June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from
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triple-net leasing and mortgage financing to site selection, construction
management and build-to-suit development. If APF acquires all of the Income
Funds in the Acquisition, APF expects to have total assets of approximately
$1.5 billion at the time of the consummation of the Acquisition and will be one
of the largest triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,024,516 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold
$750 million of APF Shares through three public offerings. In each offering,
the offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the Special Meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration
based on the exchange value, that would otherwise have been paid to your Income
Fund, Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your Units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $256.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,024,516 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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<PAGE>
substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition, will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $920, $920 and $1,535, respectively, to you per $10,000
investment. The amount distributed to you in 1998 included a special
distribution of net sales proceeds of $735 per $10,000 investment. While
historically, APF has made distributions equal to 7.625% per APF Share, based
on the exchange value, we cannot be sure that APF will be able to maintain this
level of distributions in the future. In the event that APF is unable to
maintain this level of distributions, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such
S-4
<PAGE>
Income Funds and increasing the number of APF Shares or notes that would be
allocable to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,215 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur of substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares (or from the combination of cash paid to and
payments on any notes if you elect to receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
S-5
<PAGE>
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.93%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.42x and its ratio of debt-to-total assets would
have been 35.36%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
S-6
<PAGE>
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect of APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes, or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had a tenant of
one Boston Market restaurant property which continues to make lease payments to
your Income Fund.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a
S-7
<PAGE>
REIT for four taxable years following the year during which it was
disqualified. Therefore, if APF loses its REIT status, the funds available for
distribution to you, as an APF stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund has elected to receive the notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited less
Partner Distributions Estimated Value
Investments of Net Sales Number of Estimated of APF Shares
less Proceeds per APF Value of APF Estimated Value per Average
Distributions $10,000 Shares Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$22,258,682 $8,903 1,024,516 $20,490,320 $273,000 $20,217,320 $8,087
</TABLE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$25,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
S-8
<PAGE>
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1).................................................... $ 15,940
Appraisals and Valuation(2)...................................... 4,290
Fairness Opinions(3)............................................. 30,000
Solicitation Fees(4)............................................. 13,209
Printing and Mailing(5).......................................... 76,179
Accounting and Other Fees(6)..................................... 33,816
--------
Subtotal....................................................... $173,434
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)........................ $ 49,219
Legal Closing Fees(8)............................................ 24,311
Partnership Liquidation Costs(9)................................. 26,036
--------
Subtotal....................................................... 99,566
--------
Total............................................................ $273,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
S-9
<PAGE>
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (December 16, 1988). Because the Acquisition of your Income Fund is
a "Liquidating Sale" within the meaning of the partnership agreement, it may
not be consummated without the approval of Limited Partners representing
greater than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 15 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement
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<PAGE>
and the other materials distributed to you, and the terms of APF's Acquisition
of your Income Fund, prior to voting on the Acquisition. The special meeting
will be held at 10:00 a.m., Eastern time, on , 1999, at . We and
members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a) , 1999, a date not less
than 60 calendar days from the initial delivery of the solicitation materials,
or (b) such later date as we may select and as to which we give you notice. At
our discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------- Six Months Ended
1996 1997 1998 June 30, 1999
-------- ------- -------- ----------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to
the General Partners and
Affiliates:
General Partner Distributions...... -- -- -- --
Accounting and Administrative
Services.......................... $ 83,563 $80,145 $ 94,611 $42,723
Broker/Dealer Commissions.......... -- -- -- --
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(1).... 34,500 -- 65,400 --
-------- ------- -------- -------
Total historical................. $118,063 $80,145 $160,011 $42,723
Pro Forma Distributions to be Paid
to the General Partners Following
the Acquisition:
Cash Distributions on APF
Shares(2)......................... -- -- -- --
Salary Compensation................ -- -- -- --
-------- ------- -------- -------
Total pro forma.................. -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
-------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $690 $665 $566 $688 $ 614 $400 $212
Distributions from Sales of
Properties................... -- -- -- -- 735 -- --
Distributions from Return of
Capital(1)................... 230 255 354 232 186 -- 96
---- ---- ---- ---- ------ ---- ----
Total....................... $920 $920 $920 $920 $1,535 $400 $308
==== ==== ==== ==== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
.the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you, as an APF stockholder, will have the opportunity to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We
S-14
<PAGE>
note that because the Acquisition of any one Income Fund is not a condition of
the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Funds, Legg
Mason did not address or render any opinion with respect to other aspects of
the Acquisition, including:
. the value or fairness of the notes option;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
.any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund V,
Ltd. .................. 22,258,682 8,903 8,087 8,085 7,523 8,135
</TABLE>
S-15
<PAGE>
- --------
(1) The original Limited Partner investments in the Income Fund were
$25,000,000. These columns reflect, as of December 31, 1998, an adjustment
to the Limited Partners' original investments for special distributions of
net sales proceeds from sales of restaurant properties and net sales
proceeds added to the Income Fund's working capital and subsequently
distributed to the Limited Partners of the Income Fund.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if the
Income Fund had sold their assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne (your individual general
partners), will continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all
of your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement
for your Income Fund prohibits the Income Fund from incurring
indebtedness, the only liabilities the Income Fund has are liabilities
with respect to its ongoing business operations. In the event that your
Income Fund is acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation.
<TABLE>
<CAPTION>
Estimated Gain/(Loss) per
Average $10,000 Original
Limited Partner Investment
--------------------------
<S> <C>
CNL Income Fund V, Ltd. ............................. $256
</TABLE>
- --------
S-17
<PAGE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
S-18
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive cash and Notes rather than APF
Shares. Even though a Limited Partner's election of the Cash/Notes Option may
decrease the amount of gain your Income Fund recognizes, the electing Limited
Partner still will be required to take into account his, her or its share of
your Income Fund's gain as determined under the partnership agreement of your
Income Fund. Therefore, Limited Partners who elect the notes may recognize gain
in the year of the Acquisition despite the fact that they will not receive cash
with which to pay the tax on the gain. Such Limited Partners will adjust the
basis of the Notes as described below, and the resulting increase in basis will
decrease the amount of the gain recognized over the term of the notes by the
Limited Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Income Fund is acquired by APF, your Income Fund will be deemed to have been
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, reduced. Your holding
period for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds that are acquired
by APF will equal the fair market value of the APF Shares, plus the issue price
of the notes issued in the Acquisition, plus the amount of any liabilities of
the Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-19
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,083,398 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,348,361)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,320,141)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Loss on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,320,141)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,794,401)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income Acquisition
Combined Fund V, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 667,285 $ 10,354 (j) $31,635,153
Fees............. 2,616,185 0 (25,994)(k) 2,590,191
Interest and
Other Income..... 16,269,383 101,974 0 16,371,357
------------ ---------- ------------------ ------------
Total Revenue... $49,843,082 $ 769,259 $ (15,640) $50,596,701
Expenses:
General and
Administrative... 9,579,902 106,071 ( 51,185)(l),(m) 9,634,788
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 6,404 3,935 (o) 475,305
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 124,179 58,156 (p) 4,851,488
Amortization..... 1,093,134 0 0 1,093,134
Transaction
Costs............ 483,005 91,188 0 574,193
------------ ---------- ------------------ ------------
Total Expenses.. 26,828,229 327,842 10,906 27,166,977
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,014,853 $ 441,417 $ (26,546) $23,429,724
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 238,437 (17,456)(q) 252,222
Gain (Loss) on
Sale of
Properties....... (201,843) 395,422 0 193,579
Provision For
Loss on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,303 ,729 1,075,276 (44,002) 23,335,003
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $22,303,729 $1,075,276 $ (44,002) $23,335,003
============ ========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustment Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ============
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ============
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ============
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ============
Ratio of
earnings to
fixed charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ============
Cash
distributions
declared........ $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ============
Weighted average
shares
outstanding
during period... 37,347,883 0 $ 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ============
Shares
outstanding..... 37,348,464 0 $ 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ============
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $ 23,951,658 (u1)(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $ (6,957,486)(w)(v)
Total equity.... $655,201,826 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $ 30,909,144 (u1)(v)
<CAPTION>
Historical
CNL Income
Combined Fund V, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 22 n/a 603
============== =========== =================== =================
Earnings per
share/unit...... $ n/a $ 21.51 $ n/a $ 0.52
============== =========== =================== =================
Book value per
share/unit...... $ n/a $ 326.05 $ n/a $ 16.24
============== =========== =================== =================
Dividends per
share/unit...... $ n/a $ 20.00 $ n/a $ 0.76
============== =========== =================== =================
Ratio of
earnings to
fixed charges... n/a n/a n/a 2.80x
============== =========== =================== =================
Cash
distributions
declared........ $ 33,165,402 $ 1,000,000 $ (229,235)(s) $ 33,936,167
============== =========== =================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,010,866 44,508,749(r)
============== =========== =================== =================
Shares
outstanding..... 43,498,464 n/a 1,010,866 44,509,330
============== =========== =================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $11,325,999 $3,718,183 (u2) $ 709,857,165
Mortgages/notes
receivable...... $ 353,874,178 $ 872,390 $ 0 $ 354,746,568
Receivables/due
from related
parties......... $ 9,247,098 $ 36,368 $ (284,333)(x) $ 8,999,133
Investment in
joint ventures.. $ 1,081,046 $ 2,392,506 $ 523,830 (u2) $ 3,997,382
Total assets.... $1,170,062,270 $17,352,451 $1,655,076 (u2)(x) $1,189,069,797
Total
liabilities/minority
interest........ $ 465,485,738 $ 1,050,073 $ (284,333)(x) $ 466,251,478
Total equity.... $ 704,576,532 $16,302,378 $1,939,409 (u2) $ 722,818,319
</TABLE>
S-21
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurants properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total..................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $616,904 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................ $ 144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,083,398
</TABLE>
S-22
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $10,354 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (25,994)
--------
$(25,994)
========
</TABLE>
(l) Represents the elimination of $25,994 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $25,191 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $3,935 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $58,156 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $17,456
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from April
1, 1999 through July 31, 1999 as if these properties had been acquired
on June 30, 1999. Based on historical results through July 31, 1999,
all interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma adjustments
to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
S-23
<PAGE>
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... 82,298,626 50,895,204 20,212,957 153,406,787
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $18,241,787 $141,241,787
Cash Consideration...... -- -- 273,000 273,000
APF Transaction Costs... 6,298,626 3,895,204 1,698,170 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $82,298,626 $50,895,204 $20,212,957 $153,406,787
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical............. $ 8,330,475 $10,135,087 $16,302,378 $ 34,767,940
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 2,962,348 2,962,348
Net investment in
direct financing
leases................ -- -- 755,836 755,836
Investment in joint
ventures.............. -- -- 523,830 523,830
Accrued rental income.. -- -- (270,021) (270,021)
Intangibles and other
assets................ -- (2,575,792) (61,414) (2,637,206)
Goodwill*.............. -- 43,335,909 -- 43,335,909
Excess purchase price.. 73,968,151 -- -- 73,968,151
----------- ----------- ----------- ------------
Total Allocation.... $82,298,626 $50,895,204 $20,212,957 $153,406,787
=========== =========== =========== ============
</TABLE>
*Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,968,151 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $43,335,909 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A............ 8,600
Common Stock (CFA, CFS, CFC)--Class B............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)........ 12,568,974
Retained Earnings................................. 5,883,163
Accumulated distributions in excess of earnings... 73,968,151
Goodwill for CFC/CFS (Intangibles and other
assets).......................................... 43,335,909
CFC/CFS Organizational Costs/Other Assets........ 2,575,792
Cash to pay APF transaction costs................ 10,193,830
APF Common Stock................................. 61,500
APF Capital in Excess of Par Value............... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital................................. 16,302,378
Land and buildings on operating leases............ 2,962,348
Net investment in direct financing leases......... 755,836
Investment in joint ventures...................... 523,830
Accrued rental income............................ 270,021
Intangibles and other assets..................... 61,414
Cash to pay APF Transaction costs................ 1,698,170
Cash consideration to Income Funds............... 273,000
APF Common Stock................................. 10,109
APF Capital in Excess of Par Value............... 18,231,678
(To record acquisition of Income Fund)
</TABLE>
S-24
<PAGE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $284,333 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND V, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund V,
Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 1,007,696 $ 960,258 $ 2,024,231 $ 2,147,770 $ 2,279,880 $ 2,314,818 $ 2,354,981
Net income(2)........... 1,075,276 1,000,897 1,544,895 1,731,915 1,428,159 1,679,820 1,743,029
Cash distributions
declared(3)............ 1,000,000 2,838,327 3,838,327 2,300,000 2,300,000 2,300,000 2,300,000
Net income per unit(2).. 21.32 19.89 30.70 34.40 28.31 33.26 34.51
Cash distributions
declared per unit(3)... 20.00 56.77 76.77 46.00 46.00 46.00 46.00
GAAP book value per
unit................... 326.05 333.66 324.54 370.41 379.65 393.90 405.67
Weighted average number
of Limited Partner
units outstanding...... 50,000 50,000 50,000 50,000 50,000 50,000 50,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $17,352,451 $17,648,632 $17,135,485 $19,718,430 $20,133,002 $20,760,182 $21,299,865
Total partners'
capital................ 16,302,378 16,683,104 16,227,102 18,520,534 18,982,619 19,694,760 20,283,440
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income or loss of the consolidated joint venture.
(2) Net income for the six months ended June 30, 1999 and June 30, 1998
includes gain on sale of land and buildings of $395,422 and $442,605
respectively. Net income for the year ended December 31, 1998 includes
$469,613, from gains on sales of land and buildings, $25,500 from a loss on
sale of land and building and $403,157 for a provision for loss on land and
building. Net income for the year ended December 31, 1997, includes
$550,878 from gains on the sales of land and buildings, $141,567 from a
loss on the sale of land and building and $250,694 for a provision for loss
on land and building. Net income for the year ended December 31, 1996,
includes $19,369 from the gains on sale of land and buildings and $239,525
for a provision for loss on land and buildings. Net income for the year
ended December 31, 1995, includes $5,924 from a gain on sale of land and
building.
(3) Distributions for the six months ended June 30, 1998, and the year ended
December 31, 1998 include a special distribution to the Limited Partners of
1,838,327 as a result of the distribution of net sales proceeds from the
sales of restaurant properties during 1999 and 1998.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND V, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 17, 1988, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are generally triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 22 restaurant properties
which included interests in three restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and two restaurant properties owned
with affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund
generated cash from operations, including cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses, of $879,145 and $812,900, respectively. The increase in
cash from operations for the six months ended June 30, 1999, is primarily a
result of changes in income and expenses as described in "Results of
Operations" below and changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
During the six months ended June 30, 1999, the Income Fund sold its
restaurant properties in Endicott and Ithaca, New York to the tenant for a
total of $1,125,000 and received net sales proceeds of $1,113,759 resulting in
a total gain of $213,503 for financial reporting purposes. These restaurant
properties were originally acquired by the Income Fund in December 1989 and had
costs totalling approximately $942,600, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
properties for approximately $171,200 in excess of their original purchase
prices. We expect to use the proceeds received from the sale of these
restaurant properties to reinvest in additional restaurant properties or for
other Income Fund purposes.
In June 1999, Halls Joint Venture, in which the Income Fund owns a 48.9%
interest, sold its restaurant property to the tenant in accordance with the
option under its lease agreement to purchase the restaurant property, for
$891,915, resulting in a gain to the joint venture of approximately $239,300
for financial reporting purposes. The property was originally contributed to
Halls Joint Venture in February 1990 and had a total cost of approximately
$672,000, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the joint venture sold the restaurant property for approximately
$219,900 in excess of its original purchase price. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property owned by Halls Joint Venture and the reinvestment of the proceeds will
qualify as a like-kind exchange transaction for federal income tax purposes.
As of December 31, 1998, the Income Fund had accepted two promissory notes
in connection with the sale of two of its restaurant properties. During the six
months ended June 30, 1999, the Income Fund collected the outstanding balance
of $1,043,770 relating to the promissory note accepted in connection with the
sale of the restaurant property in St. Cloud, Florida. The Income Fund intends
to reinvest the amounts collected in additional restaurant properties.
Currently, rental income from the Income Fund's restaurant properties, and
any amounts collected under its promissory notes, as described above, and any
net sales proceeds held by the Income Fund, pending reinvestment in additional
restaurant properties, are invested in money market accounts or other short-
term, highly liquid investments such as demand deposit accounts at commercial
banks, certificates of deposit, and money market accounts with less than a 30-
day maturity date, pending the Income Fund's use of such funds to
S-27
<PAGE>
pay Income Fund expenses, to make distributions to the partners and, for net
sales proceeds, to reinvest in additional restaurant properties. At June 30,
1999, the Income Fund had $2,393,763 invested in such short-term investments,
as compared to $352,648 at December 31, 1998. The increase in cash and cash
equivalents at June 30, 1999, is primarily attributable to the receipt of net
sales proceeds relating to the sales of the restaurant properties in Endicott
and Ithaca, New York, and the receipt of the remaining outstanding balance of
the mortgage note receivable, relating to the prior sale of a restaurant
property in St. Cloud, Florida, as described above. The funds remaining at June
30, 1999, will be used towards the reinvestment in additional restaurant
properties and to pay distributions and other liabilities.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
generated cash from operations, which includes cash received from tenants,
distributions from joint ventures and interest received, less cash paid for
expenses, of $1,649,735, $1,813,231, and $2,103,745. The decrease in cash from
operations during 1998 and 1997, each as compared to the previous year, is
primarily a result of changes in income and expenses as discussed in "Results
of Operations" below and changes in the Income Fund's working capital during
each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
During the years ended December 31, 1997 and 1996, the Income Fund received
$106,000 and $159,700, respectively, in capital contributions from the
corporate general partner in connection with the operations of the Income Fund.
In October 1996, the Income Fund sold its restaurant property in St. Cloud,
Florida, to the tenant for $1,150,000. In connection therewith, the Income Fund
received $100,000 in cash and accepted the remaining sales proceeds in the form
of a promissory note in the principal sum of $1,057,299, representing the
balance of the sales price of $1,050,000 plus tenant closing costs in the
amount of $7,299 the Income Fund financed on behalf of the tenant. The
promissory note bears interest at a rate of 10.75% per annum, is collateralized
by a mortgage on the restaurant property, and is being collected in 12 monthly
installments of interest only and thereafter in 168 equal monthly installments
of principal and interest. This sale is also being accounted for under the
installment sales method for financial reporting purposes; therefore, the gain
on the sale of the restaurant property was deferred and is being recognized as
income proportionately as payments of principal under the mortgage note are
collected. The Income Fund recognized a gain of $2,157, $338, and $18,445 for
financial reporting purposes for the years ended December 31, 1998, 1997, and
1996, respectively, and had a deferred gain in the amount of $181,308 and
$183,465 at December 31, 1998 and 1997. The mortgage note receivable balance
relating to this restaurant property at December 31, 1998 and 1997, was
$871,812 and $874,443, including accrued interest of $9,350 and $2,747, and net
of the remaining deferred gain of $181,308 and $183,465. Payments collected
under the mortgage note totalling $100,000 were used to pay liabilities of the
Income Fund, including quarterly distributions to the Limited Partners. We
anticipate that payments collected under the mortgage note in the future will
be reinvested in additional restaurant properties or used for payment of Income
Fund liabilities.
In January 1997, the Income Fund sold its restaurant property in Franklin,
Tennessee, to the tenant, for $980,000 and received net sales proceeds of
$960,741. Since the Income Fund had previously established an
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allowance for loss on land and building of $169,463 as of December 31, 1996
relating to this restaurant property, no loss was recognized during 1997 as a
result of this sale. The Income Fund used $360,000 of the net sales proceeds to
pay liabilities of the Income Fund, including quarterly distributions to the
Limited Partners. In addition, in June 1997, the Income Fund entered into an
operating agreement for the restaurant property located in South Haven,
Michigan, with an operator to operate the restaurant property as an Arby's
restaurant. In connection therewith, the Income Fund used approximately
$120,400 of the net sales proceeds from the sale of the restaurant property in
Franklin, Tennessee, to fund conversion costs associated with the Arby's
restaurant property. In March 1998, the Income Fund entered into a new lease
for this restaurant property with the former operator as tenant, to operate the
restaurant property as an Arby's. In December 1997, the Income Fund reinvested
approximately $244,800 of the net sales proceeds in a restaurant property
located in Sandy, Utah, and approximately $150,000 in a restaurant property
located in Vancouver, Washington, as tenants-in-common with certain of our
affiliates, as described below. The Income Fund intends to use the remaining
net sales proceeds from the sale of the restaurant property in Franklin,
Tennessee to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners.
In June 1997, the Income Fund terminated the leases with the tenant of the
restaurant properties in Connorsville and Richmond, Indiana. In connection
therewith, the Income Fund accepted a promissory note from the former tenant
for $35,297 for amounts relating to past due real estate taxes as a result of
the former tenant's financial difficulties. The promissory note, which is
uncollateralized, bears interest at a rate of ten percent per annum and is
being collected in 36 monthly installments. Receivables at December 31, 1998
and 1997 included $25,783 and $37,099, respectively, of such amounts, including
accrued interest of $1,802 in 1997. In July 1997, the Income Fund entered into
a new lease for the restaurant property in Connorsville, Indiana, with a new
tenant to operate the restaurant property as an Arby's restaurant. In
connection therewith, the Income Fund incurred $125,000 in renovation costs and
paid these amounts during the year ended December 31, 1998.
During 1997, the Income Fund sold its restaurant properties in Smyrna,
Tennessee; Salem, New Hampshire; and Port St. Lucie and Tampa, Florida, for a
total of $4,020,172 and received net sales proceeds
totalling $3,925,876, resulting in a total gain of $549,516 for financial
reporting purposes. These restaurant properties were originally acquired by the
Income Fund in 1989 and had a total cost of approximately $3,503,900, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the Income
Fund sold these restaurant properties for approximately $422,100 in excess of
their original purchase prices. The Income Fund used approximately $132,500 of
the net sales proceeds to pay liabilities of the Income Fund, including
quarterly distributions to the Limited Partners, and used the remaining net
sales proceeds to acquire additional restaurant properties and acquire
restaurant properties with certain of our affiliates. The Income Fund
distributed amounts sufficient to enable the Limited Partners to pay federal
and state income taxes, if any, at a level reasonably assumed by the us,
resulting from the sale.
During the year ended December 31, 1996, the Income Fund established an
allowance for the restaurant property in Richmond, Indiana, in the amount of
$70,062 which represented the difference between the restaurant property's
carrying value at December 31, 1996, and the estimate of net realizable value
of the restaurant property based on an anticipated sales price of this
restaurant property. In November 1997, the Income Fund sold this restaurant
property to a third party for $400,000 and received net sales proceeds of
$385,179. As a result of this transaction, the Income Fund recognized a loss of
$141,567 for financial reporting purposes. In December 1997, the Income Fund
reinvested the net sales proceeds in a restaurant property as tenants-in-common
with certain of our affiliates, as described below.
During 1998, the Income Fund sold its restaurant properties in Port Orange,
Florida, and Tyler, Texas to the tenants for a total of $2,180,000 and received
net sales proceeds totalling $2,125,220, resulting in a total gain of $466,322
for financial reporting purposes. These restaurant properties were originally
acquired by the Income Fund in 1988 and 1989 and had costs totaling
approximately $1,791,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant properties
for
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approximately $333,900 in excess of their original purchase prices. In
addition, the Income Fund incurred deferred, subordinated, real estate
disposition fees of $65,400 relating to the sales of the restaurant properties
for which net sales proceeds were not reinvested in additional restaurant
properties. The Income Fund distributed $1,838,327 of the net sales proceeds
from the 1997 and 1998 sales of the properties in Tampa, Florida, as described
above, and Port Orange, Florida, as a special distribution to the Limited
Partners in April 1998. In addition, in May 1998, the Income Fund contributed
the net sales proceeds from the sale of the restaurant property in Tyler, Texas
in a joint venture arrangement as described below. The Income Fund will
distribute amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, if any, at a level reasonably assumed by us.
As described above, in May 1998, the Income Fund entered into a joint
venture, RTO Joint Venture, a joint venture with one of our affiliates, to
construct and hold one restaurant property. As of December 31, 1998, the Income
Fund had contributed $766,746 to purchase land and pay for construction
relating to the joint venture. Construction was completed and rent commenced in
December 1998. The Income Fund holds a 53.12% interest in the profits and
losses of the joint venture.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, distributions to the Limited Partners or use
for the payment of Income Fund liabilities are invested in money market
accounts or other short-term highly liquid investments such as demand deposit
accounts at commercial banks, CDs and money market accounts with less than a
30-day maturity date, pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1998, the
Income Fund had $352,648 invested in such short-term investments as compared to
$1,361,290 at December 31, 1997. The decrease in cash and cash equivalents
during 1998, is primarily attributable to the fact that the Income Fund
distributed amounts held at December 31, 1997 relating to the net sales
proceeds received from the 1997 sale of the restaurant property in Tampa,
Florida, as a special distribution to the Limited Partners during 1998, as
described below. As of December 31, 1998, the average interest rate earned on
the rental income deposited in demand deposit accounts was approximately two
percent annually. The funds remaining at December 31, 1998, will be reinvested
in additional restaurant properties, distributed to the Limited Partners or
used for other Income Fund purposes, as described above.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who meet specified
financial standards minimizes the Income Fund's operating expenses. We believe
that the leases will continue to generate cash flow in excess of operating
expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution.
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Based on current and anticipated future cash from operations, and for the six
months ended June 30, 1998, proceeds received from the sales of restaurant
properties, the Income Fund declared distributions to the Limited Partners of
$1,000,000 and $2,838,327 for the six months ended June 30, 1999 and 1998,
respectively, or $500,000 for each of the quarters ended June 30, 1999 and
1998, respectively. This represents distributions for the six months ended June
30, 1999 and 1998 of $20.00 and $56.77 per unit, respectively, or $10.00 per
unit for each of the quarters ended June 30, 1999 and 1998. Distributions for
the six months ended June 30, 1998, included $1,838,327 as a result of the
distribution of net sales proceeds from the sale of restaurant properties. No
distributions were made to us for the quarters and six months ended June 30,
1999 and 1998. No amounts distributed to the Limited Partners for six months
ended June 30, 1999 and 1998 are required to be or have been treated by the
Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
Total liabilities of the Income Fund increased to $903,329 at June 30, 1999,
from $752,467 at December 31, 1998, partially due to the Income Fund accruing
transaction costs relating to the Acquisition. The increase in liabilities is
also partially a result of an increase in rents paid in advance and an increase
in amounts due to related parties at June 30, 1999, as compared to December 31,
1998. Liabilities at June 30, 1999, to the extent they exceed cash and cash
equivalents at June 30, 1999, excluding amounts held representing net sales
proceeds from the sale of restaurant properties and collections under the
promissory note, as described above, will be paid from future cash from
operations, or in the event we elect to make capital contributions, from future
contributions from us.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases of the Income Fund's restaurant properties are generally on a triple-net
basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based on current and anticipated future cash from operations, and for the
years ended December 31, 1998 and 1997, a portion of the sales proceeds
received from the sales of the restaurant properties, and for the years ended
December 31, 1997 and 1996, additional capital contributions from us, the
Income Fund declared distributions to the Limited Partners of $3,838,327,
$2,300,000, and $2,300,000 for the years ended December 31, 1998, 1997, and
1996, respectively. This represents distributions of $77, $46, and $46 per unit
for the years ended December 31, 1998, 1997, and 1996, respectively.
Distributions for 1998 included $1,838,327 as a result of the distribution of
net sales proceeds from the 1997 and 1998 sales of restaurant properties in
Tampa and Port Orange, Florida. This special distribution was effectively a
return of a portion of the Limited Partners' investment, although, in
accordance with the Income Fund agreement, it was applied to the Limited
Partners' unpaid cumulative preferred return. In deciding whether to sell
restaurant properties, we considered factors such as potential capital
appreciation, net cash flow, and federal income tax considerations. The reduced
number of restaurant properties for which the Income Fund receives rental
payments, as well as ongoing operations, reduced the Income Fund's revenues in
1998 and is expected to reduce the Income Fund's revenues in subsequent years.
The decrease in Income Fund revenues, combined with the fact that a significant
portion of the Income Fund's expenses are fixed in nature, resulted in a
decrease in cash distributions to the Limited Partners during 1998. No amounts
distributed or to be distributed to the Limited Partners for the years ended
December 1998, 1997, and 1996, are required to be or have been treated by the
Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions.
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $79,438, $77,353, and $113,560, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the
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Income Fund owed $128,548 and $109,367, respectively, to affiliates for such
amounts and accounting and administrative services. In addition, during 1998
and 1997, the Income Fund had incurred $65,400 and $34,500, respectively, in
real estate disposition fees due to an affiliate as a result of its services in
connection with the sale of the restaurant properties in St. Cloud, Port
Orange, and Tampa, Florida. The payment of such fees is deferred until the
Limited Partners have received the sum of their 10% Preferred Return and their
adjusted capital contributions. Other liabilities, including distributions
payable, decreased to $524,019 at December 31, 1998, from $831,100 at December
31, 1997, partially due to a decrease in construction costs payable as a result
of the payment during 1998, of construction costs accrued at December 31, 1997
for renovation costs relating to the Income Fund's restaurant property located
in Connorsville, Indiana, as described above. The decrease in liabilities is
also partially attributable to a decrease in distributions payable to the
Limited Partners at December 31, 1998 and a decrease in accrued real estate tax
expense relating to the restaurant properties in Belding and South Haven,
Michigan at December 31, 1998. Liabilities at December 31, 1998, to the extent
they exceed cash and cash equivalents, at December 31, 1998, will be paid from
future cash from operations, from amounts collected under the mortgage notes
described above or, in the event we elect to make additional capital
contributions, from future contributions from us.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund and its
consolidated joint venture, CNL/Longacre Joint Venture, owned and leased 22
wholly owned restaurant properties, including two restaurant properties which
were sold during 1998, and during the six months ended June 30, 1999, the
Income Fund and CNL/Longacre Joint Venture owned and leased 20 wholly owned
restaurant properties, including two restaurant properties which were sold in
March 1999, to operators of fast-food and family-style restaurant chains. In
connection with the restaurant properties, during the six months ended June 30,
1999 and 1998, the Income Fund, and CNL/Longacre Joint Venture, earned $667,285
and $713,849, respectively, in rental income from operating leases and earned
income from direct financing leases, $328,354 and $328,088 of which was earned
during the quarters ended June 30, 1999 and 1998, respectively. The decrease in
rental and earned income during the six months ended June 30, 1999, as compared
to the six months ended June 30, 1998, is partially attributable to a decrease
of approximately $39,600 as a result of the sales of the restaurant properties
during 1999, as described above in "Capital Resources," and 1998. The Income
Fund intends to reinvest the majority of the net sales proceeds in additional
restaurant properties.
Rental and earned income also decreased by approximately $8,900 during the
six months ended June 30, 1999 due to the fact that in August 1998, the tenant
of the restaurant property in Daleville, Indiana terminated the lease with the
Income Fund. The Income Fund is currently seeking a new tenant or purchaser for
this restaurant property.
The decrease in rental and earned income during the six months ended June
30, 1999, as compared to the six months ended June 30, 1998, was partially
offset by an increase of approximately $9,000 during the six months ended June
30, 1999, resulting from the Income Fund entering into a new lease for the
restaurant property in South Haven, Michigan during the six months ended June
30, 1998.
Rental and earned income during the quarters and six months ended June 30,
1999 and 1998, continued to remain at reduced amounts due to the fact that the
Income Fund is not receiving rental income relating to the restaurant
properties in Belding, Michigan and Lebanon, New Hampshire. Rental and earned
income are expected to remain at reduced amounts until such time as the Income
Fund executes new leases or until the restaurant properties are sold and these
proceeds from such sales are reinvested in additional restaurant
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properties. The Income Fund is currently seeking new tenants or purchasers for
these restaurant properties and the restaurant property in Daleville, Indiana,
as described above.
During the six months ended June 30, 1999 and 1998, the Income Fund also
owned and leased three restaurant properties indirectly through joint venture
arrangements, including one restaurant property in Halls Joint Venture which
was sold in June 1999, and two restaurant properties as tenants-in-common with
our affiliates. In connection therewith, during the six months ended June 30,
1999 and 1998, the Income Fund earned $229,265 and $72,103, respectively,
$172,427 and $36,882 of which were earned during the quarters ended June 30,
1999 and 1998, respectively. The increase in net income earned by these joint
ventures during the quarter and six months ended June 30, 1999, as compared to
the quarter and six months ended June 30, 1998, is primarily attributable to
the fact that in June 1999, Halls Joint Venture, in which the Income Fund owns
a 48.9% interest, recognized a gain of approximately $239,300 for financial
reporting purposes as a result of the sale of its restaurant property in June
1999, as described above in "Capital Resources." Because the joint venture
intends to reinvest the sales proceeds in an additional restaurant property,
the Income Fund does not anticipate that the sale of the restaurant property
will have a material adverse effect on operations. The increase during the
quarter and six months ended June 30, 1999 is also attributable to the fact
that in May 1998, the Income Fund reinvested net sales proceeds from the sale
of the restaurant property in Tyler, Texas, in RTO Joint Venture with one of
our affiliates.
During the six months ended June 30, 1999 and 1998, the Income Fund also
earned $101,974 and $164,856, respectively, in interest and other income,
$43,320 and $72,498 of which were earned during the quarters ended June 30,
1999 and 1998, respectively. The decrease during the quarter and six months
ended June 30, 1999 was partially attributable to a reduction in the interest
earned on the mortgage note accepted in connection with the sale of the
restaurant property located in St. Cloud, Florida due to the fact that the
Income Fund collected the remaining outstanding balance of the mortgage note
during the quarter and six months ended June 30, 1999, as described above in
"Capital Resources." Interest and other income was also lower during the
quarter and six months ended June 30, 1999, partially due to the fact that
during the quarter and six months ended June 30, 1998, the Income Fund earned
interest on the net sales proceeds relating to the sale of the restaurant
properties in Tyler, Texas and Port Orange, Florida, pending the reinvestment
of the net sales proceeds in additional restaurant properties.
During at least one of the six months ended June 30, 1999 and 1998, three
restaurant chains, Golden Corral Family Steakhouse Restaurants and Tony Roma's
Famous for Ribs Restaurant and Wendy's Old Fashioned Hamburger Restaurants,
each accounted for more than ten percent of the Income Fund's total rental,
earned and mortgage interest income, including rental and earned income from
the Income Fund's consolidated joint venture, the Income Fund's share of the
rental and earned income from restaurant properties owned by unconsolidated
joint ventures and restaurant properties owned with our affiliates as tenants-
in-common. It is anticipated that Golden Corral and Tony Roma's will continue
to account for more than ten percent of the total rental income to which the
Income Fund is entitled under the terms of its leases for the remainder of
1999. Any failure of these restaurant chains could materially affect the Income
Fund's income if the Income Fund is not able to re-lease the restaurant
properties in a timely manner.
Operating expenses, including depreciation expense, were $327,842 and
$249,333 for the six months ended June 30, 1999 and 1998, respectively, of
which $176,992 and $125,144 were incurred for the quarters ended June 30, 1999
and 1998, respectively. The increase in operating expenses during the quarter
and six months ended June 30, 1999, as compared to the quarter and six months
ended June 30, 1998, was primarily attributable to the fact that the Income
Fund incurred $59,718 and $91,188 during the quarter and six months ended June
30, 1999, respectively, in transaction costs relating to our retaining
financial and legal advisors to assist us in evaluating and negotiating the
Acquisition with APF. If the Limited Partners reject the Acquisition, the
Income Fund will bear the portion of the transaction costs based on the
percentage of "For" votes and we will bear the portion of the transaction costs
based on the percentage of "Against" votes and abstentions.
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Due to tenant defaults under the terms of the lease arrangements for the
restaurant properties in Belding, Michigan, Daleville, Indiana, and Lebanon,
New Hampshire, the Income Fund and its consolidated joint venture, CNL/Longacre
Joint Venture, have incurred and expects to continue to incur operating
expenses such as repairs and maintenance, insurance, and real estate tax
expenses, relating to these restaurant properties until the restaurant
properties are sold or re-leased to new tenants.
As a result of the sale of the restaurant properties in Myrtle Beach, South
Carolina and St. Cloud, Florida in 1995 and 1996, respectively, and recording
the gains from such sales using the installment method, the Income Fund
recognized gains for financial reporting purposes of $181,919 and $1,783 during
the six months ended June 30, 1999 and 1998, respectively, $309 and $992 of
which were recognized during the quarters ended June 30, 1999 and 1998,
respectively. The increase in the gain recognized during the six months ended
June 30, 1999, as compared to the six months ended June 30, 1998, and the
decrease during the quarter ended June 30, 1999, is due to the fact that during
the six months ended June 30, 1999, the Income Fund collected the remaining
outstanding balance relating to the promissory note collateralized by a
restaurant property in St. Cloud, Florida, as described above in "Capital
Resources," which resulted in the recognition of the remaining deferred gain
for financial reporting purposes.
As a result of the 1999 sales of the restaurant properties as described
above in "Capital Resources," and the 1998 sales of the restaurant properties
in Port Orange, Florida and Tyler, Texas, the Income Fund recognized total
gains of $213,503 and $440,822, for financial reporting purposes during the six
months ended June 30, 1999 and 1998, respectively.
During the quarter and six months ended June 30, 1998, the Income Fund
established an allowance for loss on land and building of $152,633 for
financial reporting purposes relating to the restaurant property in Belding,
Michigan, which is vacant and which the Income Fund has not successfully re-
leased. The loss represents the difference between the restaurant property's
carrying value at June 30, 1998 and the current estimate of net realizable
value at June 30, 1998. No additional allowance was deemed necessary for the
quarter and six months ended June 30, 1999.
The Years Ended December 31, 1998, 1997 and 1996
During 1996, the Income Fund and its consolidated joint venture, CNL/Long
Acre Joint Venture, owned and leased 26 wholly owned restaurant properties,
including one restaurant property in St. Cloud, Florida that was sold in
October 1996, during 1997, the Income Fund owned 27 wholly owned restaurant
properties, including six restaurant properties that were sold during the year
ended December 31, 1997, and during 1998, the Income Fund owned 21 wholly owned
restaurant properties, including two restaurant properties that were sold
during 1998. In addition, during 1998, 1997, and 1996, the Income Fund and its
consolidated joint venture, CNL/Long Acre Joint Venture, was a co-venturer in
three separate joint ventures that each owned and leased one restaurant
property. During 1997, the Income Fund and its consolidated joint venture,
CNL/Long Acre Joint Venture, owned and leased two restaurant properties, with
certain of our affiliates, as tenants-in-common. In addition, during 1998, the
Income Fund and its consolidated joint venture, CNL/Long Acre Joint Venture,
was also a co-venturer in a joint venture that owns one restaurant property. As
of December 31, 1998, the Income Fund owned, either directly or through joint
venture arrangements, 22 restaurant properties which are, in general, subject
to long-term, triple-net leases. The leases of the restaurant properties
provide for minimum base annual rental amounts, payable in monthly
installments, ranging from approximately $38,500 to $222,800. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount to be paid annually. In addition, a majority of the leases provide that,
commencing in the sixth lease year, the percentage rent will be an amount equal
to the greater of (i) the percentage rent calculated under the lease formula or
(ii) a specified percentage ranging from one-fourth to five percent of the
purchase price paid by the Income Fund for the restaurant property.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
and its consolidated joint venture, CNL/Longacre Joint Venture, earned
$1,367,303, $1,500,967, and $1,931,573, respectively, in rental
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income from operating leases and earned income from direct financing leases.
The decrease in rental and earned income during the year ended December 31,
1998 and 1997, each as compared to the previous year, was partially
attributable to a decrease of approximately $506,900 and $322,300,
respectively, as a result of the sale of several restaurant properties, as
described above in "Capital Resources." During 1998 and 1997, the decrease in
rental income was partially offset by increases of approximately $299,900 and
$24,700 due to the reinvestment of net sales proceeds in various restaurant
properties during 1998 and 1997, as described above in "Capital Resources".
Rental and earned income also decreased during 1998, as compared to 1997 and
1996, by approximately $39,100, due to the fact that in August 1998, the Income
Fund terminated the lease with the tenant of the restaurant property in
Daleville, Indiana due to financial difficulties the tenant is experiencing.
The Income Fund is currently seeking a new tenant or purchaser for this
restaurant property. The Income Fund will not recognize any rental income
relating to this restaurant property until such time as the Income Fund
executes a new lease or until the restaurant property is sold and the proceeds
from such sale is reinvested in an additional restaurant property.
The decrease in rental and earned income during 1998, as compared to 1997,
was partially offset by, and the decrease in 1997, as compared to 1996, was
partially attributable to the Income Fund increasing its allowance for doubtful
accounts during 1997, by approximately $57,700 for rental and other amounts
relating to the Hardee's restaurant properties located in Connorsville and
Richmond, Indiana, which were leased by the same tenant, due to financial
difficulties the tenant was experiencing. Rental and earned income decreased by
approximately $79,200 during 1997 due to the fact that the Income Fund
terminated the lease with the former tenant of these restaurant properties in
June 1997 and we agreed that they will cease collection efforts on past due
rental amounts once the former tenant of these restaurant properties pays all
amounts due under the promissory note for past due real estate taxes described
above in "Capital Resources." No such allowance was established during 1998 due
to the fact that the Income Fund (i) re-leased the restaurant property located
in Connorsville, Indiana, to a new tenant who began operating the restaurant
property after it was renovated into an Arby's restaurant property and (ii)
sold the restaurant property located in Richmond, Indiana, in November 1997, as
described above in "Capital Resources."
In October 1995, the tenant ceased operations of the restaurant property in
South Haven, Michigan. In connection therewith, in June 1997, the Income Fund
incurred renovation costs to convert the restaurant property into an Arby's
restaurant and entered into an operating agreement. In March 1998, the Income
Fund entered into a new lease for this restaurant property, as described above
in "Capital Resources," and earned approximately $40,200 and $5,100 in rental
income during 1998 and 1997, respectively.
Rental and earned income in 1998, 1997, and 1996, continued to remain at
reduced amounts due to the fact that the Income Fund is not receiving any
rental income from the restaurant properties in Belding, Michigan and Lebanon,
New Hampshire, as a result of the tenants defaulting under the terms of their
leases and ceasing operations of the restaurants on the restaurant properties
during 1995.
For the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $133,179, $233,663, and $130,167, respectively, in contingent rental
income. The decrease in contingent rental income during 1998, as compared to
1997, is partially attributable to, and the increase in contingent rental
income during 1997, as compared to 1996, is primarily due to, amounts collected
which represented a percentage of the net operating income generated by the
restaurant under the operating agreement with the new operator of the
restaurant property located in South Haven, Michigan. In March 1998, the Income
Fund entered into a new lease for the restaurant property in South Haven,
Michigan, with this operator. The decrease during 1998, as compared to 1997, is
also partially attributable to sales of restaurant properties, whose leases
required the payment of contingent rents.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $282,795, $302,503, and $147,804, respectively, in interest and other
income. The increase in interest income during 1997, as
S-35
<PAGE>
compared to 1996, was primarily attributable to the interest earned on the
mortgage note receivable accepted in connection with the sale of the restaurant
property in St. Cloud, Florida in October 1996. In addition, interest income
increased during 1997 due to interest earned on the net sales proceeds received
relating to the sales of several restaurant properties.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $173,941, $56,015, and $46,452, respectively, attributable
to net income earned by unconsolidated joint ventures in which the Income Fund
is a co-venturer. The increase in net income earned by joint ventures during
1998, as compared to 1997, is primarily attributable to the fact that during
1998, the Income Fund reinvested a portion of the net sales proceeds it
received from the 1997 and 1998 sales of several restaurant properties in a
restaurant property with certain of our affiliates, as tenants-in-common and
acquired an interest in RTO Joint Venture with one of our affiliates, as
described above in "Capital Resources." The increase in net income earned by
joint ventures during 1997, as compared to 1996, is primarily attributable to
the fact that in October 1997, the Income Fund acquired an interest in a
restaurant property with affiliates as tenants-in-common, as described above in
"Capital Resources."
During the year ended December 31, 1998, one lessee of the Income Fund and
its consolidated joint venture, Golden Corral Corporation contributed more than
ten percent of the Income Fund's total rental and mortgage interest income,
including rental income from the Income Fund's consolidated joint venture and
the Income Fund's share of the rental income from three restaurant properties
owned by unconsolidated joint ventures and two restaurant properties owned with
affiliates as tenants-in-common. As of December 31, 1998 Golden Corral
Corporation was the lessee under leases relating to two restaurants. In
addition, two restaurant chains, Golden Corral and Wendy's Old Fashioned
Hamburger Restaurants, each accounted for more than ten percent of the Income
Fund's total rental and mortgage interest income during 1998, including rental
income from the Income Fund's consolidated joint venture and the Income Fund's
share of the rental income from three restaurant properties owned by
unconsolidated joint ventures and two restaurant properties owned with
affiliates as tenants-in-common.
Operating expenses, including depreciation and amortization expense, were
$520,292, $574,472, and $631,565 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998 and
1997, each as compared to the previous year, was partially attributable to a
decrease in depreciation expense as a result of the sales of restaurant
properties in 1998, 1997, and 1996, as described above in "Capital Resources."
The decrease in operating expenses during 1998, as compared to 1997, is
partially offset by the fact that the Income Fund incurred $14,644 in
transaction costs related to us retaining financial and legal advisors to
assist us in evaluating and negotiating the Acquisition.
In connection with the sale of its restaurant properties in St. Cloud,
Florida and Myrtle Beach, South Carolina, during 1997 and 1996, respectively,
as described above in "Capital Resources," the Income Fund recognized a gain
for financial reporting purposes of $3,291, $1,362, and $19,369 for the years
ended December 31, 1998, 1997, and 1996, respectively. In accordance with
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate," the Income Fund recorded the sales using the installment sales
method. As such, the gain on the sales was deferred and is being recognized as
income proportionately as payments under the mortgage notes are collected.
Therefore, the balance of the deferred gain of $319,866 at December 31, 1998,
will be recognized as income in future periods as payments are collected. For
federal income tax purposes, gains of approximately $194,100 and $136,900 from
the sale of the restaurant properties in St. Cloud, Florida, and Myrtle Beach,
South Carolina, respectively, were also deferred and are being recognized as
payments under the mortgage notes are collected.
As a result of the sales of several restaurant properties as described above
in "Capital Resources," the Income Fund recognized gains totalling $440,822 and
$549,516 during 1998 and 1997, respectively, for financial reporting purposes.
The gains for 1997, were partially offset by a loss of $141,567 for financial
reporting purposes, resulting from the November 1997 sale of the restaurant
property in Richmond, Indiana, as described above in "Capital Resources."
S-36
<PAGE>
During 1998 and 1997, the Income Fund established allowances for loss on
land and buildings of $403,157 and $250,694, respectively, for financial
reporting purposes, relating to restaurant properties which became vacant and
for which the Income Fund has not successfully re-leased. The allowances
represent the difference between the net carrying value at December 31, 1998
and 1997, and their current estimated net realizable values.
At December 31, 1996, the Income Fund established an allowance for loss on
land and building in the amount of $169,463 for its restaurant property in
Franklin, Tennessee, for financial reporting purposes. The allowance
represented the difference between (i) the restaurant property's carrying value
at December 31, 1996, plus the additional rental income, accrued rental income,
that the Income Fund had recognized since inception of the lease relating to
the straight-lining of future scheduled rent increases minus (ii) $960,741
received as net sales proceeds in conjunction with the sale of the restaurant
property in January 1997, as described above in "Capital Resources."
In addition, during 1996, the Income Fund established an allowance for loss
on land and building for its restaurant property in Richmond, Indiana. The
allowance of $70,062 represented the difference between the restaurant
property's carrying value at December 31, 1996, and the estimated fair value of
the restaurant property based on an anticipated sales price of this restaurant
property. This restaurant property was sold in November 1997, as described
above in "Capital Resources."
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we believe mitigate the adverse effect
of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K
S-37
<PAGE>
Team consists of us and members from our affiliates, including representatives
from senior management, information systems, telecommunications, legal, office
management, accounting and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under
S-38
<PAGE>
long-term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be
S-39
<PAGE>
assured that the tenants have addressed all possible year 2000 issues. The late
payment of rent by one or more tenants would affect the results of operations
of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
Interest Rate Risk
The Income Fund has provided fixed rate mortgage notes to borrowers. We
believe that the estimated fair value of the mortgage notes at December 31,
1998 approximated the outstanding principal amounts. The Income Fund is exposed
to equity loss in the event of changes in interest rates. The following table
presents the expected cash flows of principal that are sensitive to these
changes.
<TABLE>
<CAPTION>
Mortgage notes
Fixed Rates
--------------
<S> <C>
1999............................................................. $ 26,987
2000............................................................. 1,042,574
2001............................................................. 50,615
2002............................................................. 56,332
2003............................................................. 62,696
Thereafter....................................................... 810,777
----------
$2,049,981
==========
</TABLE>
S-40
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-8
Balance Sheets as of December 31, 1998 and 1997........................... F-9
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-10
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-13
Unaudited Pro Forma Financial Information................................. F-24
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-25
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-27
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-29
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-31
Unaudited Pro Forma Statement of Cash Flows for the Year Ended
December 31, 1998........................................................ F-33
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-35
</TABLE>
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,879,306 and
$1,895,755, respectively and allowance for loss on
land and buildings of $653,851 in 1999 and 1998...... $ 9,635,693 $10,660,128
Net investment in direct financing leases............. 1,690,306 1,708,966
Investment in joint ventures.......................... 2,392,506 2,282,012
Mortgage notes receivable, less deferred gain......... 872,380 1,748,060
Cash and cash equivalents............................. 2,393,763 352,648
Receivables, less allowance for doubtful accounts of
$140,973 and $141,505, respectively.................. 36,368 87,490
Prepaid expenses...................................... 7,068 1,872
Accrued rental income................................. 270,021 239,963
Other assets.......................................... 54,346 54,346
----------- -----------
$17,352,451 $17,135,485
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 75,710 $ 7,546
Accrued and escrowed real estate taxes payable........ 20,068 10,361
Distributions payable................................. 500,000 500,000
Due to related parties................................ 284,333 228,448
Rents paid in advance................................. 23,218 6,112
----------- -----------
Total liabilities................................. 903,329 752,467
Commitments and Contingencies (Note 5)
Minority interest..................................... 146,744 155,916
Partners' capital..................................... 16,302,378 16,227,102
----------- -----------
$17,352,451 $17,135,485
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- ---------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................ $282,637 $285,286 $ 575,685 $ 611,506
Earned income from direct financing
leases............................ 45,717 42,802 91,600 102,343
Interest and other income.......... 43,320 72,498 101,974 164,856
-------- -------- ---------- ----------
371,674 400,586 769,259 878,705
-------- -------- ---------- ----------
Expenses:
General operating and
administrative.................... 34,888 38,763 71,002 77,317
Bad debt expense................... -- 5,882 -- 5,882
Professional services.............. 13,190 6,061 18,582 10,079
Real estate taxes.................. 8,682 9,756 16,487 16,420
State and other taxes.............. 447 1,911 6,404 9,658
Depreciation....................... 60,067 62,771 124,179 129,977
Transaction costs.................. 59,718 -- 91,188 --
-------- -------- ---------- ----------
176,992 125,144 327,842 249,333
======== ======== ========== ==========
Income Before Minority Interest in
Loss of Consolidated Joint Venture,
Equity in Earnings of Unconsolidated
Joint Ventures, Gain on Sale of
Land and Buildings and Provision for
Loss on Land and Building........... 194,682 275,442 441,417 629,372
Minority Interest in Loss of Consoli-
dated Joint Venture................. 4,787 4,033 9,172 9,450
Equity in Earnings of Unconsolidated
Joint Ventures...................... 172,427 36,882 229,265 72,103
Gain on Sale of Land and Buildings... 309 992 395,422 442,605
Provision for Loss on Land and Build-
ing................................. -- (152,633) -- (152,633)
-------- -------- ---------- ----------
Net Income........................... $372,205 $164,716 $1,075,276 $1,000,897
======== ======== ========== ==========
Allocation of Net Income:
General partners................... $ 3,722 $ (734) $ 9,157 $ 6,355
Limited partners................... 368,483 165,450 1,066,119 994,542
-------- -------- ---------- ----------
$372,205 $164,716 $1,075,276 $1,000,897
======== ======== ========== ==========
Net Income Per Limited Partner Unit.. $ 7.37 $ 3.31 $ 21.32 $ 19.89
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........... 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 503,730 $ 493,982
Net income..................................... 9,157 9,748
----------- -----------
512,887 503,730
----------- -----------
Limited partners:
Beginning balance.............................. 15,723,372 18,026,552
Net income..................................... 1,066,119 1,535,147
Distributions ($20.00 and $76.77 per limited
partner unit, respectively)................... (1,000,000) (3,838,327)
----------- -----------
15,789,491 15,723,372
----------- -----------
Total partners' capital.......................... $16,302,378 $16,227,102
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities............. $ 879,145 $ 812,900
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings............. 1,113,759 2,125,220
Additions to land and building on operating lease.... -- (125,000)
Investment in joint venture.......................... -- (437,308)
Collections on mortgage note receivable.............. 1,048,211 10,684
---------- ----------
Net cash provided by investing activities........... 2,161,970 1,573,596
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................... (1,000,000) (2,913,327)
---------- ----------
Net cash used in financing activities............... (1,000,000) (2,913,327)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... 2,041,115 (526,831)
Cash and Cash Equivalents at Beginning of Period....... 352,648 1,361,290
---------- ----------
Cash and Cash Equivalents at End of Period............. $2,393,763 $ 834,459
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period.............................. $ -- $ 65,400
========== ==========
Distributions declared and unpaid at end of period.... $ 500,000 $ 500,000
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
V, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 66.5% interest in CNL/Longacre Joint
Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
2. Land and Buildings on Operating Leases:
During the six months ended June 30, 1999, the Partnership sold its
properties in Endicott and Ithaca, New York, to the tenant for a total of
$1,125,000 and received net sales proceeds of $1,113,759 resulting in a total
gain of $213,503 for financial reporting purposes. These properties were
originally acquired by the Partnership in December 1989 and had costs totaling
approximately $942,600, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these properties for a
total of approximately $171,200 in excess of their original purchase prices.
F-5
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
3. Investment in Joint Ventures:
In June 1999, Halls Joint Venture, in which the Partnership owns a 48.9%
interest, sold its property to the tenant, in accordance with the purchase
option under the lease agreement, for $891,915. This resulted in a gain to the
joint venture of approximately $239,300 for financial reporting purposes. The
property was originally contributed to Halls Joint Venture in February 1990 and
had a total cost of approximately $672,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $219,900 in excess of its original purchase price.
The following presents the combined, condensed financial information for all of
the Partnership's investments in joint ventures at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $4,188,675 $4,812,568
Net investment in direct financing lease.......... 813,268 817,525
Cash.............................................. 16,469 17,992
Restricted cash................................... 887,114 --
Receivables....................................... 46 5,168
Prepaid expenses.................................. 498 458
Accrued rental income............................. 76,713 112,279
Liabilities....................................... 44,127 46,398
Partners' capital................................. 5,938,656 5,719,592
Revenues.......................................... 326,204 555,103
Gain on sale of property.......................... 239,336 --
Net income........................................ 513,794 454,922
</TABLE>
The Partnership recognized income totaling $229,265 and $72,103 for the six
months ended June 30, 1999 and 1998, respectively, from these joint venture,
$172,427 and $36,882 of which was earned during the quarters ended June 30,
1999 and 1998, respectively.
4. Mortgage Notes Receivable:
As of December 31, 1998, the Partnership had accepted two promissory notes
in connection with the sale of two of its properties. During the six months
ended June 30, 1999, the Partnership collected the outstanding balance of
$1,043,770 relating to the promissory note accepted in connection with the sale
of the property in St. Cloud, Florida, and in connection therewith, the
Partnership recognized the remaining gain of $181,610 relating to this
property, in accordance with Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate."
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,024,516 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public
F-6
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $20,212,956 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
6. Concentration of Credit Risk:
The following schedule presents total rental, earned, and mortgage interest
income from individual lessees and borrowers, each representing more than ten
percent of the Partnership's total rental, earned, and mortgage interest income
(including the Partnership's share of total rental and earned income from joint
ventures and properties held as tenants-in-common with affiliates), for each of
the six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Golden Corral............................................. $97,756 $97,756
Tony Roma's............................................... 92,190 92,735
Wendy's Old Fashioned Hamburger Restaurants............... N/A 86,336
</TABLE>
The information denoted by N/A indicates that for the applicable period
presented, the chain did not represent more than ten percent of the
Partnership's total rental, earned, and mortgage interest income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains, could
significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-7
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund V, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund V, Ltd. (a Florida
limited partnership) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 18, 1999, except for Note 12 for which the date is March 11, 1999 and
Note 13 for which the date is June 3, 1999
F-8
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings.................................... $10,660,128 $12,421,143
Net investment in direct financing leases.............. 1,708,966 2,277,481
Investment in joint ventures........................... 2,282,012 1,558,709
Mortgage notes receivable, less deferred gain.......... 1,748,060 1,758,167
Cash and cash equivalents.............................. 352,648 1,361,290
Receivables, less allowance for doubtful accounts of
$141,505 and $137,892................................. 87,490 108,261
Prepaid expenses....................................... 1,872 9,307
Accrued rental income.................................. 239,963 169,726
Other assets........................................... 54,346 54,346
----------- -----------
$17,135,485 $19,718,430
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 7,546 $ 24,229
Accrued construction costs payable..................... -- 125,000
Accrued and escrowed real estate taxes payable......... 10,361 93,392
Distributions payable.................................. 500,000 575,000
Due to related parties................................. 228,448 143,867
Rents paid in advance and deposits..................... 6,112 13,479
----------- -----------
Total liabilities.................................. 752,467 974,967
Minority interest...................................... 155,916 222,929
Partners' capital...................................... 16,227,102 18,520,534
----------- -----------
$17,135,485 $19,718,430
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Earned income from direct financing
leases.................................. $1,168,301 $1,343,833 $1,746,021
Rental income from operating leases...... 199,002 157,134 185,552
Contingent rental income................. 133,179 233,663 130,167
Interest and other income................ 282,795 302,503 147,804
---------- ---------- ----------
1,783,277 2,037,133 2,209,544
---------- ---------- ----------
Expenses:
General operating and administrative..... 166,878 166,346 178,991
Professional services.................... 20,542 23,172 22,605
Bad debt expense......................... 5,882 9,007 --
Real estate taxes........................ 35,434 39,619 40,711
State and other taxes.................... 9,658 11,897 12,492
Depreciation and amortization............ 267,254 324,431 376,766
Transaction costs........................ 14,644 -- --
---------- ---------- ----------
520,292 574,472 631,565
---------- ---------- ----------
Income Before Minority Interest in Loss of
Consolidated Joint Venture, Equity in
Earnings Of Unconsolidated Joint Ventures,
Gain on Sale of Land and Buildings and
Provision for Loss on Land and Buildings.. 1,262,985 1,462,661 1,577,979
Minority interest in Loss of Consolidated
Joint Venture............................. 67,013 54,622 23,884
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 173,941 56,015 46,452
Gain on Sale of Land and Buildings......... 444,113 409,311 19,369
Provision for Loss on Land and Buildings .. (403,157) (250,694) (239,525)
---------- ---------- ----------
Net Income................................. $1,544,895 $1,731,915 $1,428,159
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 9,748 $ 11,809 $ 12,513
Limited partners......................... 1,535,147 1,720,106 1,415,646
---------- ---------- ----------
$1,544,895 $1,731,915 $1,428,159
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 30.70 $ 34.40 $ 28.31
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $ 77,500 $126,460 $25,000,000 $(15,168,240) $12,524,040 $(2,865,000) $19,694,760
Contributions from
general partner........ 159,700 -- -- -- -- -- 159,700
Distributions to limited
partners ($46 per
limited partner unit).. -- -- -- (2,300,000) -- -- (2,300,000)
Net income.............. -- 12,513 -- -- 1,415,646 -- 1,428,159
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 237,200 138,973 25,000,000 (17,468,240) 13,939,686 (2,865,000) 18,982,619
Contributions from
general partner........ 106,000 -- -- -- -- -- 106,000
Distributions to limited
partners ($46 per
limited partner unit).. -- -- -- (2,300,000) -- -- (2,300,000)
Net income.............. -- 11,809 -- -- 1,720,106 -- 1,731,915
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 343,200 150,782 25,000,000 (19,768,240) 15,659,792 (2,865,000) 18,520,534
Distributions to limited
partners ($77 per
limited partner unit).. -- -- -- (3,838,327) -- -- (3,838,327)
Net income.............. -- 9,748 -- -- 1,535,147 -- 1,544,895
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $343,200 $160,530 $25,000,000 $(23,606,567) $17,194,939 $(2,865,000) $16,227,102
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 1,490,412 $ 1,771,467 $ 2,083,722
Distributions from unconsolidated joint
ventures.............................. 215,839 53,176 53,782
Cash paid for expenses................. (331,363) (305,341) (161,730)
Interest received...................... 274,847 293,929 127,971
----------- ----------- -----------
Net cash provided by operating
activities........................... 1,649,735 1,813,231 2,103,745
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. 2,125,220 5,271,796 100,000
Additions to land and buildings on
operating leases...................... (125,000) (1,900,790) --
Investment in direct financing leases.. -- (911,072) --
Investment in joint ventures........... (765,201) (1,090,062) --
Collections on mortgage notes
receivable............................ 19,931 9,265 6,712
Other.................................. -- -- (26,287)
----------- ----------- -----------
Net cash provided by investing
activities........................... 1,254,950 1,379,137 80,425
----------- ----------- -----------
Cash Flows from Financing Activities:
Contributions from general partner..... -- 106,000 159,700
Distributions to limited partners...... (3,913,327) (2,300,000) (2,300,000)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,913,327) (2,194,000) (2,140,300)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (1,008,642) 998,368 43,870
Cash and Cash Equivalents at Beginning
of Year................................ 1,361,290 362,922 319,052
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 352,648 $ 1,361,290 $ 362,922
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 1,544,895 $ 1,731,915 $ 1,428,159
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense....................... 5,882 9,007 --
Depreciation........................... 267,254 324,431 376,766
Minority interest in loss of
consolidated joint venture............ (67,013) (54,622) (23,884)
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 41,898 (2,839) 7,330
Gain on sale of land and buildings..... (444,113) (409,311) (19,369)
Provisions for loss on land and
buildings............................. 403,157 250,694 239,525
Decrease in net investment in direct
financing leases...................... 38,017 42,682 46,387
Decrease (increase) in accrued interest
on mortgage note receivable........... (6,533) 6,788 (9,414)
Decrease (increase) in receivables..... 17,333 (43,006) 10,270
Decrease in prepaid expenses........... 7,435 1,109 1,505
Increase in accrued rental income...... (70,237) (19,527) (27,875)
Increase (decrease) in accounts payable
and accrued expenses.................. (100,554) (12,509) 32,032
Increase (decrease) in due to related
parties............................... 19,181 (13,322) 59,945
Increase (decrease) in rents paid in
advance and deposits.................. (6,867) 1,741 (17,632)
----------- ----------- -----------
Total adjustments..................... 104,840 81,316 675,586
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 1,649,735 $ 1,813,231 $ 2,103,745
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted in connection
with sale of land and buildings....... $ -- $ -- $ 1,057,299
=========== =========== ===========
Deferred real estate disposition fees
incurred and unpaid at end of year.... $ 65,400 $ -- $ 34,500
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 500,000 $ 575,000 $ 575,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund V, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income are
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-13
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its 66.5%
interest in CNL/Longacre Joint Venture, a Florida general partnership, using
the consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership accounts for its interest in Cocoa Joint Venture, Halls
Joint Venture, RTO Joint Venture and a property in each of Mesa, Arizona and
Vancouver, Washington, held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and properties.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of estimates relate to
the allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases;
F-14
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
however, some leases have been classified as direct financing leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $ 5,352,136 $ 6,069,665
Buildings....................................... 7,857,598 8,546,530
----------- -----------
13,209,734 14,616,195
Less accumulated depreciation................... (1,895,755) (1,944,358)
----------- -----------
11,313,979 12,671,837
Less allowance for loss on land and buildings... (653,851) (250,694)
----------- -----------
$10,660,128 $12,421,143
=========== ===========
</TABLE>
In January 1997, the Partnership sold its property in Franklin, Tennessee,
to the tenant for $980,000 and received net sales proceeds of $960,741. Since
the Partnership had established an allowance for loss on land and building as
of December 31, 1996, no loss was recognized during 1997 as a result of the
sale. The Partnership used $360,000 of the net sales proceeds to pay
liabilities of the Partnership, including quarterly distributions to the
limited partners.
In June 1997, the Partnership entered into an operating agreement for the
property located in South Haven, Michigan, with an operator to operate the
property as an Arby's restaurant. In connection therewith, the Partnership used
approximately $120,400 of the net sales proceeds from the sale of the property
in Franklin, Tennessee, for conversion costs associated with the Arby's
property. The Partnership reinvested the majority of the remaining net sales
proceeds in additional properties.
During 1997, the Partnership sold its properties in Salem, New Hampshire;
Port St. Lucie, Florida; and Tampa, Florida for a total of $3,365,172 and
received net sales proceeds totalling $3,291,566 resulting in a total gain of
$447,521 for financial reporting purposes. These properties were originally
acquired by the Partnership in 1989 and had total costs of approximately
$2,934,400, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the properties for approximately $357,300 in
excess of their original purchase prices. The Partnership reinvested the
majority of net sales proceeds in additional properties.
In November 1997, the Partnership sold its property in Richmond, Indiana, to
a third party for $400,000 and received net sales proceeds of $385,179. As a
result of this transaction, the Partnership recognized a loss of $141,567 for
financial reporting purposes. In December 1997, the Partnership reinvested the
net sales proceeds in a property located in Vancouver, Washington, as tenants-
in-common with affiliates of the general partners (see Note 5).
F-15
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1998, the Partnership sold its properties
in Port Orange, Florida, and Tyler, Texas to the tenants for a total of
$2,180,000 and received net sales proceeds totalling $2,125,220, resulting in a
total gain of $440,822 for financial reporting purposes. These properties were
originally acquired by the Partnership in 1988 and 1989 and had costs totaling
approximately $1,791,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these properties for a
total of approximately $333,900 in excess of their original purchase prices. In
connection with the sale of the properties, the Partnership incurred deferred,
subordinated, real estate disposition fees of $65,400 (see Note 10).
In July 1997, the Partnership entered into a new lease for the property in
Connorsville, Indiana, with a new tenant to operate the property as an Arby's
restaurant. In connection therewith, during 1998, the Partnership paid $125,000
in renovation costs.
In 1997, the Partnership established an allowance for loss on land and
buildings of $250,694, for financial reporting purposes, relating to the
properties in Belding, Michigan and Lebanon, New Hampshire. Due to the fact
that the Partnership has not been able to successfully re-lease these
properties, the Partnership increased the allowance by $155,612 for the
property in Belding, Michigan, and $122,875 for the property in Lebanon, New
Hampshire, owned by the Partnership's consolidated joint venture, CNL/Longacre
Joint Venture at December 31, 1998. In addition, at December 31, 1998, the
Partnership established an allowance for loss on land and building of $124,670
relating to the property located in Daleville, Indiana, due to the fact that
the tenant terminated the lease with the Partnership. The allowances represent
the difference between the net carrying values of the properties at December
31, 1998 and current estimates of net realizable values for these properties.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $70,237, $19,527, and
$27,875, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,087,538
2000........................................................... 1,101,658
2001........................................................... 1,075,591
2002........................................................... 987,031
2003........................................................... 999,957
Thereafter..................................................... 8,250,965
-----------
$13,502,740
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant gross sales.
F-16
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Minimum lease payments receivable.................. $3,260,110 $4,213,033
Estimated residual values.......................... 566,502 806,792
Less unearned income............................... (2,117,646) (2,742,344)
---------- ----------
Net investment in direct financing leases.......... $1,708,966 $2,277,481
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 220,518
2000............................................................ 220,518
2001............................................................ 220,518
2002............................................................ 220,518
2003............................................................ 220,518
Thereafter...................................................... 2,157,520
----------
$3,260,110
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
In May 1997, the Partnership sold its property in Smyrna, Tennessee, to a
third party for $655,000 and received net sales proceeds of $634,310, resulting
in a gain of $101,995 for financial reporting purposes. This property was
originally acquired by the Partnership in March 1989 and had a cost of
approximately $569,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $64,800 in excess of its original purchase price. The Partnership
used approximately $82,500 of the net sales proceeds to pay liabilities of the
Partnership, including quarterly distributions to the limited partners. In
addition, the Partnership reinvested the remaining net sales proceeds in
additional properties as tenants-in-common with affiliates of the general
partners.
In June 1998, the Partnership terminated its lease with the tenant of the
property in Daleville, Indiana. As a result, the Partnership reclassified these
assets from net investment in direct financing lease to land and building on
operating lease. In accordance with Statement of Financial Accounting Standards
#13, "Accounting for Leases," the Partnership recorded the reclassified assets
at the lower of original cost, present fair value, or present carrying value.
No loss on termination of direct financing lease was recorded for financial
reporting purposes.
5. Investment in Joint Ventures:
As of December 31, 1998, the Partnership had a 43 percent and a 48.9%
interest in the profits and losses of Cocoa Joint Venture and Halls Joint
Venture, respectively. The remaining interests in these joint ventures are held
by affiliates of the Partnership which have the same general partners.
F-17
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In October 1997, the Partnership used a portion of the net sales proceeds
from the sale of the Property in Smyrna, Tennessee to acquire a property in
Mesa, Arizona, as tenants-in-common with an affiliate of the general partners.
The Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 42.09% interest in this property.
In addition, in December 1997, the Partnership used some or all of the net
sales proceeds from the sales of the Properties in Franklin, Tennessee;
Richmond, Indiana, and Smyrna, Tennessee to acquire a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 27.78% interest in this property.
In May, 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. Construction was completed and rent commenced in
December 1998. As of December 31, 1998, the Partnership had contributed
$766,746 to the joint venture. The Partnership holds a 53.12% interest in the
profits and losses of the joint venture. The Partnership accounts for its
investment in this joint venture under the equity method since the Partnership
shares control with an affiliate.
Cocoa Joint Venture, Halls Joint Venture, RTO Joint Venture and the
Partnership and affiliates as tenants-in-common in two separate tenancy-in-
common arrangements, each own and lease one property to an operator of national
fast-food or family-style restaurants.
The following presents the combined condensed financial information for all
of the Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $4,812,568 $4,277,972
Net investment in direct financing lease............ 817,525 --
Cash................................................ 17,992 24,994
Receivables......................................... 5,168 4,417
Prepaid expenses.................................... 458 270
Accrued rental income............................... 112,279 68,819
Liabilities......................................... 46,398 1,250
Partners' capital................................... 5,719,592 4,375,222
Revenues............................................ 555,103 151,242
Net income.......................................... 454,922 121,605
</TABLE>
The Partnership recognized income totaling $173,941, $56,015, and $46,452
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Mortgage Notes Receivable:
In connection with the sale in 1995 of its property in Myrtle Beach, South
Carolina, the Partnership accepted a promissory note in the principal sum of
$1,040,000, collateralized by a mortgage on the property. The promissory note
bears interest at 10.25% per annum and is being collected in 59 equal monthly
F-18
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
installments of $9,319, including interest, with a balloon payment of $991,332
due in July 2000. As a result of this sale being accounted for using the
installment sales method for financial reporting purposes as required by
Statement of Financial Accounting Standards No. 66, "Accounting for Sales of
Real Estate," the Partnership recognized a gain of $1,134, $1,024, and $924 for
the years ended December 31, 1998, 1997, and 1996, respectively.
In addition, in connection with the sale in 1996 of its property in St.
Cloud, Florida, the Partnership accepted a promissory note in the principal sum
of $1,057,299, representing the balance of the sales price of $1,050,000 plus
tenant closing costs in the amount of $7,299 that the Partnership financed on
behalf of the tenant. The note is collateralized by a mortgage on the property.
The promissory note bears interest at a rate of 10.75% per annum and was being
collected in 12 monthly installments of interest only, and thereafter in
168 equal monthly installments of principal and interest. As a result of this
sale being accounted for using the installment sales method for financial
reporting purposes as required by Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate," the Partnership recognized a
gain of $2,157, $338, and $18,445 for the years ended December 31, 1998, 1997,
and 1996, respectively.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance................................ $2,049,981 $2,069,912
Accrued interest receivable...................... 17,945 11,412
Less deferred gains on sale of land and build-
ings............................................ (319,866) (323,157)
---------- ----------
$1,748,060 $1,758,167
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1998 and 1997, approximate the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Receivables:
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Connorsville and Richmond, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $35,297 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note is
uncollateralized, bears interest at a rate of ten percent per annum, and is
being collected in 36 monthly installments. Receivables at December 31, 1998
and 1997, included $25,783 and $37,099, respectively of such amounts, including
accrued interest of $1,802 in 1997.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
F-19
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners.
Any gain from the sale of a property not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general, allocated
first, on a pro rata basis, to partners with positive balances in their capital
accounts; and thereafter, 95 percent to the limited partners and five percent
to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,838,327, and during each of the
years ended December 31, 1997 and 1996, the Partnership distributed $2,300,000.
Distributions for 1998 included $1,838,327 as a result of the distribution of
net sales proceeds from the 1997 and 1998 sales of the properties in Tampa and
Port Orange, Florida. This amount was applied toward the limited partners' 10%
Preferred Return. No distributions have been made to the general partners to
date.
F-20
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $1,544,895 $1,731,915 $1,428,159
Depreciation for tax reporting
purposes less than (in excess of)
depreciation for financial
reporting purposes................... 18,802 (23,618) (28,058)
Gain on disposition of land and
buildings for financial reporting
purposes in excess of gain for tax
reporting purposes................... (16,347) (354,648) (1,606)
Allowance for loss on land and
buildings............................ 403,157 250,694 239,525
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 38,017 42,682 46,387
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial
reporting purposes................... 10,795 (1,914) (1,900)
Capitalization of transaction costs
for tax reporting purposes........... 14,644 -- --
Allowance for doubtful accounts....... 3,613 100,149 33,254
Accrued rental income................. (70,237) (19,527) (27,875)
Capitalization of administrative
expenses for tax reporting purposes.. 22,990 -- --
Rents paid in advance................. (6,867) 1,241 (17,632)
Minority interest in temporary
differences of consolidated joint
venture.............................. (84,622) (41,515) (343)
Other................................. 1,705 36,721 --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $1,880,545 $1,722,180 $1,669,911
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services in the
same geographic area. These fees will be incurred and will be payable only
after the limited partners receive their 10% Preferred Return. Due to the fact
that these fees are noncumulative, if the limited partners do not
F-21
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
receive their 10% Preferred Return in any particular year, no management fees
will be due or payable for such year. As a result of such threshold, no
management fees were incurred during the years ended December 1998, 1997, and
1996.
The Affiliate of the Partnership is also entitled to receive a deferred,
subordinated real estate disposition fee, payable upon the sale of one or more
properties based on the lesser of one-half of a competitive real estate
commission or three percent of the sales price if the Affiliate provides a
substantial amount of services in connection with the sale. However, if the net
sales proceeds are reinvested in a replacement property, no such real estate
disposition fees will be incurred until such replacement property is sold and
the net sales proceeds are distributed. The payment of the real estate
disposition fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital contributions.
During the years ended December 31, 1998 and 1996, the Partnership incurred a
deferred, subordinated real estate disposition fee of $65,400 and $34,500,
respectively, as the result of the sale of the properties during 1998 and 1996,
respectively. No deferred, subordinated real estate disposition fee was
incurred for the year ended December 31, 1997 due to the reinvestment of net
sales proceeds in additional properties.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,611, $80,145, and $83,563 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Mesa, Arizona, as tenants-in-common for a purchase price
of $1,084,111 (of which the Partnership contributed $460,911 or 42.23%) from
CNL BB Corp., also an affiliate of the general partners. CNL BB Corp. had
purchased and temporarily held title to this property in order to facilitate
the acquisition of the property by the Partnership. The purchase price paid by
the Partnership represented the Partnership's percent of interest in the costs
incurred by CNL BB Corp. to acquire and carry the property, including closing
costs.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership.... $ 77,907 $ 67,106
Accounting and administrative services................ 50,641 42,261
Deferred, subordinated real estate disposition fee.... 99,900 34,500
-------- --------
$228,448 $143,867
======== ========
</TABLE>
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income (including
mortgage interest income) from individual lessees, or affiliated groups of
lessees, each representing more than ten percent of the Partnership's total
rental and earned income (including the Partnership share of total rental and
earned income from unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $195,511 $195,511 $ N/A
Shoney's, Inc.................................. N/A 229,795 241,119
</TABLE>
F-22
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
(including mortgage interest income) from individual restaurant chains, each
representing more than ten percent of the Partnership's total rental and earned
income and mortgage interest income (including the Partnership's share of total
rental and earned income from joint ventures and the properties held as
tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Wendy's Old Fashioned Hamburger Restaurant.... $220,347 $302,253 $293,817
Golden Corral Family Steakhouse............... 195,511 N/A N/A
Denny's....................................... N/A 312,510 310,021
Perkins....................................... N/A 228,492 268,939
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income (including mortgage interest
income).
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains, could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,049,031 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $20,212,956 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,024,516 shares valued at $20.00 per
APF share.
F-23
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $3,369,856(A) $572,936,859 $ 0 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0 290,522,671
Other Investments....... 16,197,812 0 16,197,812 0 0 6,361,082
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036 1,767,517
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0 2,482,041
Receivables (net
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084 1,125,933
Accrued Rental Income... 5,875,698 0 5,875,698 0 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486 2,479,317
Goodwill................ 0 0 0 0 0 0
------------ ---------- ------------ ---------- ---------- ------------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ ========== ============ ========== ========== ============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969 $ 2,013,172
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0 0
Distributions Payable... 0 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981 30,170,185
Income Tax Payable...... 0 0 0 51,466 16,906 274,485
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0 267,685,382
Deferred Income......... 2,466,355 0 2,466,355 0 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0 0
Minority Interest....... 644,611 0 644,611 0 0 0
Common Stock............ 373,484 0 373,484 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503 3,937,095
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523 657,541
Partners' Capital....... 0 0 0 0 0 0
------------ ---------- ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ ========== ============ ========== ========== ============
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
------------ -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 572,936,859 $ 9,635,693 $ 2,962,348 (B2) $ 585,534,900
Net Investment in Direct
Financing
Leases................. 0 132,179,949 1,690,306 755,836 (B2) 134,626,091
Mortgages and Notes
Receivable............. 0 353,874,178 872,380 0 354,746,558
Other Investments....... 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 1,081,046 2,392,506 523,830 (B2) 3,997,382
Cash and Cash
Equivalents............ (10,193,830)(B1) 11,310,051 2,393,763 (1,698,170)(B2) 11,732,644
(273,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)/Due from
Related Party.......... (6,614,629)(C) 9,247,098 36,368 (284,333)(E) 8,999,133
Accrued Rental Income... 0 5,875,698 270,021 (270,021)(B2) 5,875,698
Other Assets............ (2,575,792)(B1) 13,173,857 61,414 (61,414)(B2) 13,173,857
Goodwill................ 43,335,909 (B1) 43,335,909 0 0 43,335,909
------------ -------------- ----------- ------------ --------------
Total Assets........... $ 23,951,658 $1,170,062,270 $17,352,451 $ 1,655,076 $1,189,069,797
============ ============== =========== ============ ==============
Liabilities and Equity:
Accounts Payable and
Accrued Liabilities.... $ 0 $ 5,104,303 $ 95,778 $ 0 $ 5,200,081
Accrued Construction
Costs Payable.......... 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 500,000 0 500,000
Due to Related Parties.. (6,614,629)(C) 25,500,981 284,333 (284,333)(E) 25,500,981
Income Tax Payable...... (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 1,617,367 23,218 0 1,640,585
Minority Interest....... 0 644,611 146,744 0 791,355
Common Stock............ 61,500 (B1) 434,984 0 10,109 (B2) 445,093
Common Stock--Class A... (8,600)(B1) 0 0 0 0
Common Stock--Class B... (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,936,215 0 18,231,678 (B2) 811,167,893
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ (5,883,163)(B1) (88,794,667) 0 0 (88,794,667)
(73,968,151)(B1)
342,857 (D)
Partners' Capital....... 0 0 16,302,378 (16,302,378)(B2) 0
------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $ 23,951,658 $1,170,062,270 $17,352,451 $ 1,655,076 $1,189,069,797
============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 44,508,749
==============
Shares Outstanding...... 44,509,330
==============
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Property CNL Historical
Acquisition Financial CNL
Historical Pro Forma Historical Services, Financial
APF Adjustments Subtotal Advisor Inc. Corp.
----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ---------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties .. 23,564,432 2,089,441 25,653,873 3,877,654 42,804 (239,337)
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Cash Distributions
Declared............... $28,476,150 0 $28,476,150 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $ 667,285 $ 10,354 (j) $31,635,153
Fees................... (9,812,516)(b)(c) 2,616,185 0 (25,994)(k) 2,590,191
Interest and Other
Income................ 144,014 (d) 16,269,383 101,974 0 16,371,357
----------- ----------- ---------- --------- -----------
Total Revenue.......... (9,668,502) 49,843,082 769,259 (15,640) 50,596,701
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 106,071 (51,185)(l)(m) 9,634,788
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 6,404 3,935 (o) 475,305
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 124,179 58,156 (p) 4,851,488
Amortization........... 1,083,398 (h) 1,093,134 0 0 1,093,134
Transaction Costs...... 0 483,005 91,188 0 574,193
----------- ----------- ---------- --------- -----------
Total Expenses......... (3,348,361) 26,828,229 327,842 10,906 27,166,977
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... (6,320,141) 23,014,853 441,417 (26,546) 23,429,724
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 238,437 (17,456)(q) 252,222
Gain (Loss) on Sale of
Properties............ 0 (201,843) 395,422 0 193,579
Provision for Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (6,320,141) 22,303,729 1,075,276 (44,002) 23,335,003
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)... $(4,794,401) $22,303,729 $1,075,276 $ (44,002) $23,335,003
=========== =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 21.51 $ n/a $ 0.52
=========== =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 326.05 $ n/a $ 16.24
=========== =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 20.00 $ n/a $ 0.76
=========== =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.89x
=========== =========== ========== ========= ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,000,000 $(229,235)(s) $33,936,167
=========== =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,010,866 44,508,749 (r)
=========== =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,010,866 44,509,330
=========== =========== ========== ========= ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- --------- ----------
Total Revenue.......... 42,187,037 22,951,799 65,138,836 29,049,079 7,193,142 22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- --------- ----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Provision for Losses on
Properties and Gain on
Securitization......... 32,778,080 16,704,852 49,482,932 17,613,851 (773,774) (3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision for Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- --------- ----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- --------- ----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $(468,133) $ 427,134
=========== =========== =========== =========== ========= ==========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========= ==========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========= ==========
Cash Distributions
Declared............... 39,449,149 11,545,463(t) 50,994,612 n/a n/a n/a
=========== =========== =========== =========== ========= ==========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,570,494 34,219,213 n/a n/a n/a
=========== =========== =========== =========== ========= ==========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========= ==========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $1,500,482 20,708 (j) $57,602,650
Fees................... (32,715,768)(b),(c) 3,226,263 0 (28,720)(k) 3,197,543
Interest and Other
Income................ 207,144 (d) 32,221,925 282,795 0 32,504,720
------------- ----------- ---------- ---------- -----------
Total Revenue.......... (32,508,624) 91,529,648 1,783,277 (8,012) 93,304,913
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 228,736 (70,394)(l),(m) 16,097,898
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 9,658 6,299 (o) 583,403
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 267,254 116,311 (p) 10,331,904
Amortization........... 2,166,795 (h) 2,330,796 0 0 2,330,796
Transaction Costs...... 0 157,054 14,644 0 171,698
------------- ----------- ---------- ---------- -----------
Total Expenses......... (9,236,153) 51,499,724 520,292 52,216 52,072,232
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Provision for Losses on
Properties and Gain on
Securitization......... (23,272,471) 40,029,924 1,262,985 (60,228) 41,232,681
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 240,954 (34,911)(q) 191,905
Gain (Loss) on Sale of
Properties............ 0 0 444,113 0 444,113
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Provision for Losses on
Properties............ 0 (611,534) (403,157) 0 (1,014,691)
------------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,272,471) 43,098,603 1,544,895 (95,139) 44,548,359
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $ (16,374,037) $43,098,603 $1,544,895 $ (95,139) $44,548,359
============= =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 30.89 $ n/a $ 1.08
============= =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 324.54 $ n/a $ 16.35
============= =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 76.77 $ n/a $ 1.50
============= =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.02x
============= =========== ========== ========== ===========
Cash Distributions
Declared............... 9,378,504(t) 60,373,116 3,838,327 (2,296,797)(t) 61,914,646
============= =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,369,213 n/a 1,010,866 41,380,079 (s)
============= =========== ========== ========== ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,010,866 44,498,793
============= =========== ========== ========== ===========
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441(a) $ 24,942,749 $2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179(b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------ ------------ ------------ ---------- -------- -----------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------ ------------ ------------ ---------- -------- -----------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562(f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------ ------------ ------------ ---------- -------- -----------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------ ------------ ------------ ---------- -------- -----------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase in cash.... (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,309,226) 12,890,611 713,308 962,573 2,526,078
------------ ------------ ------------ ---------- -------- -----------
Cash at end of year..... $ 18,764,033 14,462,956 $ 33,226,989 $ 333,295 $639,036 1,767,517
============ ============ ============ ========== ======== ===========
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Proforma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,794,401)(a) $ 22,303,729 $1,075,276 $(44,002)(a) $ 23,335,003
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,774,655 124,179 58,156 (b) 4,956,990
Amortization expense... 1,083,398 (c) 1,993,151 0 0 1,993,151
Minority interest in
income of consolidated
joint venture......... 0 17,610 (9,172) 0 8,438
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 (110,494) 17,456 (d) (67,918)
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 (395,422) 0 (193,579)
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 51,122 0 (2,150,838)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 9,388 0 (174,181)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (5,196) 0 (325,621)
Decrease in net
investment in direct
financing leases...... 0 721,624 18,660 0 740,284
Increase in accrued
rental income......... 0 (1,915,785) (30,058) 0 (1,945,843)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663.478) 77,871 0 (585,607)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 55,885 0 641,612
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits............... 0 666,719 17,106 0 683,825
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ---------- -------- ------------
Total adjustments...... 1,083,398 (75,906,414) (196,131) 75,612 (76,026,933)
------------ ------------- ---------- -------- ------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 879,145 31,610 (52,691,930)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 1,113,759 0 4,809,823
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 1,048,211 0 1,272,584
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- ---------- -------- ------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) 2,161,970 0 (109,572,556)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners ............. (4,689,252)(g) (33,285,210) (1,000,000) 229,235 (g) (34,055,975)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ---------- -------- ------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,000,000) 229,235 179,492,710
Net increase in cash.... (3,948,003) 14,926,264 2,041,115 260,845 17,228,224
Cash at beginning of
year................... (12,326,088) 4,766,482 352,648 381,710 5,500,840
------------ ------------- ---------- -------- ------------
Cash at end of year..... $(16,274,091) $ 19,692,746 $2,393,763 $642,555 $ 22,729,064
============ ============= ========== ======== ============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Property CNL Historical
Acquisition Financial CNL
Historical Pro Forma Historical Services, Financial
APF Adjustments Subtotal Advisor Inc. Corp.
------------ ------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------ ------------ ------------ ----------- ---------- ------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------ ------------ ------------ ----------- ---------- ------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and (200,101,667) (325,187,085) (381,671) (236,372) 0
buildings on operating (3,369,856)(e)
leases................ (121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------ ------------ ------------ ----------- ---------- ------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,545,463)(j) (50,994,612) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------ ------------ ------------ ----------- ---------- ------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,175,607) 305,659,934 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,309,226) (34,696,166) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------ ------------ ------------ ----------- ---------- ------------
Cash at end of year..... $123,199,837 (110,309,226) $ 12,890,611 713,308 962,573 2,526,078
============ ============ ============ =========== ========== ============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Proforma Adjusted
Adjustments APF Fund V, Ltd. Adjustments Pro Forma
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... (16,374,037)(a) $ 43,098,603 $1,544,895 (95,139)(a) $ 44,548,359
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 267,254 116,311(b) 10,531,061
Amortization expense... 2,166,795 (c) 4,480,879 0 0 4,480,879
Minority interest in
income of consolidated
joint venture......... 0 30,156 (67,013) 0 (36,857)
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 41,898 34,911(d) 61,369
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (444,113) 0 (444,113)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 403,157 0 1,412,733
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease (increase) in
other receivables..... 0 (2,543,413) 23,215 0 (2,520,198)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 (6,533) 0 (6,533)
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 7,435 0 14,681
Decrease in net
investment in direct
financing leases...... 0 1,971,634 38,017 0 2,009,651
Increase in accrued
rental income......... 0 (2,187,652) (70,237) 0 (2,257,889)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 0 846,680 (100,554) 0 746,126
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 19,181 0 (114,183)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 (6,867) 0 429,976
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
----------- ------------ ---------- ---------- ------------
Total adjustments...... 1,825,897 13,355,702 104,840 151,222 13,611,764
----------- ------------ ---------- ---------- ------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 1,649,735 56,083 58,160,123
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 2,125,220 0 4,511,161
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) (125,000) 0 (304,135,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) (765,201) 0 (1,739,897)
Acquisition of
businesses............ (10,193,830)(f) (10,193,830) 0 (1,698,170)(g) (12,165,000)
0 (273,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 19,931 0 311,921
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 0 0 200,000
----------- ------------ ---------- ---------- ------------
Net cash provided by
(used in) investing
activities............ 11,600,556 (388,950,086) 1,254,950 (1,971,170) (389,666,306)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,737,604) (3,913,327) 2,296,797 (j) (71,354,134)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
----------- ------------ ---------- ---------- ------------
Net cash provided by
(used in) financing
activities............ (9,378,504) 287,433,133 (3,913,327) 2,296,797 285,816,603
Net increase (decrease)
in cash................ (12,326,088) (45,062,648) (1,008,642) 381,710 (45,689,580)
Cash at beginning of
year................... 0 49,829,130 1,361,290 0 51,190,420
----------- ------------ ---------- ---------- ------------
Cash at end of year..... (12,326,088) 4,766,482 $ 352,648 381,710 $ 5,500,840
=========== ============ ========== ========== ============
</TABLE>
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from April 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $82,298,626 $50,895,204 $20,212,957 $153,406,787
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $18,241,787 $141,241,787
Cash Consideration...... -- -- 273,000 273,000
APF Transaction Costs... 6,298,626 3,895,204 1,698,170 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $82,298,626 $50,895,204 $20,212,957 $153,406,787
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $16,302,378 $ 34,767,940
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 2,962,348 2,962,348
Net investment in
direct financing
leases............... -- -- 755,836 755,836
Investment in joint
ventures............. -- -- 523,830 523,830
Accrued rental
income............... -- -- (270,021) (270,021)
Intangibles and other
assets............... -- (2,575,792) (61,414) (2,637,206)
Goodwill*............. -- 43,335,909 -- 43,335,909
Excess purchase
price................ 73,968,151 -- -- 73,968,151
----------- ----------- ----------- ------------
Total Allocation.... $82,298,626 $50,895,204 $20,212,457 $153,406,787
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,968,151 was expensed at June 30, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $43,335,909
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A................ 8,600
Common Stock (CFA, CFS, CFC)--Class B................ 4,825
Additional Paid-in Capital (CFA, CFS, CFC)........... 12,568,974
Retained Earnings.................................... 5,883,163
Accumulated distributions in excess of earnings...... 73,968,151
Goodwill for CFC/CFS (Intangibles and other assets).. 43,335,909
CFC/CFS Organizational Costs/Other Assets........... 2,575,792
Cash to pay APF transaction costs................... 10,193,830
APF Common Stock.................................... 61,500
APF Capital in Excess of Par Value.................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
</TABLE>
<TABLE>
<S> <C> <C>
2.Partners Capital................................... 16,302,378
Land and buildings on operating leases............. 2,962,348
Net investment in direct financing leases.......... 755,836
Investment in joint ventures....................... 523,830
Accrued rental income............................. 270,021
Intangibles and other assets...................... 61,414
Cash to pay APF Transaction costs................. 1,698,170
Cash consideration to Income Fund................. 273,000
APF Common Stock.................................. 10,109
APF Capital in Excess of Par Value................ 18,231,678
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $284,333 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the quarter ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which
were deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,083,398
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $10,354 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (25,994)
--------
$(25,994)
========
</TABLE>
(l) Represents the elimination of $25,994 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $25,191 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $3,935 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $58,156 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $17,456 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,166,795
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $20,708 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (28,720)
--------
$(28,720)
========
</TABLE>
(l) Represents the elimination of $28,720 in administrative costs
reimbursed by the Income Fund to the Advisor.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(m) Represents savings of $41,674 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $6,299 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $116,311 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $34,911 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
F-42
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B)
(II)The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
F-43
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 9, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-44
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund V, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund V, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund V, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
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1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND V, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund V, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,049,031 fully paid and nonassessable APF Common
Shares (1,024,516 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $18,799,647, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,950,969 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 50,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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<PAGE>
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,049,031 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $204,903 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND V, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND VI, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund VI, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 8 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of your
Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis.
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Unlike your Income Fund, which is restricted, due to capital and other
limitations, to owning and leasing a static number of restaurant properties on
a triple-net basis, APF has the ability to offer a complete range of restaurant
property services to operators of national and regional restaurant chains, from
triple-net leasing and mortgage financing to site selection, construction
management and build-to-suit development. If APF acquires all of the Income
Funds in the Acquisition, APF expects to have total assets of approximately
$1.5 billion at the time of the consummation of the Acquisition and will be one
of the largest triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,865,194 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's limited partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition if fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,616.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,865,194 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF
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<PAGE>
Shares have been approved for listing on the NYSE, subject to official notice
of issuance. Prior to listing, the existing APF stockholders have not had an
active trading market in which they could sell their APF Shares. Additionally,
any Limited Partners of the Income Funds who become APF stockholders as a
result of the Acquisition, will have transformed their investment in non-
tradable units into an investment in freely tradable APF Shares. Consequently,
some of these stockholders may choose to sell their APF Shares upon listing at
a time when demand for APF Shares may be relatively low. The market price of
the APF Shares may be volatile after the Acquisition, and the APF Shares could
trade at prices substantially less than the exchange value as a result of
increased selling activity following the issuance of the APF Shares, the
interest level of investors in purchasing the APF Shares after the Acquisition
and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $920, $900 and $920, respectively, to you per $10,000
investment. While historically, APF has made distributions equal to 7.625% per
APF Share, based on the exchange value, we cannot be sure that APF will be able
to maintain this level of distributions in the future. In the event that APF is
unable to maintain this level of distributions in the future, your
distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three conflicts of interest in the Acquisition of
your Income Fund. First, we, James M. Seneff, Jr. and Robert A. Bourne, who
also sit on the Board of Directors of APF, and CNL Realty Corp., an entity
whose sole stockholders are Messrs. Seneff and Bourne, are the three general
partners of the Income Funds. As Board members of APF, Messrs. Seneff and
Bourne have a different interest in the completion of the Acquisition which may
conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third,
assuming only your Income Fund is acquired in the Acquisition, we will receive
19,296 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including this consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
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The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,231 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to certain risks inherent in the business of lending,
such as the risk of default by or bankruptcy of the borrower. Upon a default by
a borrower, APF may not be able to sell the property securing a mortgage loan
at a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would typically retain a
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residual-interest security and retain an interest-only strip security. The fair
value of the residual-interest and interest-only strip security would be the
present value of the estimated net cash flows to be received after considering
the effects of prepayments and credit losses. The capitalized mortgage
servicing rights and mortgage-related securities would be valued using
prepayment, default, and interest rate assumptions that APF believes are
reasonable. The amount of revenue recognized upon the sale of loans or loan
participations will vary depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.91%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.51x and its ratio of debt-to-total assets would
have been 34.88%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
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The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience, services
and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or that
of its franchisor or vendors, to adequately address year 2000 issues;
. increases in operating, expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of June
30, 1999, your Income Fund had no tenants under bankruptcy protection.
Therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, including lost rental,
interest and earned income, would have been equal to $1,175,483, which
constitutes 1.33% of total rental, interest and earned income, including lost
rental, interest and earned income, for the same period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income
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taxes. Unless APF is entitled to relief under specific statutory provisions, it
could not elect to be taxed as a REIT for four taxable years following the year
during which it was disqualified. Therefore, if APF loses its REIT status, the
funds available for distribution to you, as an APF stockholder, would be
reduced substantially for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive the notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited less
Partner Distributions Number of Estimated Value
Investments of Net Sales APF Estimated of APF Shares
less Proceeds per Shares Value of Estimated Value per Average
Distributions $10,000 Offered APF Shares Estimated of APF Shares $10,000 Original
of Net Sales Original to Income Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ------------- ------------- --------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 1,865,194 $37,303,880 $409,000 $36,894,880 $10,541
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
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If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)...................................................... $ 28,415
Appraisals and Valuation(2)........................................ 6,435
Fairness Opinions(3)............................................... 30,000
Solicitation Fees(4)............................................... 16,346
Printing and Mailing(5)............................................ 91,672
Accounting and Other Fees(6)....................................... 54,101
--------
Subtotal....................................................... $226,969
--------
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(7).......................... $ 89,606
Legal Closing Fees(8).............................................. 44,260
Partnership Liquidation Costs(9)................................... 48,165
--------
Subtotal....................................................... 182,031
--------
Total.............................................................. $409,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your
Income Fund's pro-rata portion of these fees was determined based
on the ratio of the value of the APF Share consideration payable to
your Income Fund, based on the exchange value, to the total value
of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
S-9
<PAGE>
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,399,998. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$841,245. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of your Income Fund's total assets as
of June 30, 1999 to the total assets of all of the Income Funds as
of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,313,596. Your Income Fund's pro-rata portion of
these fees was determined based on the ratio of the value of the
APF Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your
Income Fund's pro-rata portion of these fees was determined based
on the ratio of your Income Fund's total assets as of June 30, 1999
to the total assets of all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to
be $698,901. Your Income Fund's pro-rata portion of these costs was
determined based on the ratio of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable to
all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (June 1989). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
S-10
<PAGE>
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended
------------------------ June 30,
1996 1997 1998 1999
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Historical Distributions Paid
to the General Partners and
Affiliates:
General Partner
Distributions.............. -- -- -- --
Accounting and
Administrative Services.... $95,420 $87,877 $107,969 $44,607
Broker/Dealer Commissions... -- -- -- --
Due Diligence and Marketing
Support Fees............... -- -- -- --
Acquisition Fees............ -- -- -- --
Asset Management Fees....... -- -- -- --
Real Estate Disposition
Fees(1).................... -- -- -- --
------- ------- -------- -------
Total historical.......... $95,420 $87,877 $107,969 $44,607
Pro Forma Distributions to Be
Paid to the General Partners
Following the Acquisition:
Cash Distributions on APF
Shares(2).................. $27,248 $28,743 $ 29,426 $14,713
Salary Compensation......... -- -- -- --
------- ------- -------- -------
Total pro forma........... $27,248 $28,743 $ 29,426 $14,713
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
S-12
<PAGE>
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
Six Months Ended
June 30, 1999
----------------
Pro
1994 1995 1996 1997 1998 Historical Forma
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income............ $876 $809 $793 $821 $885 $450 $280
Distributions from Return of
Capital(1).......................... 24 91 127 79 35 -- 118
---- ---- ---- ---- ---- ---- ----
Total............................ $900 $900 $920 $900 $920 $450 $398
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
S-13
<PAGE>
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have little or no
opportunity to appreciate. Because APF is a growth-oriented company, you, as an
APF stockholder, will have the opportunity to participate in APF's future
growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the
S-14
<PAGE>
Income Funds, and (c) the method of allocating the APF Shares among the Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion does not compare the relative merits of the
Acquisition with those of any other transaction or business strategy that was
or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund VI,
Ltd. .................. 35,000,000 10,000 10,431 10,385 9,730 9,274
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
S-15
<PAGE>
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law, to assess whether the terms of the
Acquisition are fair and equitable to the Limited Partners of your Income Fund
without regard to whether the Acquisition is fair and equitable to any of the
other participants including the Limited Partners in other Income Funds. James
M. Seneff, Jr. and Robert A. Bourne act as the individual general partners of
all of the Income Funds and also as members of the Board of Directors of APF.
While Messrs. Seneff and Bourne have sought faithfully to discharge their
obligations to your Income Fund, there is an inherent conflict of interest in
serving, directly or indirectly, in a similar capacity with respect to your
Income Fund and also on APF's Board of Directors. Additionally, as stockholders
of APF, Messrs. Seneff's and Bourne's interests in the completion of the
Acquisition may conflict with yours as a Limited Partner of the Income Fund and
with their own as general partners of your Income Fund.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
19,296 APF Shares in accordance with the terms of your Income Fund's
partnership agreement. The 19,296 APF Shares issued to us will have an
estimated value, based on the exchange value, of approximately $385,920.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for your
Income Fund's liabilities to the extent that your Income Fund is unable
to satisfy such liabilities. Because the partnership agreement for your
Income Fund prohibits the Income Fund from incurring indebtedness, the
only liabilities the Income Fund has are liabilities with respect to its
ongoing business operations. In the event that your Income Funds are
acquired by APF, we would be relieved of our legal obligation to satisfy
the liabilities of the acquired Income Fund.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000 Original
Limited Partner Investment
----------------------------
<S> <C>
CNL Income Fund VI, Ltd............................ $1,616
</TABLE>
S-17
<PAGE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
.the adjusted tax basis of the assets transferred by your Income Fund to the
Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
S-18
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition
described above. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-19
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest Gain on
Sale of
Properties
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,073,184 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,358,575)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,309,927)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,309,927)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740(i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses)......... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,784,187)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund VI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 1,446,459 $ 24,594 (j) $32,428,567
Fees............. 2,616,185 0 (26,850)(k) 2,589,335
Interest and
Other Income..... 16,269,383 39,252 0 16,308,635
------------ ----------- ------------------ ------------
Total Revenue... $49,843,082 $1,485,711 $ (2,256) $51,326,537
Expenses:
General and
Administrative... 9,579,902 96,953 (51,203)(l),(m) 9,625,652
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest Gain on
Sale of
Properties
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 9,713 7,164 (o) 481,843
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 221,821 108,738 (p) 4,999,712
Amortization..... 1,082,920 825 0 1,083,745
Transaction
Costs............ 483,005 110,820 0 593,825
------------ ----------- ------------------ ------------
Total Expenses.. 26,818,015 440,132 64,699 27,322,846
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,025,067 $ 1,045,579 $ (66,955) $24,003,691
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 235,060 (27,393)(q) 238,908
Gain (Loss) on
Sale of
Properties....... (201,843) 848,303 0 646,460
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ----------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,313,943 2,128,942 (94,348) 24,348,537
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ----------- ------------------ ------------
Net Earnings
(Losses)......... $22,313,943 $ 2,128,942 $ (94,348) $24,348,537
============ =========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,612,292 (u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,569,778 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund VI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 38 n/a 619
============== =========== ==================== =================
Earnings per
share/unit...... $ n/a $ 30.41 $ n/a $ 0.54
============== =========== ==================== =================
Book value per
share/unit...... $ n/a $ 416.42 $ n/a $ 16.29
============== =========== ==================== =================
Dividends per
share/unit...... $ n/a $ 22.50 $ n/a $ 0.76
============== =========== ==================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.99x
============== =========== ==================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,575,000 $ (168,420)(s) $ 34,571,982
============== =========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,844,744 45,342,627(r)
============== =========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 1,844,744 45,343,208
============== =========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $19,155,910 $7,062,461 (u2) $ 721,031,354
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 (u2) $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 82,799 $ (26,828)(x) $ 9,303,069
Investment in
joint ventures.. $ 1,081,046 $ 5,061,676 $ 994,982 (u2) $ 7,137,704
Total assets.... $1,170,722,904 $30,241,561 $4,369,471 (u2),(x) $1,205,333,936
Total
liabilities/minority
interest........ $ 465,485,738 $ 1,092,489 $ (26,828)(x) $ 466,551,399
Total equity.... $ 705,237,166 $29,149,072 $4,396,299 (u2) $ 738,782,537
</TABLE>
S-21
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
------------
Total.................................................... $(8,599,248)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................ $ 144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<CAPTION>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
------------
$(2,913,775)
============
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,073,184
</TABLE>
S-22
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $24,594 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (26,850)
--------
$(26,850)
========
</TABLE>
(l) Represents the elimination of $26,850 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $24,353 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $7,164 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $108,738 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $27,393
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from July
1, 1999 through July 31, 1999 as if these properties had been acquired
on June 30, 1999. Based on historical results through July 31, 1999,
all interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma adjustments
to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
S-23
<PAGE>
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration Received. $81,637,992 $50,486,653 $36,721,726 $168,846,371
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $33,545,371 $156,545,371
Cash Consideration...... -- -- 409,000 409,000
APF Transaction Costs... 5,637,992 3,486,653 2,767,355 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,637,992 $50,486,653 $36,721,726 $168,846,371
=========== =========== =========== ============
Allocation of Purchase
Price:
----------------------
Net Assets --
Historical............. $ 8,330,475 $10,135,087 $29,149,072 $ 47,614,634
Purchase Price
Adjustments:...........
Land and buildings on
operating leases....... -- -- 5,626,796 5,626,796
Net investment in direct
financing leases....... -- -- 1,435,665 1,435,665
Investment in joint
ventures............... -- -- 994,982 994,982
Accrued rental income... -- -- (442,192) (442,192)
Intangibles and other
assets................. -- (2,575,792) (42,597) (2,618,389)
Goodwill*............... -- 42,927,358 -- 42,927,358
Excess purchase price... 73,307,517 -- -- 73,307,517
----------- ----------- ----------- ------------
Total Allocation...... $81,637,992 $50,486,653 $36,721,726 $168,846,371
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,307,517 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $42,927,358 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A............. 8,600
Common Stock (CFA, CFS, CFC)--Class B.............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)......... 12,568,974
Retained Earnings.................................. 5,883,163
Accumulated distributions in excess of earnings.... 73,307,517
Goodwill for CFC/CFS (Intangibles and other
assets)........................................... 42,927,358
CFC/CFS Organizational Costs/Other Assets......... 2,575,792
Cash to pay APF transaction costs................. 9,124,645
APF Common Stock.................................. 61,500
APF Capital in Excess of Par Value................ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital.................................. 29,149,072
Land and buildings on operating leases............. 5,626,796
Net investment in direct financing leases.......... 1,435,665
Investment in joint ventures....................... 994,982
Accrued rental income............................. 442,192
Intangibles and other assets...................... 42,597
Cash to pay APF Transaction costs................. 2,767,355
Cash consideration to Income Funds................ 409,000
APF Common Stock.................................. 18,447
APF Capital in Excess of Par Value................ 33,526,924
(To record acquisition of Income Fund)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $26,828 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND VI, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
VI, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,720,771 $ 1,579,779 $ 3,370,532 $ 3,456,406 $ 3,565,493 $ 3,438,286 $ 3,468,897
Net income (2).......... 2,128,942 1,568,769 3,020,881 2,899,882 2,803,601 2,861,381 3,095,028
Cash distributions
declared (3)........... 1,575,000 1,575,000 3,220,000 3,150,000 3,220,000 3,150,000 3,150,000
Net income per unit (2). 30.13 22.21 42.75 41.06 39.65 40.47 43.80
Cash distributions
declared per
unit (2)............... 22.50 22.50 46.00 45.00 46.00 45.00 45.00
GAAP book value per
unit................... 416.42 411.26 408.50 411.35 414.92 420.87 424.99
Weighted average number
of Limited
Partner units
outstanding............ 70,000 70,000 70,000 70,000 70,000 70,000 70,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $30,241,561 $29,791,350 $29,655,896 $29,993,069 $30,129,286 $30,442,314 $30,754,999
Total partners' capital. 29,149,072 28,788,018 28,595,130 28,794,249 29,044,367 29,460,766 29,749,385
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of the consolidated joint venture.
(2) Net income for the six months ended June 30, 1999 and 1998, includes
$848,303 and $345,122, respectively from gains on sale of land and
building. Net income for the years ended December 31, 1997 and 1996,
includes provision for loss on land and building of $263,186 and $77,023,
respectively. In addition, net income for the years ended December 31,
1997, 1996 and 1995, includes $79,777, $1,706 and $7,370, respectively,
from a loss on sale of land and buildings. Net income for the years ended
December 31, 1998, 1997, 1995 and 1994, also includes $345,122, $626,804,
$103,283 and $332,664, respectively, from gains on sale of land and
buildings.
(3) Distributions for the years ended December 31, 1998 and 1996, include a
special distribution to the Limited Partners of $70,000, which represented
cumulative excess operating reserves.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VI, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 17, 1988, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of selected national and regional fast-food and family-
style restaurant chains. The leases are triple-net leases, with the lessees
generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of June 30, 1999, the Income Fund owned 38
restaurant properties, which included interests in six restaurant properties
owned by joint ventures in which the Income Fund is a co-venturer and five
restaurant properties owned with affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998 was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,663,032 and
$1,655,360 for the six months ended June 30, 1999 and 1998, respectively. The
increase in cash from operations for the six months ended June 30, 1999, was
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In April 1998, the Income Fund reinvested a portion of the net sales
proceeds from the 1998 sale of the restaurant property in Melbourne, Florida,
in a joint venture arrangement, Melbourne Joint Venture, with one of our
affiliates, to construct and hold one restaurant property. As of June 30, 1999,
the Income Fund had contributed approximately $539,100, of which approximately
$44,100 was contributed during the six months ended June 30, 1999, to the joint
venture to purchase land and pay for construction costs relating to the joint
venture. As of June 30, 1999, the Income Fund owned a 50 percent interest in
the profits and losses of the joint venture.
In June 1999, the Income Fund sold four of its Burger King restaurant
properties to the tenant in accordance with the purchase option under the lease
agreements, for a total of approximately $4,354,000 and received net sales
proceeds of $4,318,145 resulting in a total gain of $848,303 for financial
reporting purposes. These restaurant properties were originally acquired by the
Income Fund in January 1990 and had costs totaling approximately $3,535,700,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold these restaurant properties for a total of approximately
$782,400 in excess of their original purchase prices. As of June 30, 1999, the
net sales proceeds of $4,318,145, plus accrued interest of $13,950, were being
held in interest-bearing escrow accounts pending the release of funds to
acquire additional restaurant properties. We believe that the transaction, or a
portion thereof, relating to the sales of the four restaurant properties and
the reinvestment of the net sales proceeds will qualify as like-kind exchange
transactions for federal income tax purposes.
Currently, rental income from the Income Fund's restaurant properties and
any net sales proceeds held by the Income Fund, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts at
commercial banks, certificates of deposit, and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At June 30,
1999, the Income Fund had $1,124,292 invested in such short-term investments as
compared to $1,170,686 at December 31, 1998. The funds remaining at June 30,
1999, after payment of distributions and other liabilities, will be used to
meet the Income Fund's working capital and other needs.
S-26
<PAGE>
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
generated cash from operations, which includes cash received from tenants,
distributions from joint ventures and interest received, less cash paid for
expenses, of $3,243,660, $3,156,041, and $3,310,762 for the years ended
December 31, 1998, 1997, and 1996, respectively. The increase in cash from
operations during 1998 and 1997, each as compared to the previous year, is
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital during
each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In January 1996, the Income Fund reinvested the remaining net sales proceeds
from the 1995 sale of the restaurant property in Little Canada, Minnesota, in a
Golden Corral restaurant property located in Clinton, North Carolina, with
certain of our affiliates as tenants-in-common. In connection therewith, the
Income Fund and its affiliates entered into an agreement whereby each co-
venturer will share in the profits and losses of the restaurant property in
proportion to its applicable percentage interest. As of December 31, 1998, the
Income Fund owned an 18 percent interest in this restaurant property.
In March 1996, the Income Fund entered into an agreement with the tenant of
the restaurant properties in Chester, Pennsylvania, and Orlando, Florida, for
payment of certain rental payment deferrals the Income Fund had granted to the
tenant through March 31, 1996. Under the agreement, the Income Fund agreed to
abate approximately $42,700 of the rental payment deferral amounts. The tenant
made payments of approximately $18,600 in each of April 1996, March 1997, and
April 1998 in accordance with the terms of the agreement, and has agreed to pay
the Income Fund the remaining balance due of approximately $74,400 in four
remaining annual installments through 2002.
In December 1996, the Income Fund sold its restaurant property in Dallas,
Texas, to an unrelated third party for $1,016,000 and received net sales
proceeds of $982,980. This restaurant property was originally acquired by the
Income Fund in June 1994 and had a cost of approximately $980,900, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the Income
Fund sold the restaurant property for approximately $2,100 in excess of its
original purchase price. Due to the fact that the Income Fund had recognized
accrued rental income since the inception of the lease relating to the
straight-lining of future scheduled rent increases in accordance with generally
accepted accounting principles, the Income Fund wrote
off the cumulative balance of such accrued rental income at the time of the
sale of this restaurant property, resulting in a loss on land and building of
$1,706 for financial reporting purposes. Due to the fact that the straight-
lining of future rent increases over the term of the lease is a non-cash
accounting adjustment, the write-off of these amounts is a loss for financial
statement purposes only. In February 1997, the Income Fund reinvested the net
sales proceeds, along with additional funds, in a Bertucci's restaurant
property located in Marietta, Georgia, for a total cost of approximately
$1,112,600. The transaction relating to the sale of the restaurant property in
Dallas, Texas and the reinvestment of the net sales proceeds was structured to
qualify as a like-kind exchange transaction for federal income tax purposes.
In January 1997, Show Low Joint Venture, in which the Income Fund owns a 36
percent interest, sold the restaurant property to the tenant for $970,000,
resulting in a gain to the joint venture of approximately $360,000 for
financial reporting purposes. The restaurant property was originally
contributed to Show Low
S-27
<PAGE>
Joint Venture in July 1990 and had a total cost of approximately $663,500,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the joint venture sold the restaurant property for approximately $306,500 in
excess of its original purchase price. In June 1997, Show Low Joint Venture
reinvested $782,413 of the net sales proceeds in a restaurant property in
Greensboro, North Carolina. As of December 31, 1998, the Income Fund had
received approximately $70,000 representing a return of capital for its pro-
rata share of the uninvested net sales proceeds.
In July 1997, the Income Fund sold the restaurant property in Whitehall,
Michigan, to an unrelated third party, for $665,000 and received net sales
proceeds of $626,907, resulting in a loss of $79,777 for financial reporting
purposes, as described below in "Results of Operations." The net sales proceeds
were reinvested in a restaurant property in Overland Park, Kansas, with certain
of our affiliates as tenants-in-common, in January 1998. In connection
therewith, the Income Fund and the affiliates entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to its applicable percentage interest. As of December
31, 1998, the Income Fund owned a 34.74% interest in this restaurant property.
In addition, in July 1997, the Income Fund sold its restaurant property in
Naples, Florida, to an unrelated third party, for $1,530,000 and received net
sales proceeds of $1,477,780, resulting in a gain of $186,550 for financial
reporting purposes. This restaurant property was originally acquired by the
Income Fund in December 1989 and had a cost of approximately $1,083,900,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant property for approximately $403,800 in
excess of its original purchase price. In December 1997, the Income Fund
reinvested the net sales proceeds in an IHOP restaurant property in Elgin,
Illinois, for a total cost of approximately $1,484,100. A portion of the
transaction, relating to the sale of the restaurant property in Naples,
Florida, and the reinvestment of the net sales proceeds was structured to
qualify as a like-kind exchange transaction for federal income tax purposes.
The Income Fund distributed amounts sufficient to enable the Limited Partners
to pay federal and state income taxes, at a level reasonably assumed by us,
resulting from the sale.
In addition, in July 1997, the Income Fund sold its restaurant property in
Plattsmouth, Nebraska, to the tenant, for $700,000 and received net sales
proceeds of $697,650, resulting in a gain of $156,401 for financial reporting
purposes. This restaurant property was originally acquired by the Income Fund
in January 1990 and had a cost of approximately $561,000, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $138,400 in excess of its original
purchase price. In January 1998, the Income Fund reinvested the net sales
proceeds in an IHOP restaurant property in Memphis, Tennessee, with certain of
our affiliates as tenants-in-common. In connection therewith, the Income Fund
and the affiliates entered into an agreement whereby each co-venturer will
share in the profits and losses of the restaurant property in proportion to its
applicable percentage interest. As of December 31, 1998, the Income Fund owned
a 46.2% interest in this restaurant property. The Income Fund distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes at a level reasonably assumed by us, resulting from the sale.
In June 1997, the Income Fund terminated the lease with the tenant of the
restaurant property in Greensburg, Indiana. In connection therewith, the Income
Fund accepted a promissory note from this former
tenant for $13,077 for amounts relating to past due real estate taxes the
Income Fund had incurred as a result of the former tenant's financial
difficulties. The promissory note, which is uncollateralized, bears interest at
a rate of ten percent per annum, and is being collected in 36 monthly
installments. Receivables at December 31, 1998, included $9,561 of such
amounts. In July 1997, the Income Fund entered into a new lease for the
restaurant property in Greensburg, Indiana, with a new tenant to operate the
restaurant property as an Arby's restaurant. In connection therewith, the
Income Fund agreed to fund $125,000 in renovation costs. The renovations were
completed in October 1997, at which time payments of rent commenced.
In September 1997, the Income Fund sold its restaurant property in Venice,
Florida, to an unrelated third party, for $1,245,000 and received net sales
proceeds of $1,201,648, resulting in a gain of $283,853 for financial reporting
purposes. This restaurant property was originally acquired by the Income Fund
in August
S-28
<PAGE>
1989 and had a cost of approximately $1,032,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $174,300 in excess of its original
purchase price. In December 1997, the Income Fund reinvested the net sales
proceeds in an IHOP restaurant property in Manassas, Virginia, for a total cost
of approximately $1,126,800. A portion of the transaction relating to the sale
of the restaurant property in Venice, Florida, and the reinvestment of the net
sales proceeds was structured to qualify as a like-kind exchange transaction
for federal income tax purposes. The Income Fund distributed amounts sufficient
to enable the Limited Partners to pay federal and state income taxes at a level
reasonably assumed by us, resulting from the sale.
In October 1997, the Income Fund and an affiliate, as tenants-in-common,
sold the restaurant property in Yuma, Arizona, in which the Income Fund owned a
51.67% interest, for a total sales price of $1,010,000 and received net sales
proceeds of $982,025, resulting in a gain, to the tenancy-in-common, of
approximately $128,400 for financial reporting purposes. The restaurant
property was originally acquired in July 1994 and had a total cost of
approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the restaurant property was sold for
approximately $120,300 in excess of its original purchase price. The Income
Fund received approximately $455,000, representing a return of capital for its
pro-rata share of the net sales proceeds. In December 1997, the Income Fund
reinvested the amounts received as a return of capital from the sale of the
Yuma, Arizona restaurant property, in a restaurant property in Vancouver,
Washington, as tenants-in-common with certain of our affiliates. In connection
therewith, the Income Fund and the affiliates entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to its applicable percentage interest. As of December
31, 1998, the Income Fund owned a 23.04% interest in this restaurant property.
The transaction relating to the sale of the restaurant property in Yuma,
Arizona and the reinvestment of the net sales proceeds was structured to
qualify as a like-kind exchange transaction for federal income tax purposes.
In January 1998, the Income Fund sold its restaurant property in Deland,
Florida, to the tenant, for $1,250,000 and received net sales proceeds of
$1,234,122, resulting in a gain of $345,122 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in October
1989 and had a cost of approximately $1,000,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $234,100 in excess of its original
purchase price. In June 1998, the Income Fund reinvested the majority of the
net sales proceeds in a restaurant property in Fort Myers, Florida, with one of
our affiliates as tenants-in-common. The transaction relating to the sale of
the restaurant property in Deland, Florida, and the reinvestment of the net
sales proceeds, was structured to qualify as a like-kind exchange transaction
for federal income tax purposes.
In February 1998, the Income Fund sold its restaurant property in Melbourne,
Florida, for $590,000 and received net sales proceeds of $552,910. Due to the
fact that during 1997, the Income Fund recorded an allowance for loss of
$158,239 for this restaurant property, no gain or loss was recognized for
financial reporting purposes in February 1998, relating to the sale. In April
1998, the Income Fund contributed a portion of the net sales proceeds to
Melbourne Joint Venture, with one of our affiliates, to construct and hold one
restaurant property. As of December 31, 1998, the Income Fund had contributed
an amount to purchase land and pay construction costs relating to the
restaurant property owned by the joint venture. The Income Fund has agreed to
contribute additional amounts to fund additional construction costs of the
joint venture. The Income Fund expects to have a 50% interest in the profits
and losses of the joint venture.
In addition, in February 1998, the Income Fund sold its restaurant property
in Liverpool, New York, for $157,500 and received net sales proceeds of
$145,221. Due to the fact that in prior years the Income Fund recorded an
allowance for loss of $181,970 for this restaurant property, no gain or loss
was recognized for financial reporting purposes in February 1998, relating to
the sale. The Income Fund intends to reinvest the net sales proceeds from the
sale of this restaurant property in an additional restaurant property.
In June 1998, the Income Fund sold its restaurant property in Bellevue,
Nebraska, to a third party and received sales proceeds of $900,000. Due to the
fact that during 1998 the Income Fund wrote off $155,528 in
S-29
<PAGE>
accrued rental income, representing a portion of the accrued rental income that
the Income Fund had recognized since the inception of the lease relating to the
straight-lining of future scheduled rent increases in accordance with generally
accepted accounting principles, no gain or loss was recorded for financial
reporting purposes in June 1998 relating to this sale. This restaurant property
was originally acquired by the Income Fund in December 1989 and had a cost of
approximately $899,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $500 in excess of its original purchase price. In September
1998, the Income Fund contributed the majority of the net sales proceeds to
Warren Joint Venture. The Income Fund has an approximate 64 percent interest in
the profits and losses of Warren Joint Venture and the remaining interest in
this joint venture is held by one of our affiliates.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
Fund had $1,170,686 invested in such short-term investments as compared to
$1,614,759 at December 31, 1997. The decrease in cash and cash equivalents
during 1998, is primarily due to the receipt of $626,907 in net sales proceeds
from the sale of the restaurant property in Whitehall, Michigan in July 1997,
which were being held at December 31, 1997, which were reinvested in a
restaurant property in Overland Park, Kansas, as tenants-in-common with certain
of our affiliates, in January 1998. This decrease is partially offset by an
increase in cash and cash equivalents due to the receipt of $145,221 in net
sales proceeds from the sale of the restaurant property in Liverpool, New York
in February 1998. As of December 31, 1998, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately two percent annually. The funds remaining at December 31, 1998,
after payment of distributions and other liabilities, will be used to invest in
an additional restaurant property as described above and to meet the Income
Fund's working capital and other needs.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on cash from
operations, the Income Fund declared distributions to the Limited Partners of
$1,575,000
S-30
<PAGE>
for each of the six months ended June 30, 1999 and 1998, or $787,500 for each
of the quarters ended June 30, 1999 and 1998. This represents distributions for
each applicable six months of $22.50 per unit, or $11.25 per unit for each of
the quarters ended June 30, 1999 and 1998. No distributions were made to us for
the quarters and six months ended June 30, 1999 and 1998. No amounts
distributed to the Limited Partners for the six months ended June 30, 1999 and
1998 are required to be or have been treated by the Income Fund as a return of
capital for purposes of calculating the Limited Partners' return on their
adjusted capital contributions. The Income Fund intends to continue to make
distributions of cash available to the Limited Partners on a quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $952,383 at June 30, 1999, from $915,817 at December 31, 1998,
primarily as the result of the Income Fund accruing transaction costs relating
to the Acquisition. The increase in liabilities is partially offset by a
decrease due to the Income Fund paying in January 1999 a special distribution
of accumulated, excess operating reserves to the Limited Partners of $70,000
which has been accrued at December 31, 1998. We believe the Income Fund has
sufficient cash on hand to meet the Income Fund's current working capital
needs.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases of the Income Fund's restaurant properties are on a triple-net basis, it
is not anticipated that a permanent reserve for maintenance and repairs will be
established at this time. To the extent, however, that the Income Fund has
insufficient funds for such purposes, we will contribute to the Income Fund an
aggregate amount of up to one percent of the offering proceeds for maintenance
and repairs.
Based on cash from operations, and cumulative excess operating reserves for
the years ended December 31, 1998 and 1996, the Income Fund declared
distributions to the Limited Partners of $3,220,000, $3,150,000, and $3,220,000
for the years ended December 31, 1998, 1997, and 1996, respectively. This
represents distributions of $46, $45, and $46 per Unit for the years ended
December 31, 1998, 1997, and 1996, respectively. No amounts distributed to the
Limited Partners for the years ended December 31, 1998, 1997, and 1996, are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $103,157, $82,503, and $96,112, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$19,403 and $32,019, respectively, to affiliates for such amounts and
accounting and administrative services. Other liabilities of the Income Fund,
including distributions payable, decreased to $896,414 at December 31, 1998,
from $1,022,326 at December 31, 1997. The decrease in other liabilities is
partially attributable to the payment during 1998 of renovation costs accrued
at December 31, 1997 for the restaurant property in Greensburg, Indiana, in
connection with the new lease entered into in July 1997, as described above. In
addition, the decrease in other liabilities at December 31, 1998 was due to a
decrease in accrued and escrowed real estate taxes payable as a result of the
Income Fund accruing real estate taxes relating to its restaurant property in
Melbourne, Florida at December 31, 1997, after the tenant vacated the
restaurant property in October 1997. This restaurant property was sold in 1998
and no accrual was made at December 31, 1998. Other liabilities also decreased
due to a decrease in rents paid in advance at December 31, 1998. The decrease
in other liabilities is partially offset by an increase in distributions
payable as a result of the Income Fund accruing a special distribution payable
to the Limited Partners of $70,000 at December 31, 1998. We believe that the
Income Fund has sufficient cash on hand to meet its current working capital
needs.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
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Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund and its
consolidated joint venture, Caro Joint Venture, owned and leased 35 wholly
owned restaurant properties, including four restaurant properties which were
sold during 1998, to operators of fast-food and family-style restaurant chains.
During the six months ended June 30, 1999, the Income Fund and Caro Joint
Venture, owned and leased 32 wholly owned restaurant properties, including four
restaurant properties which were sold in June 1999. In connection therewith,
the Income Fund and Caro Joint Venture earned $1,429,977 and $1,384,259 during
the six months ended June 30, 1999 and 1998, respectively, in rental income
from operating leases, net of adjustments to accrued rental income, and earned
income from direct financing leases from these restaurant properties, $717,160
and $627,999 of which was earned during the quarters ended June 30, 1999 and
1998. Rental and earned income increased during the quarter and six months
ended June 30, 1999, as compared to the quarter and six months ended June 30,
1998, primarily as a result of the fact that during the quarter and six months
ended June 30, 1998 the Income Fund wrote off approximately $155,500 in accrued
rental income, or non-cash accounting adjustments relating to the straight-
lining of future scheduled rent increases over the lease term in accordance
with generally accepted accounting principles, relating to its restaurant
property in Bellevue, Nebraska to adjust the carrying value of the asset to the
net sales proceeds received in June 1998 from the sale of this restaurant
property. The increase in rental and earned income was partially offset by a
decrease in rental and earned income as a result of the sales of restaurant
properties during 1998 and the 1999 sales which are described above in "Capital
Resources". Rental and earned income are expected to remain at reduced amounts
while equity in earnings of joint ventures is expected to increase due to the
fact that the Income Fund reinvested the net sales proceeds from the 1998 sales
of restaurant properties in joint ventures or in restaurant properties with our
affiliates, as tenants-in-common.
For the six months ended June 30, 1999 and 1998, the Income Fund also earned
$16,482 and $34,479, respectively, in contingent rental income, $7,307 and
$2,089 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. The decrease in contingent rental income during the six months
ended June 30, 1999 is primarily attributable to a decrease in gross sales of
certain restaurant properties, the leases of which require the payment of
contingent rental income. Contingent rental income was higher for the quarter
ended June 30, 1999, due to the fact that during the quarter ended June 30,
1998 the Income Fund adjusted estimated contingent rental amounts accrued at
December 31, 1997, to actual amounts.
For the six months ended June 30, 1998, the Income Fund owned and leased
four restaurant properties indirectly through joint venture arrangements and
five restaurant properties as tenants-in-common with our affiliates. For the
six months ended June 30, 1999, the Income Fund owned and leased five
restaurant properties indirectly through joint venture arrangements and five
restaurant properties as tenants-in-common with our affiliates. In connection
therewith, during the six months ended June 30, 1999 and 1998, the Income Fund
earned $247,222 and $117,899, respectively, attributable to net income earned
by these joint ventures, $123,447 and $61,403 of which was earned for the
quarters ended June 30, 1999 and 1998, respectively. The increase in net income
earned by joint ventures during the quarter and six months ended June 30, 1999,
as compared to the quarter and six months ended June 30, 1998, is primarily due
to the fact that in 1998 the Income Fund used the net sales proceeds from the
1998 sales of three restaurant properties to invest in Melbourne Joint Venture
and Warren Joint Venture and to acquire an interest in a restaurant property in
Fort Myers, Florida, with one of our affiliates as tenants-in-common.
During the six months ended June 30, 1999 and 1998, the Income Fund earned
$39,252 and $67,682, respectively, in interest and other income, $23,796 and
$31,006 of which was earned for the quarters ended June 30, 1999 and 1998.
Interest and other income was higher during the quarter and six months ended
June 30, 1998, partially due to the fact that during the quarter and six months
ended June 30, 1998, the Income Fund earned interest on the net sales proceeds
relating to the sale of the restaurant properties in Deland and Melbourne,
Florida, and Liverpool, New York, pending the reinvestment of the net sales
proceeds in additional
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<PAGE>
restaurant properties. Interest and other income were also higher during the
quarter and six months ended June 30, 1998, because Caro Joint Venture
recognized approximately $13,300 in other income during such periods due to the
fact that the joint venture reversed real estate tax expense as a result of the
tenant of the restaurant property paying past due real estate taxes.
Operating expenses, including depreciation and amortization expense, were
$440,132 and $356,132 for the six months ended June 30, 1999 and 1998,
respectively, of which $237,795 and $178,982 of which were incurred for the
quarters ended June 30, 1999 and 1998, respectively. The increase in operating
expenses for the quarter and six months ended June 30, 1999, was primarily due
to the fact that the Income Fund incurred $77,695 and $110,820 in transaction
costs during the quarter and six months ended June 30, 1999, respectively,
related to our retaining financial and legal advisors to assist us in
evaluating and negotiating the Acquisition with APF. If the Limited Partners
reject the Acquisition, the Income Fund will bear the portion of the
transaction costs based upon the percentage of "For" votes and we will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions. The increase in operating expenses was partially offset by a
decrease in depreciation expense due to sales of several restaurant properties
in 1998 and 1999.
As a result of the sales of the four restaurant properties described above
in "Capital Resources," the Income Fund recognized a gain of $848,303 during
the quarter and six months ended June 30, 1999. In addition, as a result of the
sale of the restaurant property in Deland, Florida, the Income Fund recognized
a gain of $345,122 during the six months ended June 30, 1998 for financial
reporting purposes.
The Years Ended December 31, 1998, 1997 and 1996
During 1996, the Income Fund and its consolidated joint venture, Caro Joint
Venture owned and leased 38 wholly owned restaurant properties, including one
restaurant property in Dallas, Texas, which was sold in December 1996, during
1997, the Income Fund owned and leased 40 wholly owned restaurant properties,
including three restaurant properties which were sold in 1997, and during 1998,
the Income Fund owned and leased 36 wholly owned restaurant properties,
including four restaurant properties which were sold in 1998. In addition,
during 1996, the Income Fund was a co-venturer in three separate joint ventures
that each owned and leased one restaurant property, during 1997, the Income
Fund was a co-venturer in three separate joint ventures that owned and leased a
total of five restaurant properties, including one restaurant property in Show
Low, Arizona, which was sold in January 1997, and during 1998, the Income Fund
was a co-venturer in five separate joint ventures that owned and leased a total
of six restaurant properties. During 1996, the Income Fund owned and leased two
restaurant properties with affiliates as tenants-in-common, during 1997, the
Income Fund owned and leased four restaurant properties with affiliates as
tenants-in-common, including one restaurant property in Yuma, Arizona, which
was sold in October, 1997, and during 1998, the Income Fund owned and leased
five restaurant properties with affiliates as tenants-in-common. As of December
31, 1998, the Income Fund owned, either directly, as tenants-in-common with
affiliates, or through joint venture arrangements, 42 restaurant properties
which are subject to long-term, triple-net leases. The leases of the restaurant
properties provide for minimum base annual rental amounts, payable in monthly
installments, ranging from approximately $37,900 to $222,800. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount. In
addition, some of the leases provide that, commencing in the fourth to sixth
lease year, the percentage rent will be an amount equal to the greater of the
percentage rent calculated under the lease formula or a specified percentage,
ranging from one to five percent, of the purchase price or gross sales.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
and its consolidated joint venture, Caro Joint Venture, earned $2,823,377,
$2,897,402, and $3,333,665, respectively, in rental income from operating
leases, net of adjustments to accrued rental income, and earned income from
direct financing leases. Rental and earned income decreased by approximately
$185,200 during 1998 due to the sales of four restaurant properties during
1998. The decrease in rental and earned income during 1998 and 1997, each as
compared to the previous year, was partially attributable to a decrease of
approximately $226,600 and $159,400, during 1998 and 1997, respectively, as a
result of the sales of four restaurant properties during 1997.
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<PAGE>
The decrease in rental and earned income during 1997, as compared to 1996, was
partially attributable to a decrease of $103,100 in rental and earned income
from the sale of the restaurant property in Dallas, Texas in December 1996. The
decrease in rental income during 1998 and 1997 was partially offset by an
increase of approximately $19,600 and $109,400, respectively, due to the
reinvestment of the net sales proceeds from the 1996 sale of the restaurant
property in Dallas, Texas, in a restaurant property in Marietta, Georgia, in
February 1997. The decrease in rental and earned income during 1998 and 1997
was partially offset by an increase of approximately $293,800 and $1,600,
respectively, in rental and earned income due to the fact that the Income Fund
reinvested the net sales proceeds from the 1997 sales of two restaurant
properties in two IHOP restaurant properties in Elgin, Illinois and Manassas,
Virginia in December 1997.
In addition, the decrease in rental and earned income for 1998, as compared
to 1997, was partially offset by the fact that during 1998, the Income Fund's
consolidated joint venture collected and recognized as income past due rental
amounts of approximately $36,000 for which the Income Fund had previously
established an allowance for doubtful accounts. The decrease in rental income
during 1998 as compared to 1997, was partially offset by, and the decrease in
rental income during 1997, as compared to 1996, was attributable to, the fact
that during 1997 the Income Fund's consolidated joint venture established an
allowance for doubtful accounts for rental amounts unpaid by the tenant of the
restaurant property in Caro, Michigan totalling approximately $84,500 due to
financial difficulties the tenant was experiencing. No such allowance was
established during 1998 or 1996.
In addition, the decrease in rental and earned income during 1998 as
compared to 1997, was partially offset by, and the decrease during 1997, as
compared to 1996, was partially attributable to, the Income Fund increasing its
allowance for doubtful accounts during 1997 by approximately $40,500 for rental
amounts relating to the Hardee's restaurant property located in Greensburg,
Indiana, due to financial difficulties the tenant was experiencing. No such
allowance was recorded in 1998. Rental and earned income also decreased by
approximately $43,700 during 1997 due to the fact that the Income Fund
terminated the lease with the former tenant of the restaurant property in
Greensburg, Indiana, in June 1997, as described above in "Capital Resources."
We have agreed that they will cease collection efforts on past due rental
amounts once the former tenant of this restaurant property pays all amounts due
under the promissory note for past due real estate taxes described above in
"Capital Resources." The decrease in rental and earned income in 1998 and 1997,
each as compared to the previous year, was slightly offset by an increase of
$18,400 and $14,200, respectively, in rental income from the new tenant of this
restaurant property who began operating the restaurant property in 1997 after
it was renovated into an Arby's restaurant property.
In addition, the decrease in rental and earned income during 1998, as
compared to 1997, was partially due to the fact that during June 1998, the
Income Fund wrote off approximately $155,500 in accrued rental income relating
to the restaurant property in Bellevue, Nebraska to adjust the carrying value
of the asset to the net proceeds received from the sale of this restaurant
property in June 1998. In addition, rental and earned income decreased during
1997, as a result of the Income Fund establishing an allowance for doubtful
accounts during 1997 totalling approximately $107,100 for rental amounts
relating to the restaurant property located in Melbourne, Florida, due to the
fact that the tenant vacated the restaurant property in October 1997. The
Income Fund will continue to pursue collection of past due rental amounts
relating to this restaurant property and will recognize such amounts as income
if collected. The Income Fund sold this restaurant property in February 1998,
as described above in "Capital Resources."
In addition, rental and earned income decreased by approximately $35,300
during 1997, as a result of the fact that in December 1996, the tenant ceased
operations and vacated the restaurant property in Liverpool, New York. The
Income Fund sold this restaurant property in February 1998, as described above
in "Capital Resources."
The decrease in rental and earned income during 1997, as compared to 1996,
was offset by the fact that the Income Fund collected and recorded as income
approximately $18,600 and $5,300, respectively, in rental payment deferrals for
the two restaurant properties leased by the same tenant in Chester,
Pennsylvania, and
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<PAGE>
Orlando, Florida. Previously, the Income Fund had established an allowance for
doubtful accounts for these amounts. These amounts were collected in accordance
with the agreement entered into in March 1996, with the tenant to pay the
remaining balance of the rental payment deferral amounts as discussed above in
"Capital Resources."
For the years ended December 31, 1998, 1997, and 1996, the Income Fund also
earned $156,676, $147,437, and $110,073, respectively, in contingent rental
income. The increase in contingent rental income during 1998 and 1997, each as
compared to the previous year, is primarily attributable to increases in gross
sales relating to certain restaurant properties whose leases require the
payment of contingent rent.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $323,105, $280,331, and $97,381, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The increase in net income earned by joint ventures during 1998, as
compared to 1997, is primarily due to the fact that in 1998, the Income Fund
reinvested the net sales proceeds it received from the 1997 and 1998 sales of
three restaurant properties, in additional restaurant properties in Overland
Park, Kansas; Memphis, Tennessee, and Fort Myers, Florida with certain of our
affiliates as tenants-in-common. The increase in net income earned by joint
ventures during 1998, as compared to 1997, was partially offset by, and the
increase in 1997, as compared to 1996, was primarily due to, the fact that in
January 1997, Show Low Joint Venture, in which the Income Fund owns a 36
percent interest, recognized a gain of approximately $360,000 for financial
reporting purposes as a result of the sale of its restaurant property. Show Low
Joint Venture reinvested the majority of the net sales proceeds in a
replacement restaurant property in June 1997. In addition, in October 1997, the
Income Fund and an affiliate, as tenants-in-common, sold the restaurant
property in Yuma, Arizona, and recognized a gain of approximately $128,400 for
financial reporting purposes, as described above in "Capital Resources." The
Income Fund owned a 51.67% interest in the restaurant property in Yuma,
Arizona, held as tenants-in-common with an affiliate. The Income Fund
reinvested its portion of the net sales proceeds in a restaurant property in
Vancouver, Washington, in December 1997, as described above in "Capital
Resources."
During the year ended December 31, 1998, four of the Income Fund's lessees,
Golden Corral Corporation, Restaurant Management Services, Inc., Mid-America
Corporation, and IHOP Properties, Inc. each contributed more than ten percent
of the Income Fund's total rental income, including rental income from the
Income Fund's consolidated joint venture and the Income Fund's share of the
rental income from the restaurant properties owned by five unconsolidated joint
ventures in which the Income Fund is a co-venturer and five restaurant
properties owned with affiliates as tenants-in-common. As of December 31, 1998,
Golden Corral Corporation and IHOP Properties, Inc. were each the lessees under
leases relating to five restaurants, Restaurant Management Services, Inc. was
the lessee under leases relating to seven restaurants and Mid-America
Corporation was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum annual rental payments required by the
leases, these four lessees each will continue to contribute more than ten
percent of the Income Fund's total rental income during 1999. In addition,
three restaurant chains, Golden Corral, Burger King, and IHOP each accounted
for more than ten percent of the Income Fund's total rental income during the
year ended December 31, 1998, including the Income Fund's consolidated joint
venture and the Income Fund's share of the rental income from the restaurant
properties owned by five unconsolidated joint ventures in which the Income Fund
is a co-venturer and five restaurant properties owned with affiliates as
tenants-in-common. In 1999, it is anticipated that these restaurant chains each
will continue to account for more than ten percent of the Income Fund's total
rental income to which the Income Fund is entitled under the terms of the
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income if the Income Fund is not able to re-lease the
restaurant properties in a timely manner.
For the years ended 1998, 1997, and 1996, the Income Fund also earned
$110,502, $119,961, and $49,056, respectively, in interest and other income.
The increase in interest and other income during the year ended December 31,
1997, as compared to the year ended December 31, 1996, was primarily
attributable to interest earned on the net sales proceeds received and held in
escrow relating to the sales of several restaurant properties pending
reinvestment of the net sales proceeds in additional restaurant properties.
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<PAGE>
Operating expenses, including depreciation and amortization expense, were
$694,773, $840,365, and $683,163 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998, as
compared to 1997, and the increase in operating expenses during 1997, as
compared to 1996, is partially due to the fact that the Income Fund recorded
approximately $122,400 in bad debt expense and approximately $19,400 in real
estate tax expense during 1997 for the restaurant property located in
Melbourne, Florida, due to the fact that the tenant vacated the restaurant
property in October 1997. The Income Fund sold this restaurant property in
February 1998, as described above in "Capital Resources." In addition, during
1997, the Income Fund's consolidated joint venture, Caro Joint Venture,
recorded bad debt expense and real estate tax expense of approximately $26,200
relating to the restaurant property located in Caro, Michigan, representing
past due rental and other amounts. No such bad debt expense and real estate tax
expense were recorded during the year ended December 31, 1998 due to the fact
that the tenant has been making rental payments in accordance with the terms of
its lease agreement.
The decrease in operating expenses during 1998, as compared to 1997, was
partially attributable to, and the increase in operating expenses during 1997
as compared to 1996, was partially offset by, the decrease in depreciation
expense which resulted from the sale of several restaurant properties during
1998 and 1997 and the sale of the restaurant property in Dallas, Texas in
December 1996. The decrease in depreciation expense was partially offset by an
increase in depreciation expense attributable to the purchase of the restaurant
property in Marietta, Georgia, in February 1997.
The decrease in operating expenses for 1998, is partially offset by the fact
that the Income Fund incurred $20,211 in transaction costs in 1998 related our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition.
As a result of the sale of the restaurant property in Deland, Florida, as
described above in "Capital Resources," the Income Fund recognized a gain of
$345,122 during the year ended December 31, 1998, for financial reporting
purposes. As a result of the sales of the restaurant properties in Naples,
Florida; Plattsmouth, Nebraska and Venice, Florida, as described above in
"Capital Resources," the Income Fund recognized a gain of $626,804 during 1997
for financial reporting purposes. The gain for 1997 was partially offset by a
loss of $79,777 for financial reporting purposes, resulting from the July 1997
sale of the restaurant property in Whitehall, Michigan, as described above in
"Capital Resources." As a result of the sale of the restaurant property in
Dallas, Texas, in December 1996, the Income Fund recognized a loss for
financial reporting purposes of $1,706 for the year ended December 31, 1996, as
discussed above in "Capital Resources."
During the years ended December 31, 1996 and 1997, the Income Fund recorded
provisions for losses on land and building in the amounts of $77,023 and
$104,947, respectively, for financial reporting purposes for the restaurant
property in Liverpool, New York. This lease was terminated in December 1996.
The allowance at December 31, 1997, represented the difference between the
restaurant property's carrying value at December
31, 1997 and the net realizable value of the restaurant property based on the
net sales proceeds received in February 1998 from the sale of the restaurant
property. The allowance at December 31, 1996, represented the difference
between the restaurant property's carrying value at December 31, 1996 and the
estimated net realizable value for this restaurant property based on an
anticipated sales price to a third party. No such provision was recorded during
the year ended December 31, 1998.
During the year ended December 31, 1997, the Income Fund established an
allowance for loss on land and an allowance for impairment in the carrying
value of the net investment in direct financing lease for its restaurant
property in Melbourne, Florida, in the amount of $158,239. The tenant of this
restaurant property vacated the restaurant property in October 1997 and ceased
making rental payments. The allowance represented the difference between the
restaurant property's carrying value at December 31, 1997 and the net sales
proceeds received in February 1998 from the sale of the restaurant property, as
described above in "Capital Resources." No such provision was recorded during
the year ended December 31, 1998 and 1996.
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The Income Fund's leases as of December 31, 1998, are triple-net leases and
contain provisions that we believe mitigate the adverse effect of inflation.
Such provisions include clauses requiring the payment of percentage rent based
on certain restaurant sales above a specified level and/or automatic increases
in base rent at specified times during the term of the lease. Management
expects that increases in restaurant sales volumes due to inflation and real
sales growth should result in an increase in rental income over time. Continued
inflation also may cause capital appreciation of the Income Fund's restaurant
properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the restaurants and on potential capital appreciation of
the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
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As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
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<PAGE>
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-39
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-23
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-24
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended
December 31, 1998........................................................ F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-34
</TABLE>
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $3,069,230 and $3,586,086,
respectively.......................................... $15,258,241 $18,559,844
Net investment in direct financing leases.............. 3,897,669 3,929,152
Investment in joint ventures........................... 5,061,676 5,021,121
Cash and cash equivalents.............................. 1,124,292 1,170,686
Restricted cash........................................ 4,332,095 --
Receivables, less allowance for doubtful accounts of
$281,449 and $323,813, respectively................... 82,799 150,912
Prepaid expenses....................................... 6,172 949
Lease costs, less accumulated amortization of $8,006
and $7,181............................................ 9,694 10,519
Accrued rental income, less allowance for doubtful
accounts of $44,793 and $38,944, respectively......... 442,192 785,982
Other assets........................................... 26,731 26,731
----------- -----------
$30,241,561 $29,655,896
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 87,205 $ 8,173
Accrued and escrowed real estate taxes payable......... 6,796 2,500
Due to related party................................... 26,828 19,403
Distributions payable.................................. 787,500 857,500
Rents paid in advance and deposits..................... 44,054 28,241
----------- -----------
Total liabilities.................................. 952,383 915,817
Commitments and Contingencies (Note 4)
Minority interest...................................... 140,106 144,949
Partners' capital...................................... 29,149,072 28,595,130
----------- -----------
$30,241,561 $29,655,896
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 595,624 $ 653,877 $1,199,285 $1,288,852
Adjustments to accrued rental
income........................ (2,925) (158,453) (5,849) (161,377)
Earned income from direct
financing leases.............. 124,461 132,575 236,541 256,784
Contingent rental income....... 7,307 2,089 16,482 34,479
Interest and other income...... 23,796 31,006 39,252 67,682
---------- --------- ---------- ----------
748,263 661,094 1,485,711 1,486,420
---------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 37,328 40,577 78,111 86,042
Bad debt expense............... -- 12,854 -- 12,854
Professional services.......... 14,132 10,921 18,842 16,791
State and other taxes.......... 247 487 9,713 10,392
Depreciation and amortization.. 108,393 114,143 222,646 230,053
Transaction costs.............. 77,695 -- 110,820 --
---------- --------- ---------- ----------
237,795 178,982 440,132 356,132
---------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures
and Gain on Sale of
Land and Buildings............. 510,468 482,112 1,045,579 1,130,288
Minority Interest in Income of
Consolidated Joint Venture..... (9,662) (11,659) (12,162) (24,540)
Equity in Earnings of
Unconsolidated Joint Ventures.. 123,447 61,403 247,222 117,899
Gain on Sale of Land and
Buildings...................... 848,303 -- 848,303 345,122
---------- --------- ---------- ----------
Net Income...................... $1,472,556 $ 531,856 $2,128,942 $1,568,769
========== ========= ========== ==========
Allocation of Net Income:
General partners............... $ 13,529 $ 5,318 $ 20,093 $ 13,806
Limited partners............... 1,459,027 526,538 2,108,849 1,554,963
---------- --------- ---------- ----------
$1,472,556 $ 531,856 $2,128,942 $1,568,769
========== ========= ========== ==========
Net Income Per Limited Partner
Unit........................... $ 20.84 $ 7.52 $ 30.13 $ 22.21
========== ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................... 70,000 70,000 70,000 70,000
========== ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six
Months Ended Year Ended
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 257,690 $ 229,363
Net income......................................... 20,093 28,327
----------- -----------
277,783 257,690
----------- -----------
Limited partners:
Beginning balance.................................. 28,337,440 28,564,886
Net income......................................... 2,108,849 2,992,554
Distributions ($22.50 and $46.00 per limited
partner unit, respectively)....................... (1,575,000) (3,220,000)
----------- -----------
28,871,289 28,337,440
----------- -----------
Total partners' capital.............................. $29,149,072 $28,595,130
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,663,032 $ 1,655,360
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 4,318,145 2,832,253
Additions to land and buildings on operating
leases.......................................... -- (125,000)
Investment in joint ventures..................... (44,121) (2,740,640)
Increase in restricted cash...................... (4,318,145) (204,074)
Payment of lease costs........................... (3,300) (3,300)
----------- -----------
Net cash provided by (used in) investing
activities.................................... (47,421) (240,761)
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,645,000) (1,575,000)
Distributions to holder of minority interest..... (17,005) (21,020)
----------- -----------
Net cash used in financing activities.......... (1,662,005) (1,596,020)
----------- -----------
Net Decrease in Cash and Cash Equivalents............ (46,394) (181,421)
Cash and Cash Equivalents at Beginning of Period..... 1,170,686 1,614,759
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,124,292 $ 1,433,338
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of period. $ 787,500 $ 787,500
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VI, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its approximate 66 percent interest in the
accounts of Caro Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
2. Land and Buildings on Operating Leases:
In June 1999, the Partnership sold four of its Burger King properties, one
in each of Sevierville, Walker Springs, Broadway and Greeneville, Tennessee, to
the tenant in accordance with the purchase option under the lease agreements,
for a total of approximately $4,354,000 and received net sales proceeds of
$4,318,145 resulting in a total gain of $848,303 for financial reporting
purposes. These properties were originally acquired by the Partnership in
January 1990 and had costs totaling approximately $3,535,700, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold these properties for a total of approximately $782,400 in
excess of their original purchase prices.
3. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $4,318,145 from the sales of
the four Burger King properties, plus accrued interest of $13,950, were being
held in interest-bearing escrow accounts pending the release of funds by the
escrow agent to acquire additional properties on behalf of the Partnership.
4. Commitments and Contingencies:
On March 11, 1999 the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,865,194 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going
F-5
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
concern basis (meaning the Partnership continues unchanged) at $36,721,726 as
of December 31, 1998. Legg Mason Wood Walker, Incorporated has rendered a
fairness opinion that the APF Share consideration, payable by APF, is fair to
the Partnership from a financial point of view. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners
that is expected to be held in the fourth quarter of 1999, limited partners
holding in excess of 50% of the Partnership's outstanding limited partnership
interests must approve the Merger prior to consummation of the transaction. If
the limited partners at the special meeting approve the Merger, APF will own
the properties and other assets of the Partnership. The general partners intend
to recommend that the limited partners of the Partnership approve the Merger.
In connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999 the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund VI, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund VI, Ltd. ( a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 19, 1999, except for Note 12,
for which the date is March 11, 1999 and
Note 13 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $18,559,844 $20,785,684
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 3,929,152 4,708,841
Investment in joint ventures........................... 5,021,121 1,130,139
Cash and cash equivalents.............................. 1,170,686 1,614,759
Restricted cash........................................ -- 709,227
Receivables, less allowance for doubtful accounts of
$323,813 and $363,410................................. 150,912 157,989
Prepaid expenses....................................... 949 4,235
Lease costs, less accumulated amortization of $7,181
and $5,581............................................ 10,519 12,119
Accrued rental income, less allowance for doubtful
accounts of $38,944 and $27,245....................... 785,982 843,345
Other assets........................................... 26,731 26,731
----------- -----------
$29,655,896 $29,993,069
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 8,173 $ 14,138
Accrued construction costs payable..................... -- 125,000
Accrued and escrowed real estate taxes payable......... 2,500 38,025
Due to related parties................................. 19,403 32,019
Distributions payable.................................. 857,500 787,500
Rents paid in advance and deposits..................... 28,241 57,663
----------- -----------
Total liabilities.................................. 915,817 1,054,345
Minority interest...................................... 144,949 144,475
Partners' capital...................................... 28,595,130 28,794,249
----------- -----------
$29,655,896 $29,993,069
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,520,346 $2,465,817 $2,776,776
Adjustments to accrued rental income.... (167,227) (17,548) (537)
Earned income from direct financing
leases................................. 470,258 449,133 557,426
Contingent rental income................ 156,676 147,437 110,073
Interest and other income............... 110,502 119,961 49,056
---------- ---------- ----------
3,090,555 3,164,800 3,492,794
---------- ---------- ----------
Expenses:
General operating and administrative.... 160,358 156,847 159,388
Professional services................... 32,400 25,861 32,272
Bad debt expense........................ 12,854 131,184 --
Real estate taxes....................... -- 43,676 --
State and other taxes................... 10,392 8,969 7,930
Depreciation and amortization........... 458,558 473,828 483,573
Transaction costs....................... 20,211 -- --
---------- ---------- ----------
694,773 840,365 683,163
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Net Investment in Direct
Financing Leases and Provision for Loss
on Land and Building and Impairment in
Carrying Value of Net Investment in
Direct Financing Lease................... 2,395,782 2,324,435 2,809,631
Minority interest in Income of Consoli-
dated Joint Venture...................... (43,128) 11,275 (24,682)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 323,105 280,331 97,381
Gain (Loss) on Sale of Land and Buildings
and Net Investment in Direct Financing
Leases................................... 345,122 547,027 (1,706)
Provision for Loss on Land and Buildings
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... -- (263,186) (77,023)
---------- ---------- ----------
Net Income................................ $3,020,881 $2,899,882 $2,803,601
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 28,327 $ 25,353 $ 28,337
Limited partners........................ 2,992,554 2,874,529 2,775,264
---------- ---------- ----------
$3,020,881 $2,899,882 $2,803,601
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 42.75 $ 41.06 $ 39.65
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 70,000 70,000 70,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995...... $1,000 $174,673 $35,000,000 $(19,214,226) $17,514,319 $(4,015,000) $29,460,766
Distributions to
limited partners
($46.00 per limited
partner unit)......... -- -- -- (3,220,000) -- -- (3,220,000)
Net income............. -- 28,337 -- -- 2,775,264 -- 2,803,601
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1996...... 1,000 203,010 35,000,000 (22,434,226) 20,289,583 (4,015,000) 29,044,367
Distributions to
limited partners
($45.00 per limited
partner unit)......... -- -- -- (3,150,000) -- -- (3,150,000)
Net income............. -- 25,353 -- -- 2,874,529 -- 2,899,882
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1997...... 1,000 228,363 35,000,000 (25,584,226) 23,164,112 (4,015,000) 28,794,249
Distributions to
limited partners
($46.00 per limited
partner unit)......... -- -- -- (3,220,000) -- -- (3,220,000)
Net income............. -- 28,327 -- -- 2,992,554 -- 3,020,881
------ -------- ----------- ------------ ----------- ----------- -----------
Balance,
December 31, 1998...... $1,000 $256,690 $35,000,000 $(28,804,226) $26,156,666 $(4,015,000) $28,595,130
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 3,092,644 $ 3,097,751 $ 3,363,188
Distributions from unconsolidated
joint ventures...................... 328,721 144,016 114,163
Cash paid for expenses............... (270,339) (180,530) (203,432)
Interest received.................... 92,634 94,804 36,843
----------- ----------- -----------
Net cash provided by operating
activities........................ 3,243,660 3,156,041 3,310,762
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings........................... 2,832,253 4,003,985 982,980
Additions to land and buildings on
operating leases.................... (125,000) (2,666,258) --
Investment in direct financing
leases.............................. -- (1,057,282) --
Investment in joint ventures......... (3,896,598) (521,867) (146,090)
Return of capital from joint
ventures............................ (84) 524,975 --
Collections on mortgage note
receivable.......................... -- -- 3,033
Decrease (increase) in restricted
cash................................ 697,650 279,367 (977,017)
Payment of lease costs............... (3,300) (3,300) (3,300)
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. (495,079) 559,620 (140,394)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.... (3,150,000) (3,220,000) (3,150,000)
Distributions to holder of minority
interest............................ (42,654) (8,832) (13,437)
----------- ----------- -----------
Net cash used in financing
activities........................ (3,192,654) (3,228,832) (3,163,437)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (444,073) 486,829 6,931
Cash and Cash Equivalents at Beginning
of Year................................ 1,614,759 1,127,930 1,120,999
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,170,686 $ 1,614,759 $ 1,127,930
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 3,020,881 $ 2,899,882 $ 2,803,601
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense..................... 12,854 131,184 --
Depreciation......................... 456,958 471,938 481,683
Amortization......................... 1,600 1,890 1,890
Minority interest in income of
consolidated joint venture.......... 43,128 (11,275) 24,682
Equity in earnings of unconsolidated
joint ventures, net of
distributions....................... 5,616 (136,315) 16,782
Loss (gain) on sale of land and
building............................ (345,122) (547,027) 1,706
Provision for loss on land and
building and impairment in carrying
value of net investment in direct
financing lease..................... -- 263,186 77,023
Decrease (increase) in receivables... 8,649 17,113 (90,360)
Decrease (increase) in prepaid
expenses............................ 3,286 (3,072) 4,087
Decrease in net investment in direct
financing leases.................... 63,868 67,389 68,177
Decrease (increase) in accrued rental
income.............................. 51,142 (81,244) (103,935)
Increase (decrease) in accounts
payable and accrued expenses........ (37,246) 25,964 2,529
Increase (decrease) in due to related
parties............................. (12,532) 29,470 (3,391)
Increase (decrease) in rents paid in
advance and deposits................ (29,422) 26,958 26,288
----------- ----------- -----------
Total adjustments.................. 222,779 256,159 507,161
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,243,660 $ 3,156,041 $ 3,310,762
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 857,500 $ 787,500 $ 857,500
=========== =========== ===========
</TABLE>
See accompanying notes fo financial statements.
F-11
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and accrued rental
income, and to decrease rental or other income or increase bad debt expense for
the current
F-12
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its approximate
66 percent interest in Caro Joint Venture, a Florida general partnership, using
the consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership's investments in Auburn Joint Venture, Show Low Joint
Venture, Asheville Joint Venture, Warren Joint Venture, and Melbourne Joint
Venture and properties in Clinton, North Carolina, Vancouver, Washington;
Overland Park, Kansas; Memphis, Tennessee and Fort Myers, Florida, each of
which is held as tenants-in-common with affiliates, are accounted for using the
equity method since the Partnership shares control with the affiliates.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees and lease incentive costs incurred in finding
new tenants and negotiating new leases for the Partnership's properties are
amortized over the terms of the new leases using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
F-13
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of some of these leases are operating leases.
Substantially all leases are for 10 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to four successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land.................... $ 8,558,191 $10,046,309
Buildings............... 13,587,739 14,344,114
----------- -----------
22,145,930 24,390,423
Less accumulated
depreciation........... (3,586,086) (3,327,334)
----------- -----------
18,559,844 21,063,089
Less allowance for loss
on land and building... -- (277,405)
----------- -----------
$18,559,844 $20,785,684
=========== ===========
</TABLE>
In February 1997, the Partnership reinvested the net sales proceeds from the
sale of a property in Dallas, Texas, along with additional funds, in a
Bertucci's property in Marietta, Georgia, for a total cost of approximately
$1,112,600.
In July 1997, the Partnership sold the property in Whitehall, Michigan, to a
third party, for $665,000 and received net sales proceeds of $626,907,
resulting in a loss of $79,777 for financial reporting purposes.
In addition, in July 1997, the Partnership sold its property in Naples,
Florida, to a third party, for $1,530,000 and received net sales proceeds of
$1,477,780, resulting in a gain of $186,550 for financial reporting purposes.
This property was originally acquired by the Partnership in December 1989 and
had a cost of approximately $1,083,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the partnership sold the
property for approximately $403,800 in excess of its original purchase price.
In December 1997, the Partnership reinvested the net sales proceeds in an IHOP
property in Elgin, Illinois, for a total cost of approximately $1,484,100.
In July 1997, the Partnership entered into a new lease for the property in
Greensburg, Indiana, with a new tenant to operate the property as an Arby's
restaurant. In connection therewith, the Partnership incurred $125,000 in
renovation costs, which were paid in 1998.
F-14
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In September 1997, the Partnership sold its property in Venice, Florida, to
a third party, for $1,245,000 and received net sales proceeds of $1,201,648,
resulting in a gain of $283,853 for financial reporting purposes. This property
was originally acquired by the Partnership in August 1989 and had a cost of
approximately $1,032,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $174,300 in excess of its original purchase price. In December
1997, the Partnership reinvested the net sales proceeds in an IHOP property in
Manassas, Virginia, for a total cost of approximately $1,126,800.
In 1997, the Partnership recorded a provision for loss on land and building
in the amount of $104,947 for financial reporting purposes for the property in
Liverpool, New York. The terms of this lease were terminated in December 1996.
This allowance represented the difference between (i) the property's carrying
value at December 31, 1997, and (ii) the net realizable value of the property
based on the net sales proceeds of $145,221 received in February 1998 from the
sale of the property. Due to the fact that in 1997 and prior years, the
Partnership had recorded an allowance for loss totalling $181,970 for this
property, no gain or loss was recognized for financial reporting purposes
during 1998 relating to the sale of this Property in February 1998.
During 1997, the Partnership established an allowance for loss on land in
the amount of $95,435 for its property in Melbourne, Florida. The tenant of
this Property vacated the property in October 1997 and ceased making rental
payments. The allowance represents the difference between the property's
carrying value for the land at December 31, 1997, and the net realizable value
of the land based on the net sales proceeds of $552,910 received in February
1998 from the sale of the property. No gain or loss was recognized for
financial reporting purposes relating to the sale of this property in February
1998.
In January 1998, the Partnership sold its property in Deland, Florida, to
the tenant for $1,250,000 and received net sales proceeds of $1,234,122,
resulting in a gain of $345,122 for financial reporting purposes. This property
was originally acquired by the Partnership in October 1989 and had a cost of
approximately $1,000,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $234,100 in excess of its original purchase price. In June 1998,
the Partnership sold its property in Bellevue, Nebraska, and received sales
proceeds of $900,000. Due to the fact that during 1998, the Partnership wrote
off $155,528 in accrued rental income, representing the majority of the accrued
rental income that the Partnership had recognized since the inception of the
lease relating to the straight-lining of future scheduled rent increases in
accordance with generally accepted accounting principles, no gain or loss was
recorded for financial reporting purposes in June 1998 relating to this sale.
This property was originally acquired by the Partnership in December 1989 and
had a cost of approximately $899,500, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $500 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized a loss of $51,142 (net of
$155,528 in write-offs and $11,699 in reserves), and income of $81,244 (net of
$17,548 in reserves) and $103,935 (net of $537 in reserves), respectively, of
such rental income.
F-15
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 2,329,253
2000........................................................... 2,402,277
2001........................................................... 2,451,812
2002........................................................... 2,466,895
2003........................................................... 2,458,306
Thereafter..................................................... 11,370,855
-----------
$23,479,398
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $ 7,212,677 $ 9,313,752
Estimated residual values....................... 1,440,446 1,655,911
Less unearned income............................ (4,723,971) (6,198,018)
----------- -----------
3,929,152 4,771,645
Less allowance for impairment in carrying val-
ue............................................. -- (62,804)
----------- -----------
Net investment in direct financing leases....... $ 3,929,152 $ 4,708,841
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 486,632
2000............................................................ 488,772
2001............................................................ 501,492
2002............................................................ 501,492
2003............................................................ 501,492
Thereafter...................................................... 4,732,797
----------
$7,212,677
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(See Note 3).
In July 1997, the Partnership sold its property in Naples, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual values) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to this
property was reflected in income (Note 3).
F-16
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, in July 1997, the Partnership sold its property in Plattsmouth,
Nebraska, to the tenant, for $700,000 and received net sales proceeds of
$697,650, resulting in a gain of $156,401 for financial reporting purposes.
This property was originally acquired by the Partnership in January 1990 and
had a cost of approximately $561,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $138,400 in excess of its original purchase price.
At December 31, 1997, the Partnership had established an allowance for
impairment in carrying value in the amount of $62,804 for its property in
Melbourne, Florida. The allowance represents the difference between (i) the
carrying value of the net investment in the direct financing lease at December
31, 1997, and (ii) the net realizable value of the net investment in the direct
financing lease based on the net sales proceeds received in February 1998 from
the sale of the property (see Note 3).
In June 1998, the Partnership sold its property in Bellevue, Nebraska, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts (see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 3.9%, a 36 percent, a 14.46%, and an 18 percent
interest in the profits and losses of Auburn Joint Venture, Show Low Joint
Venture, Asheville Joint Venture, and a property in Clinton, North Carolina,
held as tenants-in-common, respectively. The remaining interests in these joint
ventures and the property held as tenants in common are held by affiliates of
the Partnership which have the same general partners.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 36
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a cost of approximately $663,500, excluding acquisition fees
and miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $306,500 in excess of its original purchase price.
In June 1997, Show Low Joint Venture reinvested $782,413 of net sales proceeds
in a property in Greensboro, North Carolina. During 1997, the Partnership
received approximately $70,000 representing a return of capital, for its pro-
rata share of the uninvested net sales proceeds.
In October 1997, the Partnership and an affiliate, as tenants-in-common,
sold the property in Yuma, Arizona, in which the Partnership owned a 51.67%
interest, for a total sales price of $1,010,000 and received net sales proceeds
of $982,025, resulting in a gain, to the tenancy-in-common, of approximately
$128,400 for financial reporting purposes. The property was originally acquired
in July 1994 and had a total cost of approximately $861,700, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
property was sold for approximately $120,300 in excess of its original purchase
price. The Partnership received approximately $455,000 representing a return of
capital for its pro-rata share of the net sales proceeds. In December 1997, the
Partnership reinvested the amounts received as a return of capital from the
sale of the Yuma, Arizona property, in a property in Vancouver, Washington, as
tenants-in-common with affiliates of the general partners. The Partnership
accounts for its investment in the property in Vancouver, Washington, using the
equity method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 23.04% interest in the Vancouver,
Washington, property owned with affiliates as tenants-in-common.
F-17
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In January 1998, the Partnership contributed approximately $558,800 and
$694,800 to acquire a property in Overland Park, Kansas, and a property in
Memphis, Tennessee, respectively, as tenants-in-common with affiliates of the
general partners. As of December 31, 1998, the Partnership had a 34.74% and a
46.2% interest in the property in Overland Park, Kansas and Memphis, Tennessee,
respectively. In June 1998, the Partnership contributed approximately
$1,249,300 to acquire a property in Fort Myers, Florida, as tenants-in-common
with an affiliate of the general partners. As of December 31, 1998, the
Partnership had an 85 percent interest in the property in Fort Myers, Florida.
The Partnership accounts for its investments in these properties using the
equity method since the Partnership shares control with affiliates, and amounts
relating to its investments are included in investment in joint ventures.
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. As of December 31, 1998, the
Partnership had contributed approximately $494,900 to purchase land and pay
construction costs relating to the property owned by the joint venture and has
agreed to contribute an additional $31,300 to fund additional construction
costs to the joint venture. At December 31, 1998, the Partnership had an
approximate 50 percent interest in the profits and losses of the joint venture.
The Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with the affiliate.
In September 1998, the Partnership entered into a joint venture arrangement,
Warren Joint Venture, with an affiliate of the general partners to hold one
restaurant property. As of December 31, 1998, the Partnership had contributed
approximately $898,100 to the joint venture to acquire the restaurant property.
As of December 31, 1998, the Partnership owned a 64.29% interest in the profits
and losses of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with the affiliate.
Auburn Joint Venture, Show Low Joint Venture, Asheville Joint Venture,
Melbourne Joint Venture, Warren Joint Venture, and the Partnership and
affiliates as tenants-in-common in five separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the properties held
as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $ 9,030,392 $4,568,842
Net investment in direct financing leases......... 3,331,869 911,559
Cash.............................................. 12,138 7,991
Receivables....................................... 56,360 22,230
Accrued rental income............................. 237,451 160,197
Other assets...................................... 1,190 414
Liabilities....................................... 105,868 7,557
Partners' capital................................. 12,563,532 5,663,676
Revenues.......................................... 1,098,957 471,627
Gain on sale of land and building................. -- 488,372
Net income........................................ 959,057 889,883
</TABLE>
The Partnership recognized income totalling $323,105, $280,331, and $97,381
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
F-18
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Restricted Cash:
As of December 31, 1997, net sales proceeds of $697,650 from the sale of the
property in Plattsmouth, Nebraska, plus accrued interest of $11,577, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property. In January 1998, the escrow
agent released these funds to acquire the property in Memphis, Tennessee, with
affiliates of the general partners, as tenants-in-common.
7. Receivables:
In June 1997, the Partnership terminated the lease with the tenant of the
property in Greensburg, Indiana. In connection therewith, the Partnership
accepted a promissory note from this former tenant for $13,077 for amounts
relating to past due real estate taxes the Partnership had incurred as a result
of the former tenant's financial difficulties. The promissory note, which is
uncollateralized, bears interest at a rate of ten percent per annum and is
being collected in 36 monthly installments. Receivables at December 31, 1998
and 1997, included $9,561 and $13,631, respectively, of such amounts, including
accrued interest of $554 in 1997.
8. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996 the Partnership
declared distributions to the limited partners of $3,220,000, $3,150,000 and
$3,220,000, respectively. No distributions have been made to the general
partners to date.
F-19
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,020,881 $2,899,882 $2,803,601
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (65,666) (92,303) (104,412)
Allowance for loss on land and
building.............................. -- 263,186 77,023
Direct financing leases recorded as
operating leases for tax
reporting purposes.................... 63,868 67,392 68,177
Gain and loss on sale of land and
buildings for financial
reporting purposes in excess of gain
and loss on sale for
tax reporting purposes................ (543,697) (335,658) 1,706
Equity in earnings of unconsolidated
joint ventures for financial reporting
purposes in excess of equity
in earnings of unconsolidated joint
ventures for tax reporting purposes... (14,400) (147,256) (49)
Allowance for doubtful accounts........ (39,597) 369,935 (78,517)
Accrued rental income.................. 51,142 (81,244) (103,935)
Rents paid in advance.................. (30,922) 26,458 26,288
Capitalization of transaction costs for
tax reporting purposes................ 20,211 -- --
Minority interest in timing differences
of consolidated joint venture......... 14,513 (30,778) 1,781
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,476,333 $2,939,614 $2,691,663
========== ========== ==========
</TABLE>
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures and the property held as
tenants-in-common with an affiliate, but not in excess of competitive fees for
comparable services. These fees are payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
F-20
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the sales proceeds are
reinvested in a replacement property, no such real estate disposition fees
will be incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition fee is
subordinated to receipt by the limited partners of their aggregate 10%
Preferred Return, plus their adjusted capital contributions. No deferred,
subordinated real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-
to-day basis. The Partnership incurred $107,969, $87,877 and $95,420 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such
services.
The due to related parties at December 31, 1998 and 1997, totalled $19,403
and $32,019, respectively.
11. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $758,646 $751,866 $758,348
IHOP Properties, Inc........................... 454,889 N/A --
Mid-America Corporation........................ 439,519 439,519 439,519
Restaurant Management Services, Inc............ 438,257 478,750 511,040
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants.... $758,646 $751,866 $758,348
IHOP Properties, Inc........................... 454,889 N/A --
Burger King.................................... 453,634 496,487 455,764
Denny's........................................ N/A 317,041 N/A
Hardee's....................................... N/A N/A 410,951
</TABLE>
The information denoted by N/A indicates that for each period presented,
the tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant chains
could significantly impact the results of operations of the Partnership if the
Partnership is not able to release the properties in a timely manner.
F-21
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
12. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,730,388 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $36,721,726 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
13. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 12 being adjusted to 1,865,194 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial Services
Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be read in
conjunction with the selected historical financial data and accompanying notes
of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group. The
pro forma balance sheet assumes that the Acquisition occurred on June 30, 1999,
and the pro forma consolidated statements of earnings and statements of cash
flows assume that the acquisition of properties by APF from January 1, 1998
through July 31, 1999, the acquisition of the Advisor, the CNL Restaurant
Financial Services Group and the Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ----------- ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0 $ 0
Net Investment in
Diresct Financing
Leases................. 132,179,949 0 132,179,949 0 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0 290,522,671
Other Investments....... 16,197,812 0 16,197,812 0 0 6,361,082
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036 1,767,517
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0 2,482,041
Receivables (net
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084 1,125,933
Accrued Rental Income... 5,875,698 0 5,875,698 0 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486 2,479,317
Goodwill................ 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ =========== ============ ========== ========== ============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969 $ 2,013,172
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0 0
Distributions Payable... 0 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981 30,170,185
Income Tax Payable...... 0 0 0 51,466 16,906 274,485
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0 267,685,382
Deferred Income......... 2,466,355 0 2,466,355 0 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0 0
Minority Interest....... 644,611 0 644,611 0 0 0
Common Stock............ 373,484 0 373,484 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503 3,937,095
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523 657,541
Partners' Capital....... 0 0 0 0 0 0
------------ ----------- ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ =========== ============ ========== ========== ============
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
----------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 572,936,859 $15,258,241 $ 5,626,796 (B2) $ 593,821,896
Net Investment in Direct
Financing Leases....... 0 132,179,949 3,897,669 1,435,665 (B2) 137,513,283
Mortgages and Notes
Receivable............. 0 353,874,178 0 0 353,874,178
Other Investments....... 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 1,081,046 5,061,676 994,982 (B2) 7,137,704
Cash and Cash
Equivalents............ (9,124,645)(B1) 12,379,236 1,124,292 (2,767,355)(B2) 10,327,173
(409,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 0 4,488,731 4,332,095 0 8,820,826
Receivables (net
allowances)/Due from
Related Party.......... (6,614,629)(C) 9,247,098 82,799 (26,828)(E) 9,303,069
Accrued Rental Income... 0 5,875,698 442,192 (442,192)(B2) 5,875,698
Other Assets............ (2,575,792)(B1) 13,173,857 42,597 (42,597)(B2) 13,173,857
Goodwill................ 42,927,358 (B1) 42,927,358 0 0 42,927,358
----------- -------------- ----------- ------------ --------------
Total Assets........... $24,612,292 $1,170,722,904 $30,241,561 $ 4,369,471 $1,205,333,936
=========== ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 0 $ 5,104,303 $ 94,001 $ 0 $ 5,198,304
Accrued Construction
Costs Payable.......... 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 787,500 0 787,500
Due to Related Parties.. (6,614,629)(C) 25,500,981 26,828 (26,828)(E) 25,500,981
Income Tax Payable...... (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 1,617,367 44,054 0 1,661,421
Minority Interest....... 0 644,611 140,106 0 784,717
Common Stock............ 61,500 (B1) 434,984 0 18,447 (B2) 453,431
Common Stock--Class A... (8,600)(B1) 0 0 0 0
Common Stock--Class B... (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,936,215 0 33,526,924 (B2) 826,463,139
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ (5,883,163)(B1) (88,134,033) 0 0 (88,134,033)
(73,307,517)(B1)
342,857 (D)
Partners' Capital....... 0 0 29,149,072 (29,149,072)(B2) 0
----------- -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $24,612,292 $1,170,722,904 $30,241,561 $ 4,369,471 $1,205,333,936
=========== ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 45,342,627 (r)
==============
Shares Outstanding...... 45,343,208
==============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ---------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--Property. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on
Properties ............ 23,564,432 2,089,441 25,653,873 3,877,654 42,804 $ (239,337)
Equity in Earnings of
joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== ========== ========== ===========
Earnings Per Share/Unit. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Cash Distributions
Declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $1,446,459 $ 24,594 (j) $32,428,567
Fees................... (9,812,516)(b),(c) 2,616,185 0 (26,850)(k) 2,589,335
Interest and Other
Income................ 144,014 (d) 16,269,383 39,252 0 16,308,635
----------- ----------- ---------- ---------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $1,485,711 $ (2,256) $51,326,537
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 96,953 (51,203)(l),(m) 9,625,652
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 9,713 7,164 (o) 481,843
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--Property. 0 4,669,153 221,821 108,738 (p) 4,999,712
Amortization........... 1,073,184 (h) 1,082,920 825 0 1,083,745
Transaction Costs...... 0 483,005 110,820 0 593,825
----------- ----------- ---------- ---------- -----------
Total Expenses......... (3,358,575) 26,818,015 440,132 64,699 27,322,846
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,309,927) $23,025,067 $1,045,579 $ (66,955) $24,003,691
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 235,060 (27,393)(q) 238,908
Gain (Loss) on Sale of
Properties............ 0 (201,843) 848,303 0 646,460
Provision for Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,309,927) 22,313,943 2,128,942 (94,348) 24,348,537
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $(4,784,187) $22,313,943 $2,128,942 $ (94,348) $24,348,537
=========== =========== ========== ========== ===========
Earnings Per Share/Unit. $ n/a $ n/a $ 30.41 $ n/a $ 0.54
=========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 416.42 $ n/a $ 16.29
=========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 22.50 $ n/a $ 0.76
=========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.99x
=========== =========== ========== ========== ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,575,000 $ (168,420)(s) $34,571,982
=========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,844,744 45,342,627 (r)
=========== =========== ========== ========== ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,844,744 45,343,208
=========== =========== ========== ========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--Property. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain on Sale
of Properties, Gain on
Securitization,
Provision for Losses on
Properties and Other
Expenses............... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on Securitization. 0 0 0 0 0 3,694,351
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per Share/Unit. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,555,104(t) $51,004,253 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,577,316 34,225,535 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $2,980,053 $ 49,188 (j) $59,110,701
Fees................... (32,715,768)(b),(c) 3,226,263 0 (32,437)(k) 3,193,826
Interest and Other
Income................ 207,144 (d) 32,221,925 110,502 0 32,332,427
------------ ----------- ---------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $3,090,555 $ 16,751 $94,636,954
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 205,612 (83,770)(l),(m) 16,061,398
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 10,392 11,469 (o) 589,307
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--Property. (340,898)(r) 9,948,339 456,958 217,475 (p) 10,622,772
Amortization........... 2,146,368 (h) 2,310,369 1,600 0 2,311,969
Transaction Costs...... 0 157,054 20,211 0 177,265
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,256,580) 51,479,297 694,773 145,174 52,319,244
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties... $(23,252,044) $40,050,351 $2,395,782 $(128,423) $42,317,710
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 279,977 (54,785)(q) 211,054
Gain (Loss) on Sale of
Properties............ 0 0 345,122 0 345,122
Gain on Securitization. 0 3,694,351 0 0 3,694,351
Provision for Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (23,252,044) 43,119,030 3,020,881 (183,208) 45,956,703
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,353,610) $43,119,030 $3,020,881 $(183,208) $45,956,703
============ =========== ========== ========= ===========
Earnings Per Share/Unit. $ n/a $ n/a $ 43.16 $ n/a $ 1.09
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 408.50 $ n/a $ 16.44
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 46.00 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.09x
============ =========== ========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,382,757 $3,220,000 $(406,839)(t) $63,195,918
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,375,535 n/a 1,844,744 42,220,279 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,844,744 45,332,671
============ =========== ========== ========= ===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property
Acquisition
Historical Pro Forma Historical
APF Adjustments Subtotal Advisor
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (loss)................ $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation..................... 3,701,974 967,179 (b) 4,669,153 77,130
Amortization expense............. 9,700 0 9,700 36
Minority interest in income of
consolidated joint venture...... 17,610 0 17,610 0
Equity in earnings of joint
ventures, net of distributions.. 25,120 0 25,120 0
Loss (gain) on sale of land,
buildings, and net investment in
direct financing leases......... 201,843 0 201,843 0
Provision for loss on land,
buildings, and direct financing
leases.......................... 540,522 0 540,522 0
Gain on securitization........... 0 0 0 0
Net cash proceeds from
securitization of notes
receivable...................... 0 0 0 0
Decrease (increase) in other
receivables..................... (229,916) 0 (229,916) (1,904,704)
Increase in accrued interest
income included in notes
receivable...................... 0 0 0 0
Decrease (increase) in accrued
interest on mortgage note
receivable...................... 0 0 0 0
Investment in notes receivable... 0 0 0 0
Collections on notes receivable.. 0 0 0 0
Increase in restricted cash...... 0 0 0 0
Decrease in due from related
party........................... 0 0 0 0
Decrease (increase) in prepaid
expenses........................ (320,425) 0 (320,425) 0
Decrease in net investment in
direct financing leases......... 721,624 0 721,624 0
Increase in accrued rental
income.......................... (1,915,785) 0 (1,915,785) 0
Decrease (increase) in
intangibles and other assets.... (36,946)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities............... 135,281 0 135,281 (691,686)
Increase (decrease) in due to
related parties, excluding
reimbursement of acquisition,
and stock issuance costs paid on
behalf of the entity............ 575,868 0 575,868 (8,810)
Decrease in accrued interest..... 0 0 0 0
Increase in rents paid in advance
and deposits.................... 663,096 0 663,096 0
Increase (decrease) in deferred
rental income................... 1,276,472 0 1,276,472 0
------------- ------------ ------------- -----------
Total adjustments.............. 5,402,984 967,179 6,370,163 (2,564,980)
------------- ------------ ------------- -----------
Net cash provided by (used in)
operating activities.......... 28,256,292 3,056,620 31,312,912 (282,362)
Cash Flows from Investing
Activities:
Proceeds from sale of land,
buildings, direct financing
leases, and equipment........... 3,673,907 0 3,673,907 22,157
Additions to land and buildings
on operating leases............. (170,153,724) 121,715,562 (f) (48,438,162) 0
Investment in direct financing
leases.......................... (44,186,644) 0 (44,186,644) 0
Investment in joint venture...... (117,663) 0 (117,663) 0
Aqcuisition of businesses........ 0 0 0 0
Purchase of other investments.... 0 0 0 0
Net loss in market value from
investments in trading
securities...................... 0 0 0 0
Proceeds from retained interest
and securities, excluding
investment income............... 0 0 0 0
Investment in mortgage notes
receivable...................... (2,596,244) 0 (2,596,244) 0
Collections on mortgage note
receivable...................... 224,373 0 224,373 0
Investment in notes receivable... (22,358,869) 0 (22,358,869) 0
Collection on notes receivable... 626,959 0 626,959 0
Decrease in restricted cash...... 0 0 0 0
Increase in intangibles and other
assets.......................... (3,198,326) 0 (3,198,326) 0
Investment in certificates of
deposit......................... 0 0 0 0
Other............................ 0 0 0 0
------------- ------------ ------------- -----------
Net cash provided by (used in)
investing activities............ (238,086,231) 121,715,562 (116,370,669) 22,157
Cash Flows from Financing
Activities:
Subscriptions received from
stockholders.................... 210,736 0 210,736 0
Contributions from limited
partners........................ 0 0 0 0
Contributions from holder of
minority interest............... 366,289 0 366,289 0
Reimbursement of acquisition and
stock issuance costs paid by
related parties on behalf of the
entity.......................... (1,258,062) 0 (1,258,062) 0
Payment of stock issuance costs.. (735,785) 0 (735,785) 0
Proceeds from borrowing on line
of credit/notes payable......... 151,437,245 0 151,437,245 0
Payment on line of credit/notes
payable......................... (12,580,289) 0 (12,580,289) 0
Retirement of shares of common
stock........................... 0 0 0 0
Distributions to holders of
minority interest............... (21,105) 0 (21,105) 0
Distributions to
stockholders/limited partners... (28,476,150) 0 (28,476,150) (119,808)
Other............................ (3,548,744) 0 (3,548,744) 0
------------- ------------ ------------- -----------
Net cash provided by (used in)
financing activities............ 105,394,135 0 105,394,135 (119,808)
Net increase (decrease) in cash... (104,435,804) 124,772,182 20,336,378 (380,013)
Cash at beginning of year......... 123,199,837 (110,318,867) 12,880,970 713,308
------------- ------------ ------------- -----------
Cash at end of year............... $ 18,764,033 $ 14,453,315 $ 33,217,348 $ 333,295
============= ============ ============= ===========
<CAPTION>
Historical
CNL Historical
Financial CNL Financial
Services, Inc. Corp.
-------------- --------------
<S> <C> <C>
Cash Flows from Operating
Activities:
Net Income (loss)................ $ 25,898 $ (153,135)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation..................... 28,372 0
Amortization expense............. 0 900,017
Minority interest in income of
consolidated joint venture...... 0 0
Equity in earnings of joint
ventures, net of distributions.. 0 0
Loss (gain) on sale of land,
buildings, and net investment in
direct financing leases......... 0 0
Provision for loss on land,
buildings, and direct financing
leases.......................... 0 (96,475)
Gain on securitization........... 0 0
Net cash proceeds from
securitization of notes
receivable...................... 0 0
Decrease (increase) in other
receivables..................... 0 (67,340)
Increase in accrued interest
income included in notes
receivable...................... 0 0
Decrease (increase) in accrued
interest on mortgage note
receivable...................... 0 (183,569)
Investment in notes receivable... 0 (88,701,265)
Collections on notes receivable.. 0 9,662,971
Increase in restricted cash...... 0 (2,031,259)
Decrease in due from related
party........................... (193,244) 81,412
Decrease (increase) in prepaid
expenses........................ 0 0
Decrease in net investment in
direct financing leases......... 0 0
Increase in accrued rental
income.......................... 0 0
Decrease (increase) in
intangibles and other assets.... (51,848)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities............... (201,744) 94,671
Increase (decrease) in due to
related parties, excluding
reimbursement of acquisition,
and stock issuance costs paid on
behalf of the entity............ 18,669 0
Decrease in accrued interest..... 0 (57,986)
Increase in rents paid in advance
and deposits.................... 3,623 0
Increase (decrease) in deferred
rental income................... 0 0
-------------- --------------
Total adjustments.............. (344,324) (80,450,671)
-------------- --------------
Net cash provided by (used in)
operating activities.......... (318,426) (80,603,806)
Cash Flows from Investing
Activities:
Proceeds from sale of land,
buildings, direct financing
leases, and equipment........... 0 0
Additions to land and buildings
on operating leases............. (20,873) 0
Investment in direct financing
leases.......................... 0 0
Investment in joint venture...... 0 0
Aqcuisition of businesses........ 0 0
Purchase of other investments.... 0 0
Net loss in market value from
investments in trading
securities...................... 0 0
Proceeds from retained interest
and securities, excluding
investment income............... 0 182,607
Investment in mortgage notes
receivable...................... 0 0
Collections on mortgage note
receivable...................... 0 0
Investment in notes receivable... 0 0
Collection on notes receivable... 0 0
Decrease in restricted cash...... 0 0
Increase in intangibles and other
assets.......................... 0 0
Investment in certificates of
deposit......................... 0 0
Other............................ 0 0
-------------- --------------
Net cash provided by (used in)
investing activities............ (20,873) 182,607
Cash Flows from Financing
Activities:
Subscriptions received from
stockholders.................... 20,570 0
Contributions from limited
partners........................ 0 0
Contributions from holder of
minority interest............... 0 0
Reimbursement of acquisition and
stock issuance costs paid by
related parties on behalf of the
entity.......................... 0 0
Payment of stock issuance costs.. 0 0
Proceeds from borrowing on line
of credit/notes payable......... 0 94,272,038
Payment on line of credit/notes
payable......................... (4,808) (14,428,254)
Retirement of shares of common
stock........................... 0 0
Distributions to holders of
minority interest............... 0 0
Distributions to
stockholders/limited partners... 0 0
Other............................ 0 (181,146)
-------------- --------------
Net cash provided by (used in)
financing activities............ 15,762 79,662,638
Net increase (decrease) in cash... (323,537) (758,561)
Cash at beginning of year......... 962,573 2,526,078
-------------- --------------
Cash at end of year............... $ 639,036 $ 1,767,517
============== ==============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Proforma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ (4,784,187)(a) $ 22,313,943 $ 2,128,942 $ (94,348)(a) $ 24,348,537
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 0 4,774,655 221,821 108,738 (b) 5,105,214
Amortization expense... 1,073,184 (c) 1,982,937 825 0 1,983,762
Minority interest in
income of
consolidated joint
venture............... 0 17,610 12,162 0 29,772
Equity in earnings of
joint ventures, net
of distributions...... 0 25,120 3,566 27,393 (d) 56,079
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 (848,303) 0 (646,460)
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 52,204 0 (2,149,756)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (5,223) 0 (325,648)
Decrease in net
investment in direct
financing leases...... 0 721,624 31,483 0 753,107
Increase in accrued
rental income......... 0 (1,915,785) (46,311) 0 (1,962,096)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 0 (663,478) 86,628 0 (576,850)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and
stock issuance costs
paid on behalf of the
entity................ 0 585,727 7,425 0 593,152
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 17,813 0 684,532
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ----------- ----------- ------------
Total adjustments.... 1,073,184 (75,916,628) (465,910) 136,131 (76,246,407)
------------ ------------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities.......... (3,711,003) (53,602,685) 1,663,032 41,783 (51,897,870)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 4,318,145 0 8,014,209
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) (44,121) 0 (161,784)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading securities. 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 (4,318,145) 0 (4,318,145)
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 (3,300) 0 (3,300)
------------ ------------- ----------- ----------- ------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) (47,421) 0 (111,781,947)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) (17,005) 0 (38,110)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,645,000) 168,420 (g) 34,761,790
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,662,005) 168,420 178,769,890
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (46,394) 210,203 15,090,073
Cash at beginning of
year................... (11,256,903) 5,826,026 1,170,686 (2,680,464) 4,316,248
------------ ------------- ----------- ----------- ------------
Cash at end of year..... $(15,204,906) $ 20,752,290 $ 1,124,292 $(2,470,261) $ 19,406,321
============ ============= =========== =========== ============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net income (loss)...... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on securitization. 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments..... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities........... 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and equipment. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading securities. 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,555,104)(j) (51,004,253) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,185,248) 305,650,293 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,318,867) (34,705,807) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,318,867) $ 12,880,970 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund VI, Ltd. Adjustments Pro Forma
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss).............. $(16,353,610)(a) $ 43,119,030 $ 3,020,881 $ (183,208)(a) $ 45,956,703
Adjustments to reconcile net
income (loss) to net cash
provided by (used
in) operating activities:
Depreciation................... (340,898)(b) 10,147,496 456,958 217,475 (b) 10,821,929
Amortization expense........... 2,146,368 (c) 4,460,452 1,600 0 4,462,052
Minority interest in income of
consolidated joint venture.... 0 30,156 43,128 0 73,284
Equity in earnings of joint
ventures, net of
distributions................. 0 (15,440) 5,616 54,785 (d) 44,961
Loss (gain) on sale of land,
building, net investment in
direct
financing leases.............. 0 0 (345,122) 0 (345,122)
Provision for loss on land,
buildings, and direct
financing
leases/provision for deferred
taxes......................... 0 1,009,576 0 0 1,009,576
Gain on securitization......... 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of notes
receivable.................... 0 265,871,668 0 0 265,871,668
Decrease (increase) in other
receivables................... 0 (2,543,413) 21,503 0 (2,521,910)
Increase in accrued interest
income included in notes
receivable.................... 0 (170,492) 0 0 (170,492)
Increase in accrued interest on
mortgage note receivable...... 0 0 0 0 0
Investment in notes receivable. 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable.................... 0 23,539,641 0 0 23,539,641
Decrease in restricted cash.... 0 2,504,091 0 0 2,504,091
Decrease (increase) in due from
related party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid expenses... 0 7,246 3,286 0 10,532
Decrease in net investment in
direct financing leases....... 0 1,971,634 63,868 0 2,035,502
Increase in accrued rental
income........................ 0 (2,187,652) 51,142 0 (2,136,510)
Increase in intangibles and
other assets.................. 0 (154,351) 0 0 (154,351)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities............. 0 846,680 (37,246) 0 809,434
Increase in due to related
parties, excluding
reimbursement of
acquisition, and stock issuance
costs paid on behalf of the
entity........................ 0 (133,364) (12,532) 0 (145,896)
Increase in accrued interest... 0 (77,968) 0 0 (77,968)
Increase in rents paid in
advance and deposits.......... 0 436,843 (29,422) 0 407,421
Decrease in deferred rental
income........................ 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments............. 1,805,470 13,335,275 222,779 272,260 13,830,314
------------ ------------- ----------- ----------- -------------
Net cash provided by (used in)
operating activities......... (14,548,140) 56,454,305 3,243,660 89,052 59,787,017
Cash Flows from Investing
Activities:
Proceeds from sale of land,
buildings, direct financing
leases, and equipment......... 0 2,385,941 2,832,253 0 5,218,194
Additions to land and buildings
on operating leases........... 21,794,386 (h) (304,010,742) (125,000) 0 (304,135,742)
Investment in direct financing
leases........................ 0 (47,115,435) 0 0 (47,115,435)
Investment in joint venture.... 0 (974,696) (3,896,682) 0 (4,871,378)
Acquisition of businesses...... (9,124,645)(f) (9,124,645) (2,767,355)(g) (12,301,000)
(409,000)(g)
Purchase of other investments.. 0 (16,083,055) 0 0 (16,083,055)
Net loss in market value from
investments in trading
securities.................... 0 295,514 0 0 295,514
Proceeds from retained interest
and securities, excluding
investment income............. 0 212,821 0 0 212,821
Investment in mortgage notes
receivable.................... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage note
receivable.................... 0 291,990 0 0 291,990
Investment in equipment notes
receivable.................... 0 (7,837,750) 0 0 (7,837,750)
Collections on equipment notes
receivable.................... 0 3,046,873 0 0 3,046,873
Decrease in restricted cash.... 0 0 697,650 0 697,650
Increase in intangibles and
other assets.................. 0 (6,281,069) 0 0 (6,281,069)
Other.......................... 0 200,000 (3,300) 0 196,700
------------ ------------- ----------- ----------- -------------
Net cash provided by (used in)
investing activities.......... 12,669,741 (387,880,901) (495,079) (3,176,355) (391,552,335)
Cash Flows from Financing
Activities:
Subscriptions received from
stockholders.................. 0 386,592,011 0 0 386,592,011
Contributions from limited
partners...................... 0 0 0 0 0
Reimbursement of acquisition
and stock issuance costs paid
by related
parties on behalf of the
entity........................ 0 (4,574,925) 0 0 (4,574,925)
Payment of stock issuance
costs......................... 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing on line
of credit/notes payable....... 0 424,815,816 0 0 424,815,816
Payment on line of credit/notes
payable....................... 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of common
stock......................... 0 (639,528) 0 0 (639,528)
Distributions to holders of
minority interest............. 0 (34,073) (42,654) 0 (76,727)
Distributions to
stockholders/limited partners. (9,378,504)(j) (69,747,245) (3,150,000) 406,839 (j) (72,490,406)
Other.......................... 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by (used in)
financing activities.......... (9,378,504) 287,423,492 (3,192,654) 406,839 284,637,677
Net increase (decrease) in cash. (11,256,903) (44,003,104) (444,073) (2,680,464) (47,127,641)
Cash at beginning of year....... 0 49,829,130 1,614,759 0 51,443,889
------------ ------------- ----------- ----------- -------------
Cash at end of year............. $(11,256,903) $ 5,826,026 $ 1,170,686 $(2,680,464) $ 4,316,248
============ ============= =========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1.Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2.Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3.Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4.Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,637,992 $50,486,653 $36,721,726 $168,846,371
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $33,545,371 $156,545,371
Cash Consideration...... -- -- 409,000 409,000
APF Transaction Costs... 5,637,992 3,486,653 2,767,355 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $81,637,992 $50,486,653 $36,721,726 $168,846,371
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,081 $29,149,072 $ 47,614,634
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 5,626,796 5,626,796
Net investment in
direct financing
leases............... -- -- 1,435,665 1,435,665
Investment in joint
ventures............. -- -- 994,982 994,982
Accrued rental income. -- -- (442,192) (442,192)
Intangibles and other
assets............... -- (2,575,792) (42,597) (2,618,389)
Goodwill*............. -- 42,927,358 -- 42,927,358
Excess purchase price. 73,307,517 -- -- 73,307,517
----------- ----------- ----------- ------------
Total Allocation.... $81,637,992 $50,486,653 $36,721,726 $168,846,371
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,307,517 was expensed at June 30, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $42,927,358
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC) -- Class A..... 8,600
Common Stock (CFA, CFS, CFC) -- Class B........ 4,825
Additional Paid-in Capital (CFA, CFS, CFC)..... 12,568,974
Retained Earnings.............................. 5,883,163
Accumulated distributions in excess of
earnings...................................... 73,307,517
Goodwill for CFC/CFS (Intangibles and other
assets)....................................... 42,927,358
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 9,124,645
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners Capital............................ 29,149,072
Land and buildings on operating leases......... 5,626,796
Net investment in direct financing leases...... 1,435,665
Investment in joint ventures................... 994,982
Accrued rental income......................... 442,192
Intangibles and other assets.................. 42,597
Cash to pay APF Transaction costs............. 2,767,355
Cash consideration to Income Funds............ 409,000
APF Common Stock.............................. 18,447
APF Capital in Excess of Par Value............ 33,526,924
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $26,828 in related
party payables recorded as receivables by the Advisor.
5.Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational
when they were acquired by APF from January 1, 1999 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the
Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......... $ (689,425)
Secured equipment lease fees.............. (67,967)
Advisory fees............................. (126,788)
Reimbursement of administrative costs..... (382,728)
Acquisition fees.......................... (4,452,252)
Underwriting fees......................... (54,248)
Administrative, executive and guarantee
fees..................................... (532,389)
Servicing fees............................ (572,728)
Development fees.......................... (38,853)
Management fees........................... (1,681,870)
-----------
Total................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services,
Inc. records all of the loan origination fees received as revenue.
For purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six
months ended June 30, 1999 and the year ended December 31, 1998,
which were deferred for pro forma purposes as described in
5(I)(c). These deferred loan origination fees are being amortized
and recorded as interest income over the terms of the underlying
loans (15 years).
<TABLE>
<S> <C>
Interest income............................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs............ $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees........................... $(1,681,870)
Administrative executive and guarantee
fees..................................... (532,389)
Servicing fees............................ (572,728)
Advisory fees............................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group
referred to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill.................... $1,073,184
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $24,594 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the
leases had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees.............................. $ 0
Reimbursement of administrative costs........ (26,850)
--------
$(26,850)
========
</TABLE>
(l) Represents the elimination of $26,850 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $24,353 in historical professional services
and administrative expenses (audit and legal fees, office
supplies, etc.) resulting from preparing quarterly and annual
financial and tax reports for one combined entity instead of
individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,164 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January
1, 1998 and that these entities had operated under a REIT
structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $108,738 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the
remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $27,393 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two
reverse stock split and a proposal to increase the number of
authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and
depreciation expense of $6,246,947 as if properties that had been
operational when they were acquired by APF from January 1, 1998
through July 31, 1999 had been acquired and leased on January 1,
1998. No pro forma adjustments were made for any properties for
the periods prior to their construction completion and
availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the
Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......... $ (1,773,406)
Secured equipment lease fees............. (54,998)
Advisory fees............................ (305,030)
Reimbursement of administrative costs.... (408,762)
Acquisition fees......................... (21,794,386)
Underwriting fees........................ (388,491)
Administrative, executive and guarantee
fees.................................... (1,233,043)
Servicing fees........................... (1,570,331)
Development fees......................... (229,153)
Management fees.......................... (1,851,004)
------------
Total.................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services,
Inc. records all of the loan origination fees received as revenue.
For purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998
of $3,107,164 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year
ended December 31, 1998, which were deferred for pro forma
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
purposes as described in 5(II)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the
terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs.......... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees........................... $(1,851,004)
Administrative executive and guarantee
fees..................................... (1,233,043)
Servicing fees............................ (1,269,357)
Advisory fees............................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill.................... $2,146,368
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $49,188 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees.............................. $ 0
Reimbursement of administrative costs........ (32,437)
--------
$(32,437)
========
</TABLE>
(l) Represents the elimination of $32,437 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $51,333 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents additional state income taxes of $11,469 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January
1, 1998 and that these entities had operated under a REIT
structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $217,475 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $54,785 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized
common shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6.Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January
1, 1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activites:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay
the transaction costs allocated to the acquisition of the Income
Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund VI, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund VI, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund VI, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
B-1
<PAGE>
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND VI, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund VI, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-5
<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,730,388 fully paid and nonassessable APF Common
Shares (1,865,194 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $34,043,807, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,269,612 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 70,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
B-17
<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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<PAGE>
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,730,388 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of 373,039 in the aggregate (the "Threshold") nor
(ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND VI, Ltd.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND VII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund VII, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties leased on a triple-
net basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and
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mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,601,186 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not uncertain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offering.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005. In an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares to be paid to your Income
Fund, then APF has the right to decline to acquire your Income Fund. The notes
will not be listed on any exchange or automated quotation system, and a market
for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $2,300.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,601,186 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $900 to you per $10,000 investment. While historically, APF
has made distributions equal to 7.625% per APF Share, based on the exchange
value, we cannot be sure that APF will be able to maintain this level of
distributions in the future. In the event that APF is unable to maintain this
level of distributions in the future, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have four material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third,
assuming only your Income Fund is acquired in the Acquisition, we will receive
16,139 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
S-4
<PAGE>
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,231 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
S-5
<PAGE>
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership. APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.92%. If only your Income Fund was acquired as of that date. APF's debt
service ratio would have been 3.44x and its ratio of debt to total assets would
have been 35.03%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
S-6
<PAGE>
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of June
30, 1999, your Income Fund had no tenants under bankruptcy protection.
Therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999, would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for the same period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a
S-7
<PAGE>
REIT for four taxable years following the year during which it was
disqualified. Therefore, if APF loses its REIT status, the funds available for
distribution to you, as an APF stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited less
Partner Distributions Estimated Value
Investments of Net Sales Estimated of APF Shares
less Proceeds per Number of Value of Estimated Value per Average
Distributions $10,000 APF Shares APF Shares Estimated of APF Shares $10,000 Original
of Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$30,000,000 $10,000 1,601,186 $32,023,720 $378,000 $31,645,720 $10,549
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes,
S-8
<PAGE>
due , 2005. The payment received by you and other Limited Partners who elect
to receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees (1)................................................... $ 24,336
Appraisals and Valuation (2)..................................... 6,600
Fairness Opinions (3)............................................ 30,000
Solicitation Fees (4)............................................ 17,237
Printing and Mailing (5)......................................... 96,673
Accounting and Other Fees (6).................................... 47,615
--------
Subtotal..................................................... 222,461
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees (7)....................... 76,923
Legal Closing Fees (8)........................................... 37,995
Partnership Liquidation Costs (9)................................ 40,621
--------
Subtotal..................................................... 155,539
--------
Total............................................................ $378,000
========
</TABLE>
- --------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
S-9
<PAGE>
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. our Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less that all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (January 30, 1990). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement
S-10
<PAGE>
and the other materials distributed to you, and the terms of APF's Acquisition
of your Income Fund, prior to voting on the Acquisition. The special meeting
will be held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
----------------------- June 30,
1996 1997 1998 1999
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions........ -- -- -- --
Accounting and Administrative
Services............................ $92,985 $77,078 $87,256 $36,446
Broker/Dealer Commissions............ -- -- -- --
Due Diligence and Marketing Support
Fees................................ -- -- -- --
Acquisition Fees..................... -- -- -- --
Asset Management Fees ............... -- -- -- --
Real Estate Disposition Fees(1)...... -- -- -- --
------- ------- ------- -------
Total historical................... $92,985 $77,078 $87,256 $36,446
Pro Forma Distribution to Be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF Shares(2).. $22,790 $24,040 $24,611 $12,306
Salary Compensation.................. -- -- -- --
------- ------- ------- -------
Total pro forma.................... $22,790 $24,040 $24,611 $12,306
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........ $826 $654 $768 $861 $814 $450 $273
Distributions from Return of
Capital......................... 94 246 132 39 86 -- 125
---- ---- ---- ---- ---- ---- ----
Total.......................... $920 $900 $900 $900 $900 $450 $398
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-13
<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is more
economically attractive to you and the other Limited Partners than such
alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the
Income Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
S-14
<PAGE>
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
S-15
<PAGE>
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments any Distributions per Going Concern Value per per Average
less of Net Sales Average $10,000 Value per Average $10,000
Distributions of Proceeds per Limited Partner Average $10,000 $10,000 Original
Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
---------------- ----------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund VII,
Ltd. .................. 30,000,000 10,000 10,441 10,410 9,758 9,300
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Substantial Benefits to General Partners
As a result of the Acquisition assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up
to 16,139 APF Shares in accordance with the terms of your Income Fund's
partnership agreement. The 16,139 APF Shares issued to us will have an
estimated value, based on the exchange value, of approximately
$322,780.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as
S-16
<PAGE>
Vice Chairman. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under APF's 1999
Performance Incentive Plan or any other such plan approved by the
stockholders. The benefits that may be realized by Messrs. Seneff and
Bourne are likely to exceed the benefits that they would expect to
derive from the Income Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all
of your Income Fund's liabilities to the extent that your Income Fund
is unable to satisfy such liabilities. Because the partnership
agreement for your Income Fund prohibits the Income Fund from incurring
indebtedness, the only liabilities the Income Fund has are liabilities
with respect to its ongoing business operations. In the event that your
Income Fund is acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences
of the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive
APF Shares. If you have voted "Against" the Acquisition but your Income Fund
is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of
cash to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will
be taxed based on the amount of distributions you receive from APF. Each year
APF will send you a Form 1099-DIV reporting the amount of taxable and
nontaxable distributions paid to you during the preceding year. The taxable
portion of these distributions depends on the amount of APF's earnings and
profits. Because the Acquisition is a taxable transaction, APF's tax basis in
the acquired restaurant properties will be higher than your Income Fund's tax
basis had been in the same properties. At the same time, however, APF may be
required to utilize a slower method of depreciation with respect to certain
restaurant properties than that used by your Income Fund. As a result, APF's
tax depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive
loss rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
S-17
<PAGE>
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated Gain/
(Loss) per
Average $10,000
Original Limited
Partner Investment
------------------
<S> <C>
CNL Income Fund VII, Ltd..................................... $2,300
</TABLE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund
to the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract
S-18
<PAGE>
price will equal the selling price reduced by certain qualified indebtedness
encumbering your Income Fund's assets, if any, that is assumed or taken subject
to by the Operating Partnership. The exact amount of the gain to be recognized
by your Income Fund in the year of the Acquisition will also vary depending
upon the decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," (which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt
S-19
<PAGE>
investor that does not hold units either as a "dealer" or as debt-financed
property within the meaning of section 514, and you are not a social club,
voluntary employee's beneficiary association, supplemental unemployment benefit
trust, or qualified group legal services plan as described in sections 501
(c)(7), (9), (17) or (20) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 (9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,076,153 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,355,606)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) (6,312,896)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,312,896)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,787,156)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund VII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ----------------- ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $1,189,934 37,863 (j) $32,185,311
Fees............. 2,616,185 0 (21,458)(k) 2,594,727
Interest and
Other Income..... 16,269,383 84,139 0 16,353,522
------------ ---------- ----------------- ------------
Total Revenue... 49,843,082 1,274,073 16,405 51,133,560
Expenses:
General and
Administrative... 9,579,902 75,612 (41,831)(l),(m) 9,613,683
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 13,055 6,150 (o) 484,171
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 150,719 88,251 (p) 4,908,123
Amortization..... 1,085,889 0 0 1,085,889
Transaction
Costs............ 483,005 111,897 0 594,902
------------ ---------- ----------------- ------------
Total Expenses.. 26,820,984 351,283 52,570 27,224,837
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... 23,022,098 922,790 (36,165) 23,908,723
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 259,094 (28,017)(q) 262,318
Gain (Loss) on
Sale of
Properties....... (201,843) 189,244 0 (12,599)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ----------------- ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,310,974 1,371,128 (64,182) 23,617,920
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ----------------- ------------
Net
Earnings(Losses).. $22,310,974 $1,371,128 (64,182) $23,617,920
============ ========== ================= ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252(s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 n/a 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 n/a 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,420,261(u2)(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v)(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,377,747(u1)(w)
<CAPTION>
Historical
CNL Income
Combined Fund VII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 38 n/a 619
============== =========== =================== =================
Earnings per
share/unit...... $ n/a $ 0.05 $ n/a $ 0.52
============== =========== =================== =================
Book value per
share/unit...... $ n/a $ 0.81 $ n/a $ 16.28
============== =========== =================== =================
Dividends per
share/unit...... $ n/a $ 0.05 $ n/a $ 0.76
============== =========== =================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.92x
============== =========== =================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,350,000 (143,539)(s) $ 34,371,863
============== =========== =================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,582,286 45,080,169(r)
============== =========== =================== =================
Shares
outstanding..... 43,498,464 n/a 1,582,286 45,080,750
============== =========== =================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $17,448,079 $7,413,375 (u2) $ 719,674,437
Mortgages/notes
receivable...... $ 353,874,178 $ 1,235,728 $ 0 $ 355,109,906
Receivables/due
from related
parties......... $ 9,247,098 $ 2,499 $ (25,464)(x) $ 9,224,133
Investment in
joint ventures.. $ 1,081,046 $ 3,413,821 $1,044,420 (u2) $ 5,539,287
Total assets.... $1,170,530,873 $25,319,329 $4,348,575 (u2)(x) $1,200,198,777
Total
liabilities/minority
interest........ $ 465,485,738 $ 984,405 $ (25,464)(x) $ 466,444,679
Total equity.... $ 705,045,135 $24,334,924 $4,374,039 (u2) $ 733,754,098
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation expense
of $967,179 as if restaurant properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any restaurant properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................ $ (689,425)
Secured equipment lease fees................................ (67,967)
Advisory fees............................................... (126,788)
Reimbursement of administrative costs....................... (382,728)
Acquisition fees............................................ (4,452,252)
Underwriting fees........................................... (54,248)
Administrative, executive and guarantee fees................ (532,389)
Servicing fees.............................................. (572,728)
Development fees............................................ (38,853)
Management fees............................................. (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial Corp. On a
historical basis, CNL Financial Services, Inc. records all of the loan
origination fees received as revenue. For purposes of presenting pro forma
financial statements of these entities on a combined basis, these loan
origination fees are required to be deferred and amortized into revenues
over the term of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services Inc. from borrowers during the six months ended June 30,
1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................. $(1,681,870)
Administrative executive and guarantee fees................. (532,389)
Servicing fees.............................................. (572,728)
Advisory fees............................................... (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and the
CNL Restaurant Financial Services Group resulting from agreements between
these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in footnote (u)
below:
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,076,153
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
S-23
<PAGE>
(j) Represents $37,863 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (21,458)
--------
$(21,458)
========
</TABLE>
(l) Represents the elimination of $21,458 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $20,373 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund to
the Advisor.
(o) Represents additional state income taxes of $6,150 resulting from assuming
that acquisitions of restaurant properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group and
the Income Fund had been issued as of January 1, 1998 and that these
entities had operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $88,251 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $28,017 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma restaurant properties acquired from April 1,
1999 through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all interest
costs related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
S-24
<PAGE>
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration Received. $81,830,023 $50,605,410 $31,543,530 $163,978,963
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $28,708,963 $151,708,963
Cash Consideration...... -- -- 378,000 378,000
APF Transaction Costs... 5,830,023 3,605,410 2,456,567 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,830,023 $50,605,410 $31,543,530 $163,978,963
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets - Historical. $ 8,330,475 $10,135,087 $24,334,924 $ 42,800,486
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 5,906,377 5,906,377
Net investment in
direct financing
leases................ -- -- 1,506,999 1,506,999
Investment in joint
ventures.............. -- -- 1,044,420 1,044,420
Accrued rental income.. -- -- (1,175,747) (1,175,747)
Intangibles and other
assets................ -- (2,575,792) (73,443) (2,649,235)
Goodwill*.............. -- 43,046,115 -- 43,046,115
Excess purchase price.. 73,499,548 -- -- 73,499,548
----------- ----------- ----------- ------------
Total Allocation...... $81,830,023 $50,605,410 $31,543,530 $163,978,963
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,499,548 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $43,046,115 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC) - Class A......... 8,600
Common Stock (CFA, CFS, CFC) - Class B.......... 4,825
Additional Paid-In Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of earnings. 73,499,548
Goodwill for CFC/CFS (Intangibles and other
assets)........................................ 43,046,115
CFC/CFS Organizational Costs/Other Assets...... 2,575,792
Cash to pay APF transaction costs.............. 9,435,433
APF Common Stock............................... 61,500
APF Capital in Excess of Par Value............. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital.............................. 24,334,924
Land and buildings on operating leases.......... 5,906,377
Net investment in direct financing leases....... 1,506,999
Investment in joint ventures.................... 1,044,420
Accrued rental income.......................... 1,175,747
Intangibles and other assets................... 73,443
Cash to pay APF Transaction costs.............. 2,456,567
Cash consideration to Income Funds............. 378,000
APF Common Stock............................... 15,823
APF Capital in Excess of Par Value............. 28,693,140
(To record acquisition of the Income Fund)
</TABLE>
S-25
<PAGE>
(v) Represents the elimination by APF of $1,444,444 in related party payables
recorded as receivables by the Advisor, and the elimination of intercompany
balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857 from
liabilities assumed in the acquisition since the Merger Agreement requires
that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes
at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $25,464 in related party
payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma /Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND VII, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
VII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,533,167 $ 1,438,798 $ 2,948,217 $ 2,919,734 $ 2,882,709 $ 2,716,883 $ 2,917,331
Net income (2).......... 1,371,128 1,204,135 2,466,018 2,606,008 2,326,863 1,982,148 2,503,300
Cash distributions
declared(3)............ 1,350,002 1,350,000 2,700,000 2,700,000 2,700,000 2,700,002 2,760,002
Net income per unit (2). 0.045 0.040 0.081 0.086 0.077 0.065 0.083
Cash distributions
declared per unit(3)... 0.045 0.045 0.090 0.090 0.090 0.090 0.092
GAAP book value per
unit................... 0.811 0.813 0.810 0.818 0.821 0.834 0.858
Weighted average number
of Limited Partner
units outstanding...... 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $25,319,329 $25,301,757 $25,218,258 $25,479,762 $25,523,853 $25,915,616 $26,644,363
Total partners' capital. 24,334,924 24,401,913 24,313,796 24,547,778 24,641,770 25,014,907 25,732,761
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of the consolidated joint venture.
(2) Net income for the six months ended June 30, 1999 and 1998, and for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994, includes
$189,244, $499, $1,025, $184,627, $195,675, $1,421 and $77,379,
respectively, from gains on dispositions of land and buildings. Net income
for the years ended December 31, 1997, 1996 and 1995, includes a loss on
sale of land and building of $19,739, $235,465 and $6,556, respectively. In
addition, net income for the year ended December 31, 1995, includes a loss
on demolition of building of $174,466.
(3) Distributions for the year ended December 31, 1994, include a special
distribution to the Limited Partners of $60,000 which represented
cumulative excess operating reserves.
S-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 18, 1989, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of national and regional fast-food and family-style restaurant
chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 38 restaurant properties,
which included interests in nine restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and two restaurant properties owned
with affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998, was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,405,372 and
$1,401,833 for the six months ended June 30, 1999 and 1998, respectively. The
increase in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, is primarily a result of
changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In June 1999, the Income Fund sold its restaurant property in Maryville,
Tennessee to the tenant in accordance with the purchase option under the lease
agreement to purchase the restaurant property, for $1,068,802 and received net
sales proceeds of $1,059,954, resulting in a gain of $188,691 for financial
reporting purposes. This restaurant property was originally acquired by the
Income Fund in 1990 and had a cost of approximately $890,700, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the Income
Fund sold the restaurant property for approximately $169,300 in excess of its
original purchase price. As of June 30, 1999, the net sales proceeds of
$1,059,954, plus accrued interest of $3,429, were being held in an interest-
bearing escrow account pending the release of funds by the escrow agent to
acquire an additional restaurant property. We believe that the transaction, or
a portion thereof, relating to the sale of the restaurant property in
Maryville, Tennessee and the reinvestment of the proceeds will qualify as a
like-kind exchange transaction for federal income tax purposes. However, the
Income Fund anticipates that it will distribute amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any, at a level
reasonably assumed by us, resulting from the sale.
In June 1999, Halls Joint Venture, in which the Income Fund owns a 51.1%
interest, sold its restaurant property to the tenant in accordance with the
purchase option under the lease agreement for $891,915, resulting in a gain to
the joint venture of approximately $239,300 for financial reporting purposes.
The restaurant property was originally contributed to Halls Joint Venture in
1990 and had a total cost to the joint venture of approximately $672,000,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the joint venture sold the restaurant property for approximately $219,900 in
excess of its original purchase price. We believe that the transaction, or a
portion thereof, relating to the sale of the restaurant property in Halls Joint
Venture and the reinvestment of the proceeds will qualify as a like-kind
exchange transaction for federal income tax purposes.
Currently, rental income from the Income Fund's restaurant properties and
any net sales proceeds held by the Income Fund, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit at
commercial banks,
S-28
<PAGE>
certificates of deposit, and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At June 30, 1999, the Income
Fund had $906,629 invested in such short-term investments, as compared to
$856,825 at December 31, 1998. The funds remaining at June 30, 1999, after
payment of distributions and other liabilities, will be used to meet the Income
Fund's working capital and other needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, AFP, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital for the years ended December 31,
1998, 1997, and 1996, was cash from operations, which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses. Cash from operations was $2,790,975, $2,840,459, and
$2,670,869 for the years ended December 31, 1998, 1997, and 1996, respectively.
The decrease in cash from operations during 1998, as compared to 1997, is
primarily a result of changes in the Income Fund's working capital. The
increase in cash from operations during 1997, as compared to 1996, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below and changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In March 1996, the Income Fund entered into an agreement with the tenant of
the restaurant property in Daytona Beach, Florida, for payment of certain
rental payment deferrals the Income Fund had granted to the tenant through
March 31, 1996. Under the agreement, the Income Fund agreed to abate
approximately $13,200 of the rental payment deferral amounts. The tenant made
payments of approximately $5,700 in each of April 1996, March 1997, and June
1998 in accordance with the terms of the agreement, and has agreed to pay the
Income Fund the remaining balance due of approximately $22,300 in four
remaining annual installments through 2002.
In July 1996, the Income Fund sold its restaurant property in Colorado
Springs, Colorado, for $1,075,000, and received net sales proceeds of
$1,044,909, resulting in a gain of $194,839 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in July
1990 and had a cost of approximately $900,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $144,000 in excess of its original
purchase price. In October 1996, the Income Fund reinvested the net sales
proceeds, along with additional funds, in a Boston Market restaurant property
located in Marietta, Georgia. A portion of the transaction relating to the sale
of the restaurant property in Colorado Springs, Colorado, and the reinvestment
of the net sales proceeds were structured to qualify as a like-kind exchange
transaction in accordance with Section 1031 of the Internal Revenue Code. The
Income Fund distributed amounts sufficient to enable the Limited Partners to
pay federal and state income taxes resulting from the sale.
In addition, in October 1996, the Income Fund sold its restaurant property
in Hartland, Michigan, for $625,000 and received net sales proceeds of
$617,035, resulting in a loss of approximately $235,465, for financial
reporting purposes. In February 1997, the Income Fund reinvested the net sales
proceeds in CNL Mansfield Joint Venture. The Income Fund has a 79 percent
interest in the profits and losses of CNL Mansfield Joint Venture and the
remaining interest in this joint venture is held by an affiliate of the Income
Fund which has the same general partners.
S-29
<PAGE>
In May 1997, the Income Fund sold its restaurant property in Columbus,
Indiana, for $240,000 and received net sales proceeds of $223,589, resulting in
a loss of $19,739 for financial reporting purposes. In December 1997, the
Income Fund reinvested the net sales proceeds, along with additional funds, in
a restaurant property in Miami, Florida, as tenants-in-common with certain of
our affiliates, in exchange for a 35.64% interest in this restaurant property.
In October 1997, the Income Fund sold its restaurant property in Dunnellon,
Florida, for $800,000 and received net sales proceeds, net of $5,055 which
represents amounts due to the former tenant for prepaid rent, of $752,745,
resulting in a gain of $183,701 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in August 1990
and had a cost of approximately $546,300 excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $211,500 in excess of its original
purchase price. In December 1997, the Income Fund reinvested these net sales
proceeds in a restaurant property in Smithfield, North Carolina, as tenants-in-
common with one of our affiliates. We believe that the transaction, or a
portion thereof, relating to the sale of the restaurant property in Dunnellon,
Florida and the reinvestment of the net sales proceeds in the restaurant
property in Smithfield, North Carolina, will qualify as a like-kind exchange
transaction in accordance with Section 1031 of the Internal Revenue Code.
However, the Income Fund will distribute amounts sufficient to enable the
Limited Partners to pay federal and state income taxes, if any, at a level
reasonably assumed by us resulting from the sale.
In addition, in October 1997, the Income Fund and an affiliate, as tenants-
in-common, sold the restaurant property in Yuma, Arizona, in which the Income
Fund owned a 48.33% interest, for a total sales price of $1,010,000 and
received net sales proceeds of $982,025, resulting in a gain, to the tenancy-
in-common, of approximately $128,400 for financial reporting purposes. The
restaurant property was originally acquired in July 1994 and had a total cost
of approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the restaurant property was sold for
approximately $120,300 in excess of its original purchase price. In December
1997, the Income Fund reinvested its portion of the net sales proceeds from the
sale of the Yuma, Arizona, restaurant property, along with funds from the sale
of the wholly-owned restaurant property in Columbus, Indiana, in a restaurant
property in Miami, Florida, as tenants-in-common with certain of our
affiliates. We believe that the transaction, or a portion thereof, relating to
the sale of the restaurant property in Yuma, Arizona and the reinvestment of
the net sales proceeds in the restaurant property in Miami, Florida, will
qualify as a like-kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code. However, the Income Fund will distribute amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any, at a level reasonably assumed by us resulting from the sale.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburse the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term highly liquid investments such as demand deposit accounts at
commercial banks, CD's and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
Fund had $856,825 invested in such short-term investments, as compared to
$761,317 at December 31, 1997. As of December 31, 1998, the average interest
rate earned on the rental income deposited in demand deposit accounts at
commercial banks was approximately two percent annually. The funds remaining at
December 31, 1998, will be used for the payment of distributions and other
liabilities.
S-30
<PAGE>
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on cash from
operations, the Income Fund declared distributions to the Limited Partners of
$1,350,000 for each of the six months ended June 30, 1999 and 1998, or $675,000
for each of the quarters ended June 30, 1999 and 1998. This represents
distributions for each applicable six months of $0.045 per unit, or $0.023 per
unit for each applicable quarter. No distributions were made to us for the
quarters and six months ended June 30, 1999 and 1998. No amounts distributed to
the Limited Partners for the six months ended June 30, 1999 and 1998 are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $838,345 at June 30, 1999, from $757,857 at December 31, 1998. The
increase in liabilities at June 30, 1999 is primarily a result of the Income
Fund accruing transaction costs relating to the Acquisition. We believe that
the Income Fund has sufficient cash on hand to meet its current working capital
needs.
During the six months ended June 30, 1999, the Income Fund received notice
from a tenant deciding to exercise the purchase option under the lease
agreement relating to the Burger King restaurant property in Jefferson City,
Tennessee. We believe that the anticipated sales price for this restaurant
property exceeds the Income Fund's net carrying value attributable to the
restaurant property. As of August 6, 1999, the sale had not occurred.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases of the Income Fund's restaurant properties are generally on a triple-net
basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based primarily on cash from operations, the Income Fund declared
distributions to the Limited Partners of $2,700,000 for each of the years ended
December 31, 1998, 1997, and 1996. This represents distributions of $0.090 per
Unit for each of the years ended December 31, 1998, 1997, and 1996. No amounts
distributed to the Limited Partners for the years ended December 31, 1998,
1997, and 1996 are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions.
S-31
<PAGE>
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $86,851, $74,968, and $97,288, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$17,911 and $27,683, respectively, to affiliates for such amounts and
accounting and administrative services. As of March 11, 1999, the Income Fund
had reimbursed the affiliates all such amounts. In addition, as of December 31,
1998 and 1997, the Income Fund owed $7,200 in real estate disposition fees to
an affiliate as a result of its services in connection with the 1995 sale of
the restaurant property in Jacksonville, Florida. The payment of such fees is
deferred until the Limited Partners have received the sum of their 10%
preferred return and their adjusted capital contributions. Total liabilities,
including distributions payable, of the Income Fund decreased to $732,746 at
December 31, 1998, from $749,587 at December 31, 1997 primarily as a result of
a decrease in rents paid in advance at December 31, 1998.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund and its
consolidated joint venture, San Antonio #849 Joint Venture, owned and leased 29
wholly owned restaurant properties to operators of fast-food and family-style
restaurant chains, including one restaurant property which was sold in 1999.
The Income Fund and its consolidated joint venture, earned $1,186,255 and
$1,199,345 during the six months ended June 30, 1999 and 1998, respectively, in
rental income from operating leases and earned income from direct financing
leases, $591,655 and $602,246 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively. Rental and earned income decreased
approximately $8,100 during the quarter and six months ended June 30, 1999, as
compared to the quarter and six months ended June 30, 1998, primarily as a
result of the sale of the restaurant property in Maryville, Tennessee, as
described above in "Capital Resources."
During the six months ended June 30, 1999 and 1998, the Income Fund owned
and leased nine restaurant properties indirectly through other joint venture
arrangements, including one restaurant property in Halls Joint Venture which
was sold in 1999, and owned two restaurant properties indirectly with our
affiliates as tenants-in-common. In connection therewith, during the six months
ended June 30, 1999 and 1998, the Income Fund earned $268,374 and $151,193,
respectively, $195,079 and $73,260 of which was earned during the quarters
ended June 30, 1999 and 1998, respectively. The increase in net income earned
by joint ventures is attributable to the fact that in June 1999, Halls Joint
Venture, in which the Income Fund owns a 51.1% interest, recognized a gain of
approximately $239,300, approximately $122,000 of which was allocated to the
Income Fund, for financial reporting purposes as a result of the sale of its
restaurant property in June 1999, as described above in "Capital Resources."
Because the joint venture intends to reinvest the sales proceeds in an
additional restaurant property in 1999, the Income Fund does not anticipate
that the sale of the restaurant property will have a material adverse effect on
operations.
Operating expenses, including depreciation expense, were $351,283 and
$235,162 for the six months ended June 30, 1999 and 1998, respectively, of
which $189,111 and $117,992 were incurred during the quarters ended June 30,
1999 and 1998, respectively. The increase in operating expenses during the
quarter and six months ended June 30, 1999, was primarily due to the fact that
during the quarter and six months ended June 30, 1999, the Income Fund incurred
$78,624 and $111,897, respectively, in transaction costs related to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition with APF. If the Limited Partners reject the
Acquisition, the Income Fund will bear the portion of the transaction costs
based upon the percentage of "For" votes and we will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.
S-32
<PAGE>
As a result of the sale of the restaurant property in Florence, South
Carolina in August 1995, and recording the gain using the installment method,
the Income Fund recognized a gain for financial reporting purposes of $553 and
$499 for the six months ended June 30, 1999 and 1998, respectively, $280 and
$252 of which was recognized during the quarters ended June 30, 1999 and 1998,
respectively. In addition, as a result of the sale of the restaurant property
in Maryville, Tennessee, as described above in "Capital Resources," the Income
Fund recognized a gain of $188,691 for financial reporting purposes during the
quarter and six months ended June 30, 1999. No restaurant properties were sold
during the quarter and six months ended June 30, 1998.
The Years Ended December 31, 1998, 1997 and 1996
During 1996, the Income Fund and its consolidated joint venture, San Antonio
#849 Joint Venture, owned and leased 33 wholly owned restaurant properties,
including two restaurant properties in Colorado Springs, Colorado, and
Hartland, Michigan, which were sold in July and October 1996, respectively,
during 1997, the Income Fund and its consolidated joint venture, San Antonio
#849 Joint Venture, owned and leased 31 wholly owned restaurant properties,
including two restaurant properties in Columbus, Indiana and Dunnellon,
Florida, which were sold in May and October 1997, respectively, and during
1998, the Income Fund and its consolidated joint venture, San Antonio #849
Joint Venture, owned and leased 29 wholly owned restaurant properties. In
addition, during 1996, the Income Fund and its consolidated joint venture, San
Antonio #849 Joint Venture, was a co-venturer in three separate joint ventures
which owned and leased eight restaurant properties and owned and leased one
restaurant property with an affiliate as tenants-in-common. During 1997, the
Income Fund and its consolidated joint venture, San Antonio #849 Joint Venture,
was a co-venturer in four separate joint ventures which owned and leased nine
restaurant properties and owned and leased three restaurant properties with
affiliates as tenants-in-common, including one restaurant property in Yuma,
Arizona which was sold in October 1997, and during 1998, the Income Fund and
its consolidated joint venture, San Antonio #849 Joint Venture, was a co-
venturer in four separate joint ventures which owned and leased nine restaurant
properties and owned and leased two restaurant properties with affiliates as
tenants-in-common. As December 31, 1998, the Income Fund and its consolidated
joint venture, San Antonio #849 Joint Venture, owned either directly, as
tenants-in-common with an affiliate, or through joint venture arrangements 40
restaurant properties, which are generally subject to long-term, triple-net
leases. The leases of the restaurant properties provide for minimum base annual
rental amounts, payable in monthly installments, ranging from approximately
$22,100 to $191,900. Substantially all of the leases provide for percentage
rent based on sales in excess of a specified amount. In addition, some of the
leases provide that, commencing in the specified lease years, generally ranging
from the sixth to the eleventh lease year, the annual base rent required under
the terms of the lease will increase.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
and its consolidated joint venture, San Antonio #849 Joint Venture, earned
$2,390,557, $2,436,222, and $2,459,094, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease
in rental and earned income during 1998 and 1997, each as compared to the
previous year, was attributable to a decrease in rental and earned income as a
result of the sales of the restaurant properties in Colorado Springs, Colorado;
Hartland, Michigan; Columbus, Ohio and Dunnellon, Florida, in July 1996,
October 1996, May 1997 and October 1997, respectively. The decrease in 1997, as
compared to 1996, was partially offset by an increase in rental and earned
income as a result of reinvesting the net sales proceeds from the sale of the
restaurant property in Colorado, Springs, Colorado, in a restaurant property in
Marietta, Georgia, in October 1996. Rental and earned income are expected to
remain at reduced amounts in future years as a result of reinvesting the
proceeds from the sales of the restaurant properties in Hartland, Michigan;
Columbus, Ohio and Dunnellon, Florida in joint ventures and in restaurant
properties owned with affiliates, as tenants-in-common, as described below.
However, as a result of reinvesting in joint ventures and in restaurant
properties owned with affiliates, as tenants-in-common, net income earned by
unconsolidated joint ventures increased in 1998, as described below.
S-33
<PAGE>
For the years ended December 31, 1998, 1997 and 1996, the Income Fund also
earned $93,906, $51,345, $44,973, respectively, in contingent rental income.
The increase in contingent rental income during 1998 and 1997, each as compared
to the previous year, is primarily a result of increased gross sales of certain
restaurant properties requiring the payment of contingent rental income.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $171,263, $183,579, $240,079, respectively, in interest and other
income. The decrease in interest and other income for 1997, as compared to
1996, is partially attributable to the fact that during 1996, the Income Fund
recognized approximately $46,500 in other income due to the fact that the
corporate franchisor of the restaurant properties in Pueblo and Colorado
Springs, Colorado, paid past due real estate taxes relating to the restaurant
properties and the Income Fund reversed such amounts during 1996 that it had
previously accrued as payable during 1995. In addition, the decrease in
interest and other income during 1997, as compared to 1996, was due to the fact
that during 1996, the Income Fund earned approximately $10,000 in interest
income on the net sales proceeds held in escrow relating to the restaurant
property in Colorado Springs, Colorado. These proceeds were reinvested in a
restaurant property in Marietta, Georgia, in October 1996.
For the years ended December 31, 1998, 1997, and 1996, the Income Fund also
earned $311,081, $267,251, $157,254, respectively, attributable to net income
earned by unconsolidated joint ventures in which the Income Fund is a co-
venturer and restaurant properties owned indirectly with affiliates as tenants-
in-common. The increase in net income earned by joint ventures during the year
ended 1998, as compared to 1997, is partially due to the fact that in February
1997, the Income Fund reinvested the net sales proceeds it received from the
sale, in October 1996, of the restaurant property in Hartland, Michigan in CNL
Mansfield Joint Venture, with an affiliate of the Income Fund which has the
same general partners. In addition, the increase in net income earned by joint
ventures during the year ended 1998, as compared to 1997, is partially due to
the Income Fund investing in a restaurant property in Smithfield, North
Carolina, in December 1997, with certain of our affiliates as tenants-in-
common, as described above in "Capital Resources." In addition, the increase in
net income earned by joint ventures during 1998 was partially offset by, and
the increase in net income earned by joint ventures during 1997, as compared to
1996, is partially attributable to, the fact that in October 1997, the Income
Fund and an affiliate, as tenants-in-common, sold the restaurant property in
Yuma, Arizona, in which the Income Fund owned a 48.33% interest. The tenancy-
in-common recognized a gain of approximately $128,400 for financial reporting
purposes, as described above in "Capital Resources."
During the year ended December 31, 1998, three lessees of the Income Fund
and its consolidated joint venture, Golden Corral Corporation, Restaurant
Management Services, Inc., and Waving Leaves, Inc., each contributed more than
ten percent of the Income Fund's total rental income, including rental income
from the Income Fund's consolidated joint venture and the Income Fund's share
of rental income from nine restaurant properties owned by unconsolidated joint
ventures and two restaurant properties owned with affiliates as tenants-in-
common. As of December 31, 1998, Golden Corral Corporation was the lessee under
leases relating to five restaurants, Restaurant Management Services, Inc. was
the lessee under leases relating to seven restaurants and one site currently
consisting of land only, and Waving Leaves, Inc. was the lessee under leases
relating to four restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, these three lesses each will continue
to contribute more than ten percent of the Income Fund's total rental income
during 1999. In addition, during the year ended December 31, 1998, three
restaurant chains, Golden Corral, Hardee's , and Burger King, each accounted
for more than ten percent of the Income Fund's total rental income, including
rental income from the Income Fund's consolidated joint venture and the Income
Fund's share of rental income from nine restaurant properties owned by
unconsolidated joint ventures and two restaurant properties owned with
affiliates as tenants-in-common. In 1999, it is anticipated that these three
restaurant chains each will continue to account for more than ten percent of
the Income Fund's total rental income to which the Income Fund is entitled
under the terms of the leases. Any failure of these lessees or restaurant
chains could materially affect the Income Fund's income if the Income Fund is
not able to re-lease the restaurant properties in a timely manner.
S-34
<PAGE>
Operating expenses, including depreciation and amortization expense, were
$483,224, $478,614, and $516,056 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily a result of the Income Fund incurring $18,781 in
transaction costs relating to us retaining financial and legal advisors to
assist us in evaluating and negotiating the Acquisition. The increase in
operating expenses during 1998, as compared to 1997, is partially offset be a
decrease in general operating and administrative expenses.
The decrease in operating expenses during 1997, as compared to 1996, was
primarily a result of a decrease in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties. In
addition, the decrease in operating expenses during 1997, as compared to 1996,
was due to the fact that in July 1996, the Income Fund sold the restaurant
property in Colorado Springs, Colorado, as discussed above in "Capital
Resources," and in connection therewith, paid approximately $9,000 in 1996 real
estate taxes which were due upon the sale of the restaurant property. Because
of the sale, no real estate taxes were recorded in 1997.
The decrease in operating expenses during 1997, as compared to 1996, was
also partially attributable to a decrease in depreciation expense due to the
sales of the restaurant properties in Hartland, Michigan and Colorado Springs,
Colorado in 1996. The decrease in depreciation expense was partially offset by
the purchase of the restaurant property in Marietta, Georgia, in October 1996.
In connection with the sale of its restaurant property in Florence, South
Carolina, during 1995, the Income Fund recognized a gain for financial
reporting purposes of $1,025, $926, $836 for these years ended December 31,
1998, 1997, and 1996, respectively. In accordance with Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate," the Income
Fund recorded the sale using the installment sales method. As such, the gain on
sale was deferred and is being recognized as income proportionately as payments
under mortgage note are collected. Therefore, the balance of the deferred gain
of $125,278 at December 31, 1998 is being recognized as income in future
periods as payments ar collected. For federal income tax purposes, a gain of
approximately $97,300 from the sale of this restaurant property was also
deferred during 1995 and is being recognized as payments under the mortgage
note are collected.
As a result of the sale of the restaurant property in Columbus, Indiana,
during 1997, as described above in "Capital Resources," the Income Fund
recognized a loss of $19,739 for financial reporting purposes, for the year
ended December 31, 1997. As a result of the sale of the restaurant property in
Dunnellon, Florida, as described above in "Capital Resources," the Income Fund
recognized a gain for financial reporting purposes of $183,701 for the year
ended December 31, 1997.
As a result of the sale of the restaurant property in Colorado Springs,
Colorado, during 1996, as described above in "Capital Resources," the Income
Fund recognized a gain of $194,839 for financial reporting purposes for the
year ended December 31, 1996. As a result of the sale of the restaurant
property in Hartland, Michigan, as described above in "Capital Resources," the
Income Fund recognized a loss for financial reporting purposes of $235,465 for
the year ended December 31, 1996.
The Income Fund's leases as of December 31, 1998, are generally triple-net
leases and contain provisions that we believe mitigate the adverse effect of
inflation. Such provisions include clauses requiring the payment of percentage
rent based n certain restaurant sales above a specified level and/or automatic
increases in base rent at specified times during the term of the lease.
Inflation has had a minimal effect on income from operations. Management
expects that increases in restaurant sales volumes due to inflation and real
sales growth should result in an increase in rental income over time. Continued
inflation also may cause capital appreciation of the Income Fund's restaurant
properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the restaurants and on potential capital appreciation of
the restaurant properties.
S-35
<PAGE>
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
S-36
<PAGE>
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
S-37
<PAGE>
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
Interest Rate Risk
The Income Fund has provided fixed rate mortgage notes to borrowers. We
believe that the estimated fair value of the mortgage notes at December 31,
1998 approximated the outstanding principal amounts. The Income Fund is exposed
to equity loss in the event of changes in interest rates. The following table
presents the expected cash flows of principal that are sensitive to these
changes.
<TABLE>
<CAPTION>
Mortgage notes
Fixed Rates
--------------
<S> <C>
1999.......................................................... $ 11,968
2000.......................................................... 1,114,132
2001.......................................................... 2,195
2002.......................................................... 2,425
2003.......................................................... 2,679
Thereafter.................................................... 224,478
----------
$1,357,877
==========
</TABLE>
S-38
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-8
Balance Sheets as of December 31, 1998 and 1997........................... F-9
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. F-10
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-13
Unaudited Pro Forma Financial Information................................. F-22
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-23
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-25
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-27
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-29
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-31
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-33
</TABLE>
S-39
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December
1999 31, 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,473,926 and $2,473,926,
respectively.......................................... $14,127,414 $15,078,507
Net investment in direct financing leases.............. 3,320,665 3,365,392
Investment in joint ventures........................... 3,413,821 3,327,934
Mortgage notes receivable, less deferred gain of
$124,725 and $125,278, respectively................... 1,235,728 1,241,056
Cash and cash equivalents.............................. 906,629 856,825
Restricted cash........................................ 1,063,383 --
Receivables, less allowance for doubtful accounts of
$16,679 and $28,853, respectively..................... 2,499 78,478
Prepaid expenses....................................... 13,021 4,116
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1999 and 1998................... 1,175,747 1,205,528
Other assets........................................... 60,422 60,422
----------- -----------
$25,319,329 $25,218,258
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 89,920 $ 2,885
Escrowed real estate taxes payable..................... 4,249 5,834
Distributions payable.................................. 675,000 675,000
Due to related parties................................. 25,464 25,111
Rents paid in advance and deposits..................... 43,712 49,027
----------- -----------
Total liabilities.................................... 838,345 757,857
Commitments and Contingencies (Note 5)
Minority interest...................................... 146,060 146,605
Partners' capital...................................... 24,334,924 24,313,796
----------- -----------
$25,319,329 $25,218,258
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases..... $ 490,454 $ 498,467 $ 983,178 $ 991,191
Earned income from
direct financing
leases............... 101,201 103,779 203,077 208,154
Contingent rental
income............... 2,169 2,958 3,679 12,378
Interest and other
income............... 44,581 41,148 84,139 85,138
----------- ----------- ------------ ------------
638,405 646,352 1,274,073 1,296,861
----------- ----------- ------------ ------------
Expenses:
General operating and
administrative....... 28,491 34,550 63,827 67,662
Professional
services............. 7,366 7,313 11,785 12,594
State and other
taxes................ -- 40 13,055 2,728
Depreciation and
amortization......... 74,630 76,089 150,719 152,178
Transaction costs..... 78,624 -- 111,897 --
----------- ----------- ------------ ------------
189,111 117,992 351,283 235,162
----------- ----------- ------------ ------------
Income Before Minority
Interest in Income of
Consolidated Joint
Venture,
Equity in Earnings of
Unconsolidated Joint
Ventures, and Gain on
Sale of Land and
Building............... 449,294 528,360 922,790 1,061,699
Minority Interest in
Income of Consolidated
Joint Venture.......... (4,631) (4,596) (9,280) (9,256)
Equity in Earnings of
Unconsolidated Joint
Ventures............... 195,079 73,260 268,374 151,193
Gain on Sale of Land and
Building............... 188,971 252 189,244 499
----------- ----------- ------------ ------------
Net Income.............. $ 828,713 $ 597,276 $ 1,371,128 $ 1,204,135
=========== =========== ============ ============
Allocation of Net
Income:
General partners...... $ 8,053 $ 5,972 $ 13,477 $ 12,041
Limited partners...... 820,660 591,304 1,357,651 1,192,094
----------- ----------- ------------ ------------
$ 828,713 $ 597,276 $ 1,371,128 $ 1,204,135
=========== =========== ============ ============
Net Income Per Limited
Partner Unit........... $ 0.027 $ 0.020 $ 0.045 $ 0.040
=========== =========== ============ ============
Weighted Average Number
of Limited Partner
Units Outstanding...... 30,000,000 30,000,000 30,000,000 30,000,000
=========== =========== ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 205,744 $ 181,085
Net income..................................... 13,477 24,659
----------- -----------
219,221 205,744
----------- -----------
Limited partners:
Beginning balance.............................. 24,108,052 24,366,693
Net income..................................... 1,357,651 2,441,359
Distributions ($0.045 and $0.090 per limited
partner unit, respectively)................... (1,350,000) (2,700,000)
----------- -----------
24,115,703 24,108,052
----------- -----------
Total partners' capital.......................... $24,334,924 $24,313,796
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CLN INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,405,372 $ 1,401,833
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... 1,059,954 --
Increase in restricted cash...................... (1,061,529) --
Collections on mortgage notes receivable......... 5,832 5,267
Other............................................ -- 13,255
----------- -----------
Net cash provided by investing activities...... 4,257 18,522
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,350,000) (1,350,000)
Distributions to holder of minority interest..... (9,825) (9,663)
----------- -----------
Net cash used in financing activities.......... (1,359,825) (1,359,663)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 49,804 60,692
Cash and Cash Equivalents at Beginning of Period..... 856,825 761,317
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 906,629 $ 822,009
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period.......................................... $ 675,000 $ 675,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND VII, LTD.
(a Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VII, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 83 percent interest in San Antonio #849
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partners' proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
2. Land and Buildings on Operating Leases:
In June 1999, the Partnership sold its property in Maryville, Tennessee to
the tenant in accordance with the purchase option under the lease agreement to
purchase the property, for $1,068,802, and received net sales proceeds of
$1,059,954, resulting in a gain of $188,691 for financial reporting purposes.
This property was originally acquired by the Partnership in 1990 at a cost of
approximately $890,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold this property for a total
of approximately $169,300 in excess of its original purchase price.
3. Investment in Joint Ventures:
In June 1999, Halls Joint Venture, in which the Partnership owns a 51.1%
interest, sold its property to the tenant in accordance with the purchase
option under the lease agreement for $891,915, resulting in a gain to the joint
venture of approximately $239,300 for financial reporting purposes. The
property was originally contributed to Halls Joint Venture in 1990 and had a
total cost of approximately $672,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $219,900 in excess of its original purchase price.
F-5
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures at:
<TABLE>
<CAPTION>
June 30, December
1999 31, 1998
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.......................... $ 9,892,904 $10,612,379
Cash............................................... 4,133 3,763
Restricted cash.................................... 887,114 --
Receivables........................................ 32 21,249
Accrued rental income.............................. 129,946 178,775
Other assets....................................... 1,129 1,116
Liabilities........................................ 9,019 8,916
Partners' capital.................................. 10,906,239 10,808,366
Revenues........................................... 630,777 1,324,602
Gain on sale of land and building.................. 239,336 --
Net income......................................... 719,130 1,028,391
</TABLE>
The Partnership recognized income totaling $268,374 and $151,193 during the
six months ended June 30, 1999 and 1998, respectively, from these joint
ventures, $195,079 and $73,260 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively.
4. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $1,059,954 from the sale of
the property in Maryville, Tennessee, plus accrued interest of $3,429, were
being held in an interest-bearing escrow account pending the release of funds
by the escrow agent to acquire an additional property.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,601,186 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $31,543,529 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If
F-6
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
the limited partners at the special meeting approve the Merger, APF will own
the properties and other assets of the Partnership. The general partners intend
to recommend that the limited partners of the Partnership approve the Merger.
In connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
During the six months ended June 30, 1999, the Partnership received notice
from a tenant deciding to exercise the purchase option under its lease
agreement relating to the Burger King property in Jefferson City, Tennessee.
The general partners believe that the anticipated sales price for this property
exceeds the Partnership's net carrying value attributable to the property. As
of August 6, 1999, the sales had not occurred.
F-7
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund VII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund VII, Ltd. (a
Florida Limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 25, 1999, except for Note 11 for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-8
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.............................. $15,078,507 $15,382,863
Net investment indirect financing leases............... 3,365,392 3,447,152
Investment in joint ventures........................... 3,327,934 3,393,932
Mortgage notes receivable, less deferred gain.......... 1,241,056 1,250,597
Cash and cash equivalents.............................. 856,825 761,317
Receivables, less allowance for doubtful accounts of
$28,853 and $32,959................................... 78,478 64,092
Prepaid expenses....................................... 4,116 4,755
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1998 and 1997................... 1,205,528 1,114,632
Other assets........................................... 60,422 60,422
----------- -----------
$25,218,258 $25,479,762
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,885 $ 6,131
Escrowed real estate taxes payable..................... 5,834 7,785
Distributions payable.................................. 675,000 675,000
Due to related parties................................. 25,111 34,883
Rents paid in advance and deposits..................... 49,027 60,671
----------- -----------
Total liabilities.................................. 757,857 784,470
Minority interest...................................... 146,605 147,514
Partners' capital...................................... 24,313,796 24,547,778
----------- -----------
$25,218,258 $25,479,762
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CLN INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,976,709 $1,960,724 $1,954,033
Earned income from direct financing
leases................................. 413,848 475,498 505,061
Contingent rental income................ 93,906 51,345 44,973
Interest and other income............... 171,263 183,579 240,079
---------- ---------- ----------
2,655,726 2,671,146 2,744,146
---------- ---------- ----------
Expenses:
General operating and administrative.... 133,915 143,173 159,001
Professional services................... 23,443 23,546 27,640
Real estate taxes....................... -- 2,979 9,010
State and other taxes................... 2,729 4,560 2,448
Depreciation............................ 304,356 304,356 317,957
Transaction costs....................... 18,781 -- --
---------- ---------- ----------
483,224 478,614 516,056
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, and Gain (Loss) on Sale of Land
and Buildings............................ 2,172,502 2,192,532 2,228,090
Minority Interest in Income of
Consolidated Joint Venture............... (18,590) (18,663) (18,691)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 311,081 267,251 157,254
Gain (Loss) on Sale of Land and
Buildings................................ 1,025 164,888 (39,790)
---------- ---------- ----------
Net Income................................ $2,466,018 $2,606,008 $2,326,863
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 24,659 $ 24,300 $ 23,586
Limited partners........................ 2,441,359 2,581,708 2,303,277
---------- ---------- ----------
$2,466,018 $2,606,008 $2,326,863
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.081 $ 0.086 $ 0.077
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 30,000,000 30,000,000 30,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $132,199 $30,000,000 $(14,777,623) $13,099,331 $(3,440,000) $25,014,907
Distributions to
limited partners
($0.090 per limited
partner unit)........ -- -- -- (2,700,000) -- -- (2,700,000)
Net income............ -- 23,586 -- -- 2,303,277 -- 2,326,863
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 155,785 30,000,000 (17,477,623) 15,402,608 (3,440,000) 24,641,770
Distributions to
limited partners
($0.090 per limited
partner unit)........ -- -- -- (2,700,000) -- -- (2,700,000)
Net income............ -- 24,300 -- -- 2,581,708 -- 2,606,008
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 180,085 30,000,000 (20,177,623) 17,984,316 (3,440,000) 24,547,778
Distributions to
limited partners
($0.090 per limited
partner unit)........ -- -- -- (2,700,000) -- -- (2,700,000)
Net income............ -- 24,659 -- -- 2,441,359 -- 2,466,018
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $204,744 $30,000,000 $(22,877,623) $20,425,675 $(3,440,000) $24,313,796
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,435,937 $ 2,500,189 $ 2,549,406
Distributions from unconsolidated
joint ventures...................... 376,557 300,696 191,174
Cash paid for expenses............... (187,925) (140,819) (248,523)
Interest received.................... 166,406 180,393 178,812
----------- ----------- -----------
Net cash provided by operating
activities........................ 2,790,975 2,840,459 2,670,869
----------- ----------- -----------
Cash Flows from Investing Activities:
Additions to land and buildings on
operating leases.................... -- -- (1,041,555)
Proceeds from sale of land and
buildings........................... -- 976,334 1,661,943
Investment in joint ventures......... -- (1,650,905) --
Collections on mortgage notes
receivable.......................... 10,811 9,766 8,821
Other................................ 13,221 -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. 24,032 (664,805) 629,209
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.... (2,700,000) (2,700,000) (2,700,000)
Distributions to holder of minority
interest............................ (19,499) (19,766) (19,723)
----------- ----------- -----------
Net cash used in financing
activities........................ (2,719,499) (2,719,766) (2,719,723)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 95,508 (544,112) 580,355
Cash and Cash Equivalents at Beginning
of Year............................... 761,317 1,305,429 725,074
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 856,825 $ 761,317 $ 1,305,429
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income........................... $ 2,466,018 $ 2,606,008 $ 2,326,863
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 304,356 304,356 317,957
Minority interest in income of
consolidated joint venture.......... 18,590 18,663 18,691
Loss (gain) on sale of land and
buildings........................... (1,025) (164,888) 39,790
Equity in earnings of unconsolidated
joint ventures, net of
distributions....................... 65,476 33,445 33,920
Decrease (increase) in receivables... (27,330) 17,173 (14,827)
Decrease (increase) in prepaid
expenses............................ 639 (101) 379
Decrease in net investment in direct
financing leases.................... 81,760 76,941 70,329
Increase in accrued rental income.... (90,896) (102,142) (104,639)
Increase (decrease) in accounts
payable and accrued expenses........ (5,197) 3,222 (40,072)
Increase (decrease) in due to related
parties............................. (9,772) 25,816 (4,244)
Increase (decrease) in rents paid in
advance and deposits................ (11,644) 21,966 26,722
----------- ----------- -----------
Total adjustments.................. 324,957 234,451 344,006
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ $ 2,790,975 $ 2,840,459 $ 2,670,869
----------- ----------- -----------
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31......................... $ 675,000 $ 675,000 $ 675,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-13
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its 83.3%
interest in San Antonio #849 Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's proportionate
share of the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been eliminated.
The Partnership's investments in Halls Joint Venture, CNL Restaurant
Investments II, Des Moines Real Estate Joint Venture, and CNL Mansfield Joint
Venture, and a property in Smithfield, North Carolina, and a property in Miami,
Florida, for which each of the two properties is held as tenants-in-common with
affiliates, are accounted for using the equity method since the Partnership
shares control with affiliates which have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. The more significant areas requiring the use
of management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
F-14
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land or land and buildings primarily to operators
of national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are operating
leases. Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. In addition, the tenant generally pays all property
taxes and assessments, fully maintains the interior and exterior of the
building and carries insurance coverage for public liability, property damage,
fire and extended coverage. The lease options generally allow tenants to renew
the leases for two to four successive five-year periods subject to the same
terms and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................. $ 8,430,465 $ 8,430,465
Buildings........................................ 9,121,968 9,121,968
----------- -----------
17,552,433 17,552,433
Less accumulated depreciation.................... (2,473,926) (2,169,570)
----------- -----------
$15,078,507 $15,382,863
=========== ===========
</TABLE>
In May 1997, the Partnership sold its property in Columbus, Indiana, for
$240,000 and received net sales proceeds of $223,589, resulting in a loss of
$19,739 for financial reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $90,896, $102,142 (net of
$11,159 in reserves), and $104,639 (net of $1,631 in reserves), respectively,
of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 1,891,776
2000........................................................... 1,925,741
2001........................................................... 2,022,708
2002........................................................... 2,034,710
2003........................................................... 1,940,473
Thereafter..................................................... 10,605,505
-----------
$20,420,913
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts
F-15
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
for future contingent rentals which may be received on the leases based on a
percentage of the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $ 5,915,553 $ 6,411,161
Estimated residual values........................ 1,008,935 1,008,935
Less unearned income............................. (3,559,096) (3,972,944)
----------- -----------
Net investment in direct financing leases........ $ 3,365,392 $ 3,447,152
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................ $ 495,609
2000............................................................ 495,609
2001............................................................ 496,766
2002............................................................ 496,766
2003............................................................ 496,766
Thereafter...................................................... 3,434,037
----------
$5,915,553
==========
</TABLE>
In October 1997, the Partnership sold its property in Dunnellon, Florida,
for $800,000 and received net sales proceeds (net of $5,055 which represents
amounts due to the former tenant for prepaid rent) of $752,745, resulting in a
gain of $183,701 for financial reporting purposes. This property was originally
acquired by the Partnership in August 1990 and had a cost of approximately
$546,300, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the property for approximately $211,500 in
excess of its original purchase price.
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 51.1% interest, an 18 percent interest and a 4.79%
interest in the profits and losses of Halls Joint Venture, CNL Restaurant
Investments II, and Des Moines Real Estate Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In February 1997, the Partnership entered into a joint venture arrangement,
CNL Mansfield Joint Venture, with an affiliate of the Partnership which has the
same general partners, to hold one restaurant property in Mansfield, Texas. As
of December 31, 1998, the Partnership owned a 79 percent interest,
respectively, in the profits and losses of the joint venture. The Partnership
accounts for its investment in this joint venture under the equity method since
the Partnership shares control with the affiliate.
F-16
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
As of January 1, 1997, the Partnership had a 48.33% interest in a property
in Yuma, Arizona, with an affiliate of the Partnership that has the same
general partners, as tenants-in-common. In October 1997, the Partnership and
the affiliate, as tenants-in-common, sold the property in Yuma, Arizona, for a
total sales price of $1,010,000 and received net sales proceeds of $982,025
resulting in a gain of approximately $128,400 for financial reporting purposes.
The property was originally acquired in July 1994 and had a total cost of
approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the property was sold for approximately
$120,300 in excess of its original purchase price. In December 1997, the
Partnership reinvested its portion of the net sales proceeds from the sale of
the Yuma, Arizona, property, along with funds from the sale of a wholly-owned
Property in Columbus, Indiana, in a property in Miami, Florida, as tenants-in-
common with affiliates of the general partners. The Partnership accounts for
its investment in the property in Miami, Florida, using the equity method since
the Partnership shares control with affiliates, and amounts relating to its
investment are included in investment in joint ventures. As of December 31,
1998, the Partnership owned a 35.64% interest in the Miami, Florida property
owned with affiliates as tenants-in-common.
In December 1997, the Partnership acquired a property in Smithfield, North
Carolina as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 53 percent interest in this
property.
CNL Restaurant Investments II owns and leases six properties to an operator
of national fast-food or family-style restaurants, and Halls Joint Venture, Des
Moines Real Estate Joint Venture, CNL Mansfield Joint Venture, and the
Partnership and affiliates as tenants-in-common in two separate tenancy-in-
common arrangements, each own and lease one property to an operator of national
fast-food or family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the two properties
held as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $10,612,379 $10,892,405
Cash............................................. 3,763 750
Receivables...................................... 21,249 18,819
Accrued rental income............................ 178,775 147,685
Other assets..................................... 1,116 1,079
Liabilities...................................... 8,916 8,625
Partners' capital................................ 10,808,366 11,052,113
Revenues......................................... 1,324,602 1,012,624
Gain on sale of land and building................ -- 128,371
Net income....................................... 1,028,391 905,117
</TABLE>
The Partnership recognized income totalling $311,081, $267,251, and $157,254
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures and the two properties held as tenants-in-common with
affiliates.
F-17
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Mortgage Notes Receivable:
In connection with the sale of its property in Florence, South Carolina
during 1995, the Partnership accepted a promissory note in the principal sum of
$1,160,000, collateralized by a mortgage on the property. The promissory note
bears interest at a rate of 10.25% per annum and is being collected in 59 equal
monthly installments of $10,395, with a balloon payment of $1,105,715 due in
July 2000.
In addition, the Partnership accepted a promissory note in the principal sum
of $240,000 in connection with the sale of its property in Jacksonville,
Florida in December 1995. The note is collateralized by a mortgage on the
property. The promissory note bears interest at a rate of ten percent per annum
and is being collected in 119 equal monthly installments of $2,106, with a
balloon payment of $218,252 due in December 2005.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance.................................. $1,357,877 $1,368,688
Accrued interest receivable........................ 8,457 8,212
Less deferred gain on sale of land and building.... (125,278) (126,303)
---------- ----------
$1,241,056 $1,250,597
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1998 and 1997, approximate the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property not in liquidation of
the Partnership is, in general, allocated first, on a pro rata basis, to
partners with positive balances in their capital accounts; and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership,
F-18
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
iii) third, to pay all of the Partnership's liabilities, if any, to the general
and limited partners, iv) fourth, after allocations of net income, gains and/or
losses, to distribute to the partners with positive capital accounts balances,
in proportion to such balances, up to amounts sufficient to reduce such
positive balances to zero, and v) thereafter, any funds remaining shall then be
distributed 95 percent to the limited partners and five percent to the general
partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of $2,700,000. No
distributions have been made to the general partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,466,018 $2,606,008 $2,326,863
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (16,795) (25,552) (24,753)
Gain on sale of land and buildings for
financial reporting purposes in excess
of gain for tax reporting purposes..... (246) (178,348) (163,152)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 81,760 76,941 70,329
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial reporting
purposes............................... 11,026 (55,911) 1,420
Accrued rental income................... (90,896) (102,142) (104,639)
Rents paid in advance................... (12,644) 21,966 26,722
Minority interest in timing differences
of unconsolidated joint venture........ 982 981 981
Allowance for uncollectible accounts.... (4,106) -- --
Capitalization of transaction costs for
tax reporting purposes................. 18,781 -- --
Other................................... -- (10,275) --
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,453,880 $2,333,668 $2,133,771
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the
F-19
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Partnership agreed to pay the Affiliate an annual, noncumulative, subordinated
management fee of one percent of the sum of gross revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
revenues from joint ventures and the properties held as tenants-in-common with
affiliates, but not in excess of competitive fees for comparable services.
These fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fee will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees were incurred for the years ended December 31, 1998,
1997, and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,256, $77,078, and 92,985 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership...... $10,111 $20,321
Accounting and administrative services.................. 7,800 7,362
Deferred, subordinated real estate disposition fee...... 7,200 7,200
------- -------
$25,111 $34,883
======= =======
</TABLE>
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures and
the two properties held as tenants-in-common with affiliates), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation...................... $732,650 $625,724 $608,852
Restaurant Management Services, Inc............ 448,691 444,069 446,867
Waving Leaves, Inc............................. 300,546 N/A --
Flagstar Enterprises, Inc...................... N/A 307,738 464,042
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including
F-20
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
the Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the two properties held as tenants-in-common
with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants.... $732,650 $625,724 $608,852
Burger King.................................... 469,984 466,626 478,901
Hardees........................................ 451,348 447,074 524,625
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,202,371 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $31,543,529 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 1,601,186 shares valued at $20.00 per
APF share.
F-21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on operating
leases (net depreciation)............ $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct Financing
Leases............................... 132,179,949 0 132,179,949 0 0
Mortgages and Notes Receivable........ 63,351,507 0 63,351,507 0 0
Other Investments..................... 16,197,812 0 16,197,812 0 0
Investment In Joint Ventures.......... 1,081,046 0 1,081,046 0 0
Cash and Cash Equivalents............. 18,764,033 0 18,764,033 333,295 639,036
Restricted Cash/Certificates of
Deposit.............................. 2,006,690 0 2,006,690 0 0
Receivables (net allowances)/ Due from
Related Party........................ 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income................. 5,875,698 0 5,875,698 0 0
Other Assets.......................... 12,551,632 0 12,551,632 405,214 313,486
Goodwill.............................. 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets......................... $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and Accrued
Liabilities.......................... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction Costs Payable.... 9,745,014 0 9,745,014 0 0
Distributions Payable................. 0 0 0 0 0
Due to Related Parties................ 1,444,444 0 1,444,444 0 500,981
Income Tax Payable.................... 0 0 0 51,466 16,906
Line of Credit/Notes payable.......... 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income....................... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance................. 1,617,367 0 1,617,367 0 0
Minority Interest..................... 644,611 0 644,611 0 0
Common Stock.......................... 373,484 0 373,484 0 0
Common Stock--Class A................. 0 0 0 6,400 2,000
Common Stock--Class B................. 0 0 0 3,600 724
Additional Paid-in-capital............ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated distributions in excess of
net earnings......................... (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital..................... 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and Equity......... $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
Wtd. Avg. Shares Outstanding 37,347,883
============
Shares Outstanding 37,348,464
============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund VII, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $14,127,414 $ 5,906,377 (B2) $ 592,970,650
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 3,320,665 1,506,999 (B2) 137,007,613
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 1,235,728 0 355,109,906
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 3,413,821 1,044,420 (B2) 5,539,287
Cash and Cash
Equivalents............ 1,767,517 (9,435,433)(B1) 12,068,448 906,629 (2,456,567)(B2) 10,140,510
(378,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 1,063,383 0 5,552,114
Receivables (net
allowances)/Due from
Related Party.......... 1,125,933 (6,614,629)(C) 9,247,098 2,499 (25,464)(E) 9,224,133
Accrued Rental Income... 0 0 5,875,698 1,175,747 (1,175,747)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 73,443 (73,443)(B2) 13,173,857
Goodwill................ 0 43,046,115 (B1) 43,046,115 0 0 43,046,115
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $304,738,561 $ 24,420,261 $1,170,530,873 $25,319,329 $ 4,348,575 $1,200,198,777
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 94,169 $ 0 $ 5,198,472
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 675,000 0 675,000
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 25,464 (25,464)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 43,712 0 1,661,079
Minority Interest....... 0 0 644,611 146,060 0 790,671
Common Stock............ 0 61,500 (B1) 434,984 0 15,823 (B2) 450,807
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 28,693,140 (B2) 821,629,355
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,163)(B1) (88,326,064) 0 0 (88,326,064)
(73,499,548)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 24,334,924 (24,334,924)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,420,261 $1,170,530,873 $25,319,329 $ 4,348,575 $1,200,198,777
============ ============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding 45,080,169(r)
==========
Shares Outstanding 45,080,750
==========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ----------- ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 27,900,894 $ 3,056,620(a) $ 30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
------------ ----------- ------------ ----------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
------------ ----------- ------------ ----------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $ 23,564,432 $ 2,089,441 $ 25,653,873 $ 3,877,654 $ 42,804 $ (239,337)
Equity Earnings of
Joint
Ventures/Minority
Interest ............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision For Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
------------ ----------- ------------ ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 239,337
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
------------ ----------- ------------ ----------- ---------- -----------
Net Earnings (Losses)... $ 22,853,308 $ 2,089,441 $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
============ =========== ============ =========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
============ =========== ============ =========== ========== ===========
Cash Distributions
Declared. ............. $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
============ =========== ============ =========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
============ =========== ============ =========== ========== ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VII, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $ 1,189,934 $ 37,863 (j) $32,185,311
Fees................... (9,812,516)(b),(c) 2,616,185 0 (21,458)(k) 2,594,727
Interest and Other
Income................ 144,014 (d) 16,269,383 84,139 0 16,353,522
----------- ----------- ----------- --------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $ 1,274,073 $ 16,405 $51,133,560
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 75,612 (41,831)(l),(m) 9,613,683
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 13,055 6,150 (o) 484,171
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 150,719 88,251 (p) 4,908,123
Amortization........... 1,076,153 (h) 1,085,889 0 0 1,085,889
Transaction Costs...... 0 483,005 111,897 0 594,902
----------- ----------- ----------- --------- -----------
Total Expenses......... (3,355,606) 26,820,984 351,283 52,570 27,224,837
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,312,896) $23,022,098 $ 922,790 $ (36,165) $23,908,723
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 259,094 (28,017)(q) 262,318
Gain (Loss) on Sale of
Properties............ 0 (201,843) 189,244 0 (12,599)
Provision For Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ----------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,312,896) 22,310,974 1,371,128 (64,182) 23,617,920
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ----------- --------- -----------
Net Earnings (Losses)... $(4,787,156) $22,310,974 $ 1,371,128 $ (64,182) $23,617,920
=========== =========== =========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.05 $ n/a $ 0.52
=========== =========== =========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 0.81 $ n/a $ 16.28
=========== =========== =========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.05 $ n/a $ 0.76
=========== =========== =========== ========= ===========
Ratio of Earnings to
Fixed Charges ......... n/a n/a n/a n/a 2.92x
=========== =========== =========== ========= ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $ 1,350,000 $(143,539)(s) $34,371,863
=========== =========== =========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,582,286 45,080,169(r)
=========== =========== =========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,582,286 45,080,750
=========== =========== =========== ========= ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,555,860(t) $51,005,009 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,577,812 34,226,031 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VII, Ltd. Adjustments Pro Forma
------------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $2,484,463 $ 75,726 (j) $58,641,649
Fees................... (32,715,768)(b),(c) 3,226,263 0 (27,875)(k) 3,198,388
Interest and Other
Income................ 207,144 (d) 32,221,925 171,263 0 32,393,188
------------ ----------- ---------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $2,655,726 $ 47,851 $94,233,225
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 157,358 (70,909)(l),(m) 16,026,005
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 2,729 9,845 (o) 580,020
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 304,356 176,503 (p) 10,429,198
Amortization........... 2,152,306 (h) 2,316,307 0 0 2,316,307
Transaction Costs...... 0 157,054 18,781 0 175,835
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,250,642) 51,485,235 483,224 115,439 52,083,898
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on
Securitizations,
Provision for Losses on
Properties and Other
Expenses............... $(23,257,982) $40,044,413 $2,172,502 $(67,588) $42,149,327
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 292,491 (56,034)(q) 222,319
Gain (Loss)on Sale of
Properties............ 0 0 1,025 0 1,025
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,257,982) 43,113,092 2,466,018 (123,622) 45,455,488
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,359,548) $43,113,092 $2,466,018 $(123,622) $45,455,488
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.08 $ n/a $ 1.08
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 0.81 $ n/a $ 16.41
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.90 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.06x
============ =========== ========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,383,513 $2,700,004 $(287,081)(t) $62,796,436
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,376,031 n/a 1,582,286 41,958,317 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,582,286 45,070,213
============ =========== ========== ========= ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441(a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179(b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (36,946) (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562(f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,319,623) 12,880,214 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,452,559 $ 33,216,592 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF VII, Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,787,156)(a) $ 22,310,974 $1,371,128 $ (64,182)(a) $ 23,617,920
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,774,655 150,719 88,251 (b) 5,013,625
Amortization expense... 1,076,153 (c) 1,985,906 0 0 1,985,906
Minority interest in
income of consolidated
joint venture......... 0 17,610 9,280 0 26,890
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 (85,887) 28,017 (d) (32,750)
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 (189,244) 0 12,599
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 75,979 0 (2,125,981)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (8,905) 0 (329,330)
Decrease in net
investment in direct
financing leases...... 0 721,624 44,727 0 766,351
Increase in accrued
rental income......... 0 (1,915,785) (41,108) 0 (1,956,893)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 86,650 0 (576,828)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 353 0 586,080
Decrease in accrued
interest.............. 0 (57,986) (3,005) 0 (60,991)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (5,315) 0 661,404
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------ ---------- ----------- -------------
Total adjustments...... 1,076,153 (75,913,659) 34,244 116,268 (75,763,147)
------------ ------------ ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,405,372 52,086 (52,145,227)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 1,059,954 0 4,756,018
Additions to land and
buildings on operating
leases................ 4,452,252(e) (44,006,783) 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Acquisition of
businesses............ 0 0 0 0 0
0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 5,832 0 230,205
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 (1,061,529) 0 (1,061,529)
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------ ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) 4,257 0 (111,730,269)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) (9,825) 0 (30,930)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,350,000) 143,539 (g) 34,491,671
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------ ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,359,825) 143,539 179,047,189
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 49,804 195,625 15,171,693
Cash at beginning of
year................... (11,567,691) 5,514,482 856,825 (2,438,571) 3,932,736
------------ ------------ ---------- ----------- -------------
Cash at end of year..... $(15,515,694) $ 20,440,746 $ 906,629 $(2,242,946) $ 19,104,429
============ ============ ========== =========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Restated Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,555,860)(j) (51,005,009) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,186,004) 305,649,537 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,319,623) (34,706,563) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,319,623) $ 12,880,214 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Pro Forma Adjusted
Adjustments APF Fund VII, Ltd Adjustments Pro Forma
------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,359,548)(a) $ 43,113,092 $ 2,466,018 $ (123,622)(a) $ 45,455,488
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 304,356 176,503 (b) 10,628,355
Amortization expense... 2,152,306 (c) 4,466,390 0 0 4,466,390
Minority interest in
income of consolidated
joint venture......... 0 30,156 18,590 0 48,746
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 65,476 56,034 (d) 106,070
Loss(gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (1,025) 0 (1,025)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 0 0 1,009,576
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease(increase) in
other receivables..... 0 (2,543,413) (27,330) 0 (2,570,743)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease(increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 639 0 7,885
Decrease in net
investment in direct
financing leases...... 0 1,971,634 81,760 0 2,053,394
Increase in accrued
rental income......... 0 (2,187,652) (90,896) 0 (2,278,548)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 846,680 (5,197) 0 841,483
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) (9,772) 0 (143,136)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 (11,644) 0 425,199
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,811,408 13,341,213 324,957 232,537 13,898,707
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 2,790,975 108,915 59,354,195
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 0 0 2,385,941
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) 0 0 (974,696)
Acquisition of
businesses............ (9,435,433)(f) (9,435,433) (2,456,567)(g) (12,270,000)
(378,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 10,811 0 302,801
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 13,221 0 213,221
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 12,358,953 (388,191,689) 24,032 (2,834,567) (391,002,224)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) (19,499) 0 (53,572)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,748,001) (2,700,000) 287,081 (j) (72,160,920)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (9,378,504) 287,422,736 (2,719,499) 287,081 284,990,318
Net increase (decrease)
in cash................ (11,567,691) (44,314,648) 95,508 (2,438,571) (46,657,711)
Cash at beginning of
year................... 0 49,829,130 761,317 0 50,590,447
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(11,567,691) $ 5,514,482 $ 856,825 $(2,438,571) $ 3,932,736
============ ============= =========== =========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price paid exceeds the
fair value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price paid exceeds the fair value
of the net tangible assets acquired. The excess purchase price will be recorded
as an expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of March 31, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration Received. $81,830,023 $50,605,410 $31,543,530 $163,978,963
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $28,708,963 $151,708,963
Cash Consideration...... -- -- 378,000 378,000
APF Transaction Costs... 5,830,023 3,605,410 2,456,567 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $81,830,023 $50,605,410 $31,543,530 $163,978,963
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $24,334,924 $ 42,800,486
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 5,906,377 5,906,377
Net investment in
direct
financing leases..... -- -- 1,506,999 1,506,999
Investment in joint
ventures............. -- -- 1,044,420 1,044,420
Accrued rental income. -- -- (1,175,747) (1,175,747)
Intangibles and other
assets............... -- (2,575,792) (73,443) (2,649,235)
Goodwill*............. -- 43,046,115 -- 43,046,115
Excess purchase price. 73,499,548 -- -- 73,499,548
----------- ----------- ----------- ------------
Total Allocation.... $81,830,023 $50,605,410 $31,543,530 $163,978,963
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,499,548 was expensed at June 30, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $43,046,115
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A...... 8,600
Common Stock (CFA, CFS, CFC)--Class B....... 4,825
Additional Paid-in Capital (CFA, CFS, CFC).. 12,568,974
Retained Earnings........................... 5,883,163
Accumulated distributions in excess of earn-
ings....................................... 73,499,548
Goodwill for CFC/CFS (Intangibles and other
assets).................................... 43,046,115
CFC/CFS Organizational Costs/Other Assets. 2,575,792
Cash to pay APF transaction costs......... 9,435,433
APF Common Stock.......................... 61,500
APF Capital in Excess of Par Value........ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners' Capital.......................... 24,334,924
Land and buildings on operating leases...... 5,906,377
Net investment in direct financing leases... 1,506,999
Investment in joint ventures................ 1,044,420
Accrued rental income..................... 1,175,747
Intangibles and other assets.............. 73,443
Cash to pay APF Transaction costs......... 2,456,567
Cash consideration to Income Funds........ 378,000
APF Common Stock.......................... 15,823
APF Capital in Excess of Par Value........ 28,693,140
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $25,464 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term of
the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which were
deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,076,153
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $37,863 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (21,458)
--------
$(21,458)
========
</TABLE>
(l) Represents the elimination of $21,458 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $20,373 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $6,150 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $88,251 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $28,017 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
under the purchase accounting method. The adjustment to the basis of
the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful
lives of the properties.
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
purposes as described in 5(II)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the
terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,152,306
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to qualify
as a REIT and does not expect to incur federal income taxes.
(j) Represents $75,726 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (27,875)
--------
$(27,875)
========
</TABLE>
(l) Represents the elimination of $27,875 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $43,034 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $9,845 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $176,503 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair
value as a result by the Income Fund to fair value as a result of
accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $56,034 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions that had been
operational upon acquisition by APF as if these properties had been
acquired on January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund VII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund VII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund VII, Ltd. a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
Agreement:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such
limited partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the
Registration Statement) of the Share Consideration such Dissenting
Partners would have otherwise received had such partners not elected to
receive the Notes (the "Note Option"). The Notes will mature on the
fifth anniversary of the Closing Date and will bear interest at a fixed
rate equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable
to Dissenting Partners had such Dissenting Partners not elected the
Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
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1.6 The following subsection shall be added to Section 10.2:
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP CORP.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND VII, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund VII, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
B-6
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,202,371 fully paid and nonassessable APF Common
Shares (1,601,186 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $29,261,140, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,797,629 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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<PAGE>
performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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<PAGE>
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 30,000,000 units of limited partnership interests. All of
the outstanding Fund Interests have been duly authorized, are validly issued,
fully paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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<PAGE>
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a
party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates
(other than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any
of the General Partners or the corporate General Partner's directors,
officers, and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (C) no party is in breach or
default, and no event has occurred which with notice or lapse of time would
constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (D) no party has repudiated any
provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Fund are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims, and are current and
collectible in accordance with their terms at their recorded amounts, subject
only to the reserve for bad debts set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Fund.
7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
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7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Fund has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
five years (or such lesser periods as the Fund has actively engaged in business
or owned any material assets): (i) the name, address, and telephone number of
the agent; (ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured; and (iii) the policy number and the period of
coverage. With respect to each current insurance policy, to the Knowledge of
the General Partners and the Fund: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect; (B) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Fund nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has repudiated
any provision thereof. The Fund has been covered during the past five years (or
such lesser periods as the Fund has actively engaged in business or owned any
material assets) by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
Section 7.18 of the Disclosure Schedule describes any self-insurance
arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the transactions
contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had any
liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do not
materially violate any such laws, ordinances, regulations or orders. The Fund
is not subject to any Liability or claim in connection with any environmental
law or any use, treatment, storage or disposal of any hazardous substance or
material or pollutant or any spill, leakage, discharge or release of any
hazardous substance or material or pollutant as a result of having owned or
operated any business prior to the Effective Time, which if a violation existed
would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,202,371 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $320,237 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND VII, Ltd.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
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CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND VIII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund VIII, Ltd., which we refer to as the Income Fund, for the purpose
of enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his representative upon written request to D.F. King
& Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis.
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Unlike your Income Fund, which is restricted, due to capital and other
limitations, to owning and leasing a static number of restaurant properties on
a triple-net basis, APF has the ability to offer a complete range of restaurant
property services to operators of national and regional restaurant chains, from
triple-net leasing and mortgage financing to site selection, construction
management and build-to-suit development. If APF acquires all of the Income
Funds in the Acquisition, APF expects to have total assets of approximately
$1.5 billion at the time of the consummation of the Acquisition and will be one
of the largest triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,021,318 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's limited partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $2,796.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 2,021,318 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition, will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $975, $1,000 and $1,000, respectively, to you per $10,000
investment. While historically, APF has made distributions equal to 7.625% per
APF Share, based on the exchange value, we cannot be sure that APF will be able
to maintain this level of distributions in the future. In the event that APF is
unable to maintain this level of distributions in the future, your
distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have four material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third,
assuming only your Income Fund is acquired in the Acquisition, we will receive
28,012 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including this consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such
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Income Funds and increasing the number of APF Shares or notes that would be
allocable to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,229 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds, if any, of a sale or
refinancing of your Income Fund's assets, to an investment in an entity in
which you may realize the value of your investment only through the sale of
your APF Shares, not from liquidation proceeds, if any, from restaurant
properties. Continuation of your Income Fund would, on the other hand, permit
you eventually to receive liquidation proceeds, if any, from the sale of the
Income Fund's restaurant properties, and your share of these sale proceeds
could be higher than the amount realized from the sale of your APF Shares or
from the combination of cash paid to and payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
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APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.91%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.44x and its ratio of debt-to-total assets would
have been 34.79%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
S-6
<PAGE>
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience, services
and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or that
of its franchisor or vendors, to adequately address year 2000 issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of June
30, 1999, your Income Fund had no tenants under bankruptcy protection.
Therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999, would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for the same period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a
S-7
<PAGE>
REIT for four taxable years following the year during which it was
disqualified. Therefore, if APF loses its REIT status, the funds available for
distribution to you, as an APF stockholder, would be reduced substantially for
each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Limited Estimated Value
Original Limited Partner Investments of APF Shares
Partner Investments less Distributions Number of Estimated Value Estimated Value per Average
less Distributions of Net Sales Proceeds APF Shares of APF Shares Estimated of APF Shares $10,000 Original
of Net Sales per $10,000 Offered to Payable Acquisition after Acquisition Limited Partner
Proceeds(1) Original Investment(1) Income Fund to Income Fund Expenses Expenses Investment
- ------------------- ---------------------- ----------- --------------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 2,021,318 $40,426,360 $446,000 $39,980,360 $11,423
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on
S-8
<PAGE>
, 2005. APF may redeem the notes at any time prior to their maturity at a
price equal to the sum of the outstanding principal balance plus accrued
interest.
EXPENSES OF THE ACQUISITIONS
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1).................................................... $ 30,710
Appraisals and Valuation(2)...................................... 5,940
Fairness Opinions(3)............................................. 30,000
Solicitation Fees(4)............................................. 18,791
Printing and Mailing(5).......................................... 105,387
Accounting and Other Fees(6)..................................... 58,651
--------
Subtotal....................................................... 249,479
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)........................ 97,106
Legal Closing Fees(8)............................................ 47,965
Partnership Liquidation Costs(9)................................. 51,450
--------
Subtotal....................................................... 196,521
--------
Total............................................................ $446,000
========
</TABLE>
- --------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
S-9
<PAGE>
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (August 1990). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
S-10
<PAGE>
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at . We and
members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you (on or about
, 1999 and will continue until the later of (a) , 1999, a date not
less than 60 calendar days from the initial delivery of the solicitation
materials, or (b) such later date as we may select and as to which we give you
notice. At our discretion, we may elect to extend the solicitation period.
Under no circumstances will the solicitation period be extended beyond March
31, 2000. Any consent form received by Corporate Election Services prior to
5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you, received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
S-11
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------ Six Months Ended
1996 1997 1998 June 30, 1999
-------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions
Broker/Dealer Commissions.......... -- -- -- --
Accounting and Administrative
Services........................... $ 89,317 $80,461 $96,202 $43,296
Due Diligence and Marketing Support
Fees............................... -- -- -- --
Acquisition Fees.................... -- -- -- --
Asset Management Fees............... -- -- -- --
Real Estate Disposition Fees(1)..... 41,250 -- -- --
-------- ------- ------- -------
Total historical.................. $130,567 $80,461 $96,202 $43,296
Pro Forma Distributions to Be Paid
to the General Partners Following
the Acquisition:
Cash Distributions on APF
Shares(2).......................... $ 39,556 $41,726 $42,717 $21,359
Salary Compensation................. -- -- -- --
-------- ------- ------- -------
Total pro forma................... $ 39,556 $41,726 $42,717 $21,359
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date no such
fees have been paid since the required minimum returns have not been made
to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
S-12
<PAGE>
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
--------------------------- --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ----- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income.... $936 $944 $875 $ 917 $ 931 $377 $292
Distributions from Return of
Capital(1).................. 9 6 100 $ 83 69 73 137
---- ---- ---- ----- ------ ---- ----
Total...................... $945 $950 $975 1,000 $1,000 $450 $429
==== ==== ==== ===== ====== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
Cash distributions for the year ended December 31, 1997, include $350,000
earned in 1997, but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is more
economically attractive to you and the other Limited Partners than such
alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or the notes.
S-13
<PAGE>
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc. and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the
S-14
<PAGE>
Income Funds, and (c) the method of allocating the APF Shares among the Income
Funds, Legg Mason did not address or render any opinion with respect to other
aspects of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales Average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Income Fund Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
- ----------- ------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund VIII,
Ltd. .................. 35,000,000 10,000 11,263 11,227 10,473 9,300
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
S-15
<PAGE>
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
28,012 APF Shares in the aggregate in accordance with the terms of your
Income Fund's partnership agreement. The 28,012 APF Shares issued to us
will have an estimated value, based on the exchange value of
approximately $560,240.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for your
Income Fund's liabilities to the extent that your Income Fund is unable
to satisfy such liabilities. Because the partnership agreement for your
Income Fund prohibits the Income Fund from incurring indebtedness, the
only liabilities the Income Fund has liabilities with respect to its
ongoing business operations. In the event that your Income Fund is
acquired by APF, we would be relieved of our legal obligation to satisfy
the liabilities of the acquired Income Fund.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
S-17
<PAGE>
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner Investment
------------------
<S> <C>
CNL Income Fund VIII, Ltd. .................................. $2,796
</TABLE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between;
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses
S-18
<PAGE>
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold Units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of
S-19
<PAGE>
the APF Shares, plus the issue price of the notes issued in the Acquisition,
plus the amount of any liabilities of the Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620 $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,071,519 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,360,240)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,308,262)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,308,262)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,782,522)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund VIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $1,474,403 $ 88,997 (j) $32,520,914
Fees............. 2,616,185 0 (27,894)(k) 2,588,291
Interest and
Other Income..... 16,269,383 111,409 0 16,380,792
------------ ---------- ------------------ ------------
Total Revenue... $49,843,082 $1,585,812 $ 61,103 $51,489,997
Expenses:
General and
Administrative... 9,579,902 86,645 (52,494)(l),(m) 9,614,053
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 17,646 7,764 (o) 490,376
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 150,094 92,181 (p) 4,911,428
Amortization..... 1,081,255 0 0 1,081,255
Transaction
Costs............ 483,005 121,090 0 604,095
------------ ---------- ------------------ ------------
Total Expenses.. 26,816,350 375,475 47,451 27,239,276
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain on
Sale of
Properties and
Provision for
Losses on
Properties....... $23,026,732 $1,210,337 $ 13,652 $24,250,721
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 123,193 (28,666)(q) 125,768
Gain (Loss) on
Sale of
Properties....... (201,843) 0 0 (201,843)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,315,608 1,333,530 (15,014) 23,634,124
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $22,315,608 $1,333,530 $ (15,014) $23,634,124
============ ========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivable/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(u)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,720,015 (u1),(v)
Total
liabilities..... $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,677,501 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund VIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 36 n/a 617
============== =========== ==================== =================
Earnings per
share/unit...... $ n/a $ 0.04 $ n/a $ 0.52
============== =========== ==================== =================
Book value per
share/unit...... $ n/a $ 0.87 $ n/a $ 16.30
============== =========== ==================== =================
Dividends per
share/unit...... $ n/a $ 0.05 $ n/a $ 0.76
============== =========== ==================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.93x
============== =========== ==================== =================
Cash
distributions
declared:....... $ 33,165,402 1,575,002 $ (50,791)(s) $ 34,689,613
============== =========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,999,018 45,496,901(r)
============== =========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 1,999,018 45,497,482
============== =========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $23,341,047 $10,056,662 (u2) $ 728,210,692
Mortgages/notes
receivable...... $ 353,874,178 $ 1,507,221 $ 0 $ 355,381,399
Receivable/due
from related
parties......... $ 9,247,098 $ 5,426 $ (81,968)(x) $ 9,170,556
Investment in
joint ventures.. $ 1,081,046 2,776,099 $ 1,416,815 (u2) $ 5,273,960
Total assets.... $1,170,830,627 $31,570,332 $ 5,960,134 (u2),(x) $1,208,361,092
Total
liabilities..... $ 465,485,738 $ 1,156,497 $ (81,968)(x) $ 466,560,267
Total equity.... $ 705,344,889 $30,413,835 $ 6,042,102 (u2) $ 741,800,825
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation expense
of $967,179 as if restaurant properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any restaurant properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......... $ (689,425)
Secured equipment lease fees.............. (67,967)
Advisory fees............................. (126,788)
Reimbursement of administrative costs..... (382,728)
Acquisition fees.......................... (4,452,252)
Underwriting fees......................... (54,248)
Administrative, executive and guarantee
fees..................................... (532,389)
Servicing fees............................ (572,728)
Development fees.......................... (38,853)
Management fees........................... (1,681,870)
-----------
Total................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial Corp. On a
historical basis, CNL Financial Services, Inc. records all of the loan
origination fees received as revenue. For purposes of presenting pro forma
financial statements of these entities on a combined basis, these loan
origination fees are required to be deferred and amortized into revenues
over the term of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services Inc. from borrowers during the six months ended June 30,
1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............ $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees........................... $(1,681,870)
Administrative executive and guarantee
fees..................................... (532,389)
Servicing fees............................ (572,728)
Advisory fees............................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and the
CNL Restaurant Financial Services Group resulting from agreements between
these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in footnote (u)
below:
<TABLE>
<S> <C>
Amortization of goodwill.................... $1,071,519
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
S-23
<PAGE>
(j) Represents $88,997 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees.............................. $ 0
Reimbursement of administrative costs........ (27,894)
--------
$(27,894)
========
</TABLE>
(l) Represents the elimination of $27,894 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $24,600 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund to
the Advisor.
(o) Represents additional state income taxes of $7,764 resulting from assuming
that acquisitions of restaurant properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group and
the Income Fund had been issued as of January 1, 1998 and that these
entities had operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $92,181 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $28,666 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma restaurant properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June 30,
1999. Based on historical results through July 31, 1999, all interest costs
related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Funds Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,530,270 $50,420,036 $39,843,631 $171,793,937
=========== =========== =========== ============
Share Consideration..... 76,000,000 47,000,000 36,455,937 159,455,937
Cash Consideration...... -- -- 446,000 446,000
APF Transaction Costs... 5,530,270 3,420,036 2,941,694 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,530,270 $50,420,036 $39,843,631 $171,793,937
=========== =========== =========== ============
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Funds Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Allocation of Purchase
Price:
Net Assets-Historical... $ 8,330,475 $10,135,087 $30,413,835 $ 48,879,397
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 8,012,333 8,012,333
Net investment in
direct financing
leases................ -- -- 2,044,329 2,044,329
Investment in joint
ventures.............. -- -- 1,416,815 1,416,815
Accrued rental income.. -- -- (1,976,584) (1,976,584)
Intangibles and other
assets................ -- (2,575,792) (67,097) (2,642,889)
Goodwill*.............. -- 42,860,741 -- 42,860,741
Excess purchase price.. 73,199,795 -- -- 73,199,795
----------- ----------- ----------- ------------
Total Allocation...... $81,530,270 $50,420,036 $39,843,631 $171,793,937
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,199,795 was
expensed at June 30, 1999 because the Advisor has not been deemed to qualify
as a "business" for purposes of applying APB Opinion No. 16, "Business
Combinations." Goodwill of $42,860,341 relating to the acquisition of the
CNL Financial Services Group is being amortized over 20 years. APF did not
acquire any intangibles as part of any of the acquisitions. The entries were
as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A........... 8,600
Common Stock (CFA, CFS, CFC)--Class B........... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of
earnings....................................... 73,199,795
Goodwill for CFC (Intangibles and other
assets)........................................ 42,860,741
CFC/CFS Organizational Costs/Other Assets...... 2,575,792
Cash to pay APF transaction costs.............. 8,950,306
APF Common Stock............................... 61,500
APF Capital in Excess of Par Value............. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital............................... 30,413,835
Land and buildings on operating leases.......... 8,012,333
Net investment in direct financing leases....... 2,044,329
Investment in joint ventures.................... 1,416,815
Accrued rental income.......................... 1,976,584
Intangibles and other assets................... 67,097
Cash to pay APF Transaction costs.............. 2,941,694
Cash consideration to Income Funds............. 446,000
APF Common Stock............................... 19,990
APF Capital in Excess of Par Value............. 36,435,947
(To record acquisition of Income Fund)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party payables
recorded as receivables by the Advisor, and the elimination of intercompany
balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857 from
liabilities assumed in the acquisition since the Merger Agreement requires
that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes
at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $81,968 in related party
payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND VIII, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
VIII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 1,709,005 $ 1,797,089 3,625,906 $ 3,619,489 $ 3,593,610 $ 3,667,137 3,670,207
Net income(2)........... 1,333,530 1,598,777 3,288,912 3,241,567 3,096,992 3,336,755 3,308,267
Cash distributions
declared(3)............ 1,575,002 1,925,001 3,850,003 3,150,003 3,412,500 3,325,002 3,307,500
Net income per unit(2).. 0.038 0.045 0.093 0.092 0.088 0.094 0.094
Cash distributions
declared per unit(3)... 0.045 0.055 0.110 0.090 0.098 0.095 0.095
GAAP book value per
unit................... 0.869 0.883 0.876 0.892 0.889 0.898 0.898
Weighted average number
of Limited Partner
Units outstanding...... 35,000,000 35,000,000 35,000,000 35,000,000 35,000,000 35,000,000 35,000,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $31,570,332 $31,980,610 $32,071,119 $32,258,296 $32,437,106 $32,575,586 $32,615,349
Total partners' capi-
tal.................... 30,413,835 30,890,174 30,655,307 31,216,398 31,124,834 31,440,342 31,428,589
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of the consolidated joint venture.
(2) Net income for the years ended December 31, 1998 and 1995, includes
$108,176 and $71,638, respectively, from a gain on sale of land and
building. In addition, net income for the years ended December 31, 1996 and
1995, includes $99,031 and $11,712, respectively, from a loss on sale of
land and buildings.
(3) Distributions for the six months ended June 30, 1999 and the year ended
December 31, 1998, include an additional special distribution to the
Limited Partners of $350,000 declared the first quarter of 1998 from
cumulative excess operating reserves. Distributions for the years ended
December 31, 1998, 1996 and 1995, include a special distribution to the
Limited Partners of $350,000, $262,500 and $175,000, respectively, which
represented cumulative excess operating reserves.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 18, 1989, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of national and regional fast-food and family-style restaurant
chains. The leases are triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of June
30, 1999, the Income Fund owned 36 restaurant properties, which included
interests in nine restaurant properties owned by joint ventures in which the
Income Fund is a co-venturer.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998, was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,717,444 and
$1,873,504 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, is
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
As of December 31, 1998, the Income Fund had accepted three promissory notes
in connection with the sale of three of its restaurant properties. During the
six months ended June 30, 1999, the maker relating to one of the promissory
notes prepaid principal of $272,500 which was applied to the outstanding
principal balance. The Income Fund intends to reinvest the $272,500 payment in
an additional restaurant property.
Currently, rental income from the Income Fund's restaurant properties and
any amounts collected under its promissory note, as described above, are
invested in money market accounts or other short-term, highly liquid
investments such as demand deposit accounts at commercial banks, certificates
of deposits, and money market accounts with less than a 30-day maturity date,
pending the Income Fund's use of such funds to pay Income Fund expenses or to
make distributions to the partners. At June 30, 1999, the Income Fund had
$1,896,858 invested in such short-term investments, as compared to $1,809,258
at December 31, 1998. The funds remaining at June 30, 1999, after payment of
distributions and other liabilities, will be used to invest in an additional
restaurant property and to meet the Income Fund's working capital and other
needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital for the years ended December 31,
1998, 1997, and 1996 was cash from operations, which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses. Cash from operations was $3,562,592, $3,543,056, and
$3,462,668 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase in cash from operations for
S-27
<PAGE>
1998, as compared to 1997, was primarily a result of changes in the Income
Fund's working capital, and the increase in cash from operations for 1997, as
compared to 1996, was primarily a result of changes in income and expenses as
discussed in "Results of Operations" below and changes in the Income Fund's
working capital.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In May 1996, the Income Fund reinvested the remaining net sales proceeds of
approximately $234,100 from the 1995 sale of the restaurant property in Ocoee,
Florida, in Middleburg Joint Venture, which purchased a restaurant property in
Middleburg Heights, Ohio. The Income Fund has an approximate 12 percent
interest in the profits and losses of Middleburg Joint Venture and the
remaining interest in this joint venture is held by an affiliate of the Income
Fund which has the same general partners.
In October 1996, the Income Fund sold its restaurant property in Orlando,
Florida, to the tenant for $1,375,000. In connection therewith, the Income Fund
accepted a promissory note in the principal sum of $1,388, 568, representing
the gross sales price of $1,375,000 plus tenant closing costs of $13,568 that
the Income Fund financial on behalf of the tenant. The promissory note bears
interest at a rate of 10.75% per annum and is collateralized by a mortgage on
the restaurant property. The promissory note is being collected in 12 monthly
installments of interest only, afterwards, in 24 monthly installments of
$15,413 consisting of principal and interest, and thereafter in 144 monthly
installments of $16,220 consisting of principal and interest. The mortgage note
receivable balances at December 31, 1998 and 1997 of $1,356,466 and $1,394,979,
respectively, include accrued interest of $12,044 and $12,386, respectively,
relating to this restaurant property. Proceeds received from the collection of
this mortgage note will be distributed to the Limited Partners or will be used
for other Income Fund purposes. This restaurant property was originally
acquired by the Income Fund in December 1990 and had a cost of approximately
$1,177,000, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Income Fund sold the restaurant property for approximately
$198,000 in excess of its original purchase price. Due to the fact that the
Income Fund had recognized accrued rental income since the inception of the
lease relating to the straight lining of future scheduled rent increases in
accordance with generally accepted accounting principles, the Income Fund wrote
off the cumulative balance of such accrued rental income at the time of the
sale of this restaurant property, resulting in a loss of $99,031 for financial
reporting purposes. Due to the fact that the straight lining of future
scheduled rent increases over the term of the lease is a non-cash accounting
adjustment, the write off of these amounts is a loss for financial statement
purposes only.
In July 1998, the Income Fund received $116,397 as a settlement from the
Florida Department of Transportation for a right of way taking relating to a
parcel of land on its restaurant property in Brooksville, Florida. In
connection therewith, the Income Fund recognized a gain of $108,176 for
financial reporting purposes. The Income Fund anticipates that it will
distribute amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, if any, at a level reasonably assumed by us resulting from
the right of way taking. The Income Fund intends to reinvest the proceeds in an
additional restaurant property or use the funds for other Income Fund purposes.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term highly liquid investments such as demand deposit accounts at
commercial banks,
S-28
<PAGE>
CDs and money market accounts with less than a 30-day maturity date, pending
the Income Fund's use of such funds to pay Income Fund expenses or to make
distributions to partners. At December 31, 1998, the Income Fund had $1,809,258
invested in such short-term investments as compared to $1,602,236 at December
31, 1997. The increase during 1998, as compared to 1997, is primarily due to
the receipt of a settlement for a right-of-way taking related to the Income
Fund's restaurant property in Brooksville, Florida, as described above. As of
December 31, 1998, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately two
percent annually. The funds remaining at December 31, 1998, after the payment
of distributions and other liabilities, will be used to meet the Income Fund's
working capital and other needs.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on cash from
operations and, for the six months ended June 30, 1998, accumulated excess
operating reserves, the Income Fund declared distributions to Limited Partners
of $1,575,002 and $1,925,001 for the six months ended June 30, 1999 and 1998,
respectively, or $787,501 for each of the quarters ended June 30, 1999 and
1998. This represents distributions of $0.045 and $0.055 per unit for the six
months ended June 30, 1999 and 1998, respectively, or $0.023 per unit for the
quarters ended June 30, 1999 and 1998. No distributions were made to us for the
quarters and six months ended June 30, 1999 and 1998. No amounts distributed to
the Limited Partners for the six months ended June 30, 1999 and 1998 are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
decreased to $1,047,857 at June 30, 1999, from $1,307,212 at December 31, 1998,
partially as a result of the payment of a special distribution accrued at
December 31, 1998, of accumulated, excess operating reserves to the Limited
Partners of $350,000 in January 1999. In addition, the decrease in liabilities
is partially offset by an increase in liabilities due to the Income Fund
accruing transaction costs relating to the Acquisition. We believe that the
Income Fund has sufficient cash on hand to meet its current working capital
needs.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
S-29
<PAGE>
Based on cash from operations, and for the years ended December 31, 1998 and
1996, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,850,003, $3,150,003, and $3,412,500
for the years ended December 31, 1998, 1997, and 1996, respectively. This
represents distributions of $0.110 per unit for the year ended December 31,
1998, $0.090 per Unit for the year ended December 31, 1997, and $0.098 per unit
for the year ended December 31, 1996. No amounts distributed to the Limited
Partners for the years ended December 31, 1998, 1997, and 1996, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions.
During 1998, 1997, and 1996, affiliates incurred $98,613, $80,998, and
$100,264, respectively, for certain operating expense on behalf of the Income
Fund. As of December 31, 1998 and 1997 the Income Fund owed $20,216 and $4,599,
respectively, to affiliates for such amounts and accounting and administrative
services. As of March 11, 1999, the Income Fund had reimbursed the affiliates
all such amounts, In addition, during the years ended December 31, 1996 and
1995 the Income Fund incurred $41,250 and $13,800, respectively, in real estate
disposition fees due to an affiliate as a result of its services in connection
with the sale of the restaurant property in Orlando, Florida and the two
restaurant properties in Jacksonville, Florida. No such fees were incurred
during the year ended December 31, 1998 and 1997. The payment of such fees is
deferred until the Limited Partners have received the sum of their 10%
preferred return and their adjusted capital contributions. Other liabilities of
the Income Fund, including distributions payable, increased to $1,231,946 at
December 31, 1998, from $873,875 at December 31, 1997. The increase in other
liabilities is primarily attributable to the Income Fund's accruing a special
distribution payable to the Limited Partners of $350,000 at December 31, 1998,
from cumulative excess operating reserves. No special distribution payable was
accrued at December 31, 1997. We believe that the Income Fund has sufficient
cash on hand to meet its current working capital needs.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund and its
consolidated joint venture, Woodway Joint Venture, owned and leased 28 wholly
owned restaurant properties to operators of fast-food and family-style
restaurant chains. In connection therewith, during the six months ended June
30, 1999 and 1998, the Income Fund and Woodway Joint Venture earned $1,457,789
and $1,508,188, respectively, in rental income from operating leases and earned
income from direct financing leases, $727,941 and $753,190 of which was earned
during the quarters ended June 30, 1999 and 1998, respectively. Rental and
earned income decreased during the quarter and six months ended June 30, 1999,
due to the fact that the leases relating to four Burger King restaurant
properties were amended to provide for rent reductions from August 1998 through
the end of the lease term.
For the six months ended June 30, 1999 and 1998, the Income Fund also earned
$16,614 and $21,033, respectively, in contingent rental income, $13,335 and
$2,547 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. Contingent rental income was lower during the six months ended
June 30, 1999, as compared to the six months ended June 30, 1998, due to the
fact that during the six months ended June 30, 1998, the Income Fund recorded
additional contingent rental amounts as a result of adjusting estimated
contingent rental amounts accrued at December 31, 1997, to actual amounts.
Contingent rental income was higher for the quarter ended June 30, 1999, as
compared to the quarter ended June 30, 1998, due to a change in the percentage
rent formula in accordance with the terms of the lease agreement for the
Wendy's restaurant property in Midlothian, Virginia.
S-30
<PAGE>
During the six months ended June 30, 1999 and 1998, the Income Fund also
earned $111,409 and $135,326, respectively, in interest and other income,
$57,044 and $70,242 of which was earned during the quarters ended June 30, 1999
and 1998. The decrease in interest and other income during the quarter and six
months ended June 30, 1999, is primarily attributable to a reduction in the
interest earned on the mortgage note accepted in connection with the sale of
the restaurant property located in Orlando, Florida due to the fact that the
maker of the note prepaid principal in the amount of $272,500 during the six
months ended June 30, 1999, as described above in "Capital Resources."
For the quarters and six months ended June 30, 1999 and 1998, the Income
Fund owned and leased eight restaurant properties indirectly through joint
venture arrangements. In connection with these joint venture arrangements,
during the six months ended June 30, 1999 and 1998, the Income Fund earned
$129,878 and $139,253, respectively, attributable to net income earned by these
unconsolidated joint ventures, $69,647 and $71,149 of which was earned during
the quarters ended June 30, 1999 and 1998, respectively. The decrease in net
income earned by joint ventures for the quarter and six months ended June 30,
1999, is primarily due to the fact that the lease relating to the Burger King
restaurant property in Asheville, North Carolina, owned by Asheville Joint
Venture, was amended to provide for rent reductions from August 1998 through
the end of the lease term.
Operating expenses, including depreciation and amortization expense, were
$375,475 and $198,312 for the six months ended June 30, 1999 and 1998,
respectively, $205,950 and $102,852 of which was earned during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, is partially due to an increase in
depreciation expense due to the fact that, in August 1998, the Income Fund
reclassified the leases for four Burger King restaurant properties from direct
financing leases to operating leases, as a result of lease amendments.
The increase in operating expenses for the quarter and six months ended June
30, 1999, is also partially due to the fact that the Income Fund incurred
$87,527 and $121,090, respectively, in transaction costs related to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition with APF. If the Limited Partners reject the
Acquisition, the Income Fund will bear the portion of the transaction costs
based upon the percentage of "For" votes and we will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.
In addition, the increase in operating expenses for the six months ended
June 30, 1999 is due to the Income Fund incurring additional state taxes due to
changes in tax laws of a state in which the Income Fund conducts business.
The Years Ended December 31, 1998, 1997 and 1996
During 1996 and 1997, the Income Fund and its consolidated joint venture,
Woodway Joint Venture, owned and leased 29 wholly-owned restaurant properties,
including one restaurant property in Orlando, Florida, which was sold in
October 1996, and during 1998, the Income Fund and its consolidated joint
venture, Woodway Joint Venture, owned and leased 28 Wholly-owned restaurant
properties. In addition, during 1996, 1997, and 1998, the Income Fund was a co-
venturer in three joint ventures that owned and leased a total of eight
restaurant properties. As of December 31, 1998, the Income Fund owned, either
directly or through joint venture arrangements, 36 restaurant properties which
are subject to long-term, triple-net leases. The leases of the restaurant
properties provide for minimum base annual rental amounts, payable in monthly
installments, ranging from approximately $41,300 to $213,800. All of the leases
provide for percentage rant based on sales in excess of a specified amount. In
addition, a majority of the leases provide that, commencing in specified lease
years, ranging from the third to sixth lease year, the annual base rent
required under the terms of the lease will increase.
S-31
<PAGE>
During the years ended December 31, 1998, 1997 and 1996, the Income Fund and
its consolidated joint venture, Woodway Joint Venture, earned $2,991,048,
$3,015,642, and $3,182,058, respectively, in rental income from operating
leases and earned income from direct financing leases. The decrease in rental
and earned income for 1998, as compared to 1997, is primarily due to the fact
that the leases relating to the Burger King restaurant properties in New York
City and Syracuse, New York and New Philadelphia and Mansfield, Ohio were
amended to provide for rent reductions from August 1998 through the end of the
lease terms. The decrease in rental and earned income during 1997 as compared
to 1996, is primarily attributable to the sale of the restaurant property in
Orlando, Florida, in October 1996, as described above in "Capital Resources."
For the years ended December 31, 1998, 1997, and 1996, the Income Fund also
earned $101,911, $85,735, and $31,712, respectively, in contingent rental
income. The increase in contingent rental income for 1998, as compared to 1997,
is primarily attributable to an increase in gross sales for certain restaurant
properties requiring the payment of contingent rental income. The increase in
contingent rental income during 1997 as compared to 1996, is primarily
attributable to (i) the Income Fund adjusting estimated contingent rental
amounts accrued at December 31, 1996, to actual amounts during the year ended
December 31, 1997, and (ii) increased gross sales of certain restaurant
properties requiring the payment of contingent rental income.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $269,744, $238,338, and $127,246, respectively, in interest and
other income. The increase in interest and other income during 1997 as compared
to 1996, is primarily attributable to the interest earned on the mortgage notes
accepted in connection with the sale of the one restaurant property located in
Orlando, Florida, in October 1996 and the two restaurant properties located in
Jacksonville, Florida, in December 1995.
For the years ended December 31, 1998, 1997, and 1996, the Income Fund also
earned $276,721, $293,480, and $266,500, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Income Fund is a
co-venturer. The decrease in net income by joint ventures for 1998, as compared
to 1997, is primarily due to the fact that the lease relating to the Burger
King restaurant property in Asheville, North Carolina of Asheville Joint
Venture was amended to provide for rent reductions from August 1998 through the
end of the lease term. The increase in net income earned by joint ventures
during 1997 as compared to 1996, is primarily attributable to the fact that the
Income Fund invested in Middleburg Joint Venture in May 1996, as described
above in "Capital Resources."
During the year ended December 31, 1998, three lessees of the Income Fund
and its consolidated joint venture, Golden Corral Corporation, Carrols
Corporation and Restaurant Management Services, Inc., each contributed more
than ten percent of the Income Fund's total rental income, including rental
income from the Income Fund's consolidated joint venture and the Income Fund's
share of rental income from eight restaurant properties owned by joint
ventures. As of December 31, 1998, Golden Corral Corporation was the lessee
under leases relating to four restaurants, Carrols Corporation was the lessee
under leases relating to five restaurants and, Restaurant Management Services,
Inc. was the lessee under leases relating to five restaurants. It is
anticipated that, based on the minimum annual rental payments required by the
leases, these three lessees will continue to contribute more than ten percent
of the Income Fund's total rental income during 1999. In addition, during the
year ended December 31, 1998, three restaurant chains, Golden Corral Family
Steakhouse Restaurants, Burger King and Shoney's, each accounted for more than
ten percent of the Income Fund's total rental income, including rental income
from the Income Fund's consolidated joint venture and the Income Fund's share
of rental income from eight restaurant properties owned by unconsolidated joint
ventures. In 1999, it is anticipated that these three restaurant chains each
will continue to account for more than ten percent of the Income Fund's total
rental income to which the Income Fund is entitled under the terms of the
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income if the Income Fund is not able to re-lease the
restaurant property in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$445,170, $377,922, and $397,587 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating
S-32
<PAGE>
expenses during 1998, as compared to 1997, is partially due to an increase in
depreciation expense relating to the fact that during 1998, the Income Fund
reclassified the leases for its restaurant properties in New City and Syracuse,
New York and New Philadelphia and Mansfield, Ohio from direct financing leases
to operating leases due to lease amendments.
The increase in operating expenses for 1998, is also partially due to the
fact that the Income Fund incurred $21,042 in transaction costs related to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition. The decrease in operating expenses during 1997, as
compared to 1996, is primarily attributable to a decrease in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties.
As a result of the right of way settlement for the Income Fund's restaurant
property in Brooksville, Florida, as described above in "Capital Resources,"
the Income Fund recognized a gain on sale of land of $108,176 during the year
ended December 31, 1998, for financial reporting purposes. As a result of the
1996 sale of the restaurant property in Orlando, Florida, as described above in
"Capital Resources," the Income Fund recognized a loss of $99,031 for the year
ended December 31, 1996. No restaurant properties were sold during 1997.
The Income Fund's leases as of December 31, 1998, are triple-net leases and
contain provisions that we believe mitigate the adverse effect of inflation.
Such provisions include clauses requiring the payment of percentage rent based
on certain restaurant sales above a specified level and/or automatic increases
in base rent at specified times during the term of the lease. Management
expects that increases in restaurant sales volume due to inflation and real
sales growth should result in an increase in rental income over time. Continued
inflation also may cause capital appreciation of the Income Fund's restaurant
properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the restaurants and on potential capital appreciation of
the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K
S-33
<PAGE>
Team consists of us and members from our affiliates, including representatives
from senior management, information systems, telecommunications, legal, office
management, accounting and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under
S-34
<PAGE>
long-term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be
S-35
<PAGE>
assured that the tenants have addressed all possible year 2000 issues. The late
payment of rent by one or more tenants would affect the results of operations
of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
Interest Rate Risk
The Income Fund has provided fixed rate mortgage notes to borrowers. We
believe that the estimated fair value of the mortgage notes at December 31,
1998 approximated the outstanding principal amounts. The Income Fund is exposed
to equity loss in the event of changes in interest rates. The following table
presents the expected cash flows of principal that are sensitive to these
changes.
<TABLE>
<CAPTION>
Mortgage notes
Fixed Rates
--------------
<S> <C>
1999.......................................................... $ 47,552
2000.......................................................... 61,451
2001.......................................................... 68,361
2002.......................................................... 76,049
2003.......................................................... 84,601
Thereafter.................................................... 1,457,906
----------
$1,795,920
==========
</TABLE>
S-36
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-22
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,835,604 and
$1,685,510, respectively............................ $15,619,184 $15,769,278
Net investment in direct financing leases............ 7,721,863 7,802,785
Investment in joint ventures......................... 2,776,099 2,809,759
Mortgage notes receivable............................ 1,507,221 1,811,726
Cash and cash equivalents............................ 1,896,858 1,809,258
Receivables, less allowance for doubtful accounts of
$24,636 in 1998..................................... 5,426 84,265
Prepaid expenses..................................... 14,426 3,959
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1999 and 1998................. 1,976,584 1,927,418
Other assets......................................... 52,671 52,671
----------- -----------
$31,570,332 $32,071,119
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................... $ 96,091 $ 4,258
Escrowed real estate taxes payable................... 21,347 27,838
Distributions payable................................ 787,501 1,137,501
Due to related party................................. 81,968 75,266
Rents paid in advance................................ 60,950 62,349
----------- -----------
Total liabilities.................................. 1,047,857 1,307,212
Commitments and Contingencies (Note 3)
Minority interest.................................... 108,640 108,600
Partners' capital.................................... 30,413,835 30,655,307
----------- -----------
$31,570,332 $32,071,119
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases...................... $ 492,313 $ 455,192 $ 985,302 $ 910,748
Earned income from direct
financing leases............ 235,628 297,998 472,487 597,440
Contingent rental income..... 13,335 2,547 16,614 21,033
Interest and other income.... 57,044 70,242 111,409 135,326
---------- ---------- ---------- ----------
798,320 825,979 1,585,812 1,664,547
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative.............. 34,860 43,649 72,509 76,092
Professional services........ 8,404 6,857 14,136 12,363
State and other taxes........ 112 103 17,646 5,372
Depreciation................. 75,047 52,243 150,094 104,485
Transaction costs............ 87,527 -- 121,090 --
---------- ---------- ---------- ----------
205,950 102,852 375,475 198,312
---------- ---------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated
Joint Venture and Equity in
Earnings of Unconsolidated
Joint Ventures................ 592,370 723,127 1,210,337 1,466,235
Minority Interest in Income of
Consolidated Joint Venture.... (3,330) (3,307) (6,685) (6,711)
Equity in Earnings of
Unconsolidated Joint
Ventures...................... 69,647 71,149 129,878 139,253
---------- ---------- ---------- ----------
Net Income..................... $ 658,687 $ 790,969 $1,333,530 $1,598,777
========== ========== ========== ==========
Allocation of Net Income:
General partners............. $ 6,587 $ 7,910 $ 13,335 $ 15,988
Limited partners............. 652,100 783,059 1,320,195 1,582,789
---------- ---------- ---------- ----------
$ 658,687 $ 790,969 $1,333,530 $1,598,777
========== ========== ========== ==========
Net Income Per Limited Partner
Unit.......................... $ 0.019 $ 0.022 $ 0.038 $ 0.045
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding................... 35,000,000 35,000,000 35,000,000 35,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 258,248 $ 226,441
Net income..................................... 13,335 31,807
----------- -----------
271,583 258,248
----------- -----------
Limited partners:
Beginning balance.............................. 30,397,059 30,989,957
Net income..................................... 1,320,195 3,257,105
Distributions ($0.045 and $0.110 per limited
partner unit, respectively)................... (1,575,002) (3,850,003)
----------- -----------
30,142,252 30,397,059
----------- -----------
Total partners' capital.......................... $30,413,835 $30,655,307
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities........ $ 1,717,444 $1,873,504
----------- ----------
Cash Flows from Investing Activities:
Collections on mortgage notes receivable........... 301,803 20,097
----------- ----------
Net cash provided by investing activities........ 301,803 20,097
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (1,925,002) (1,925,001)
Distributions to holder of minority interest....... (6,645) (6,587)
----------- ----------
Net cash used in financing activities............ (1,931,647) (1,931,588)
----------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... 87,600 (37,987)
Cash and Cash Equivalents at Beginning of Period..... 1,809,258 1,602,236
----------- ----------
Cash and Cash Equivalents at End of Period........... $ 1,896,858 $1,564,249
=========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VIII, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its approximate 88 percent interest in Woodway
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
2. Mortgage Notes Receivable:
As of December 31, 1998, the Partnership had accepted three promissory notes
in connection with the sale of three of its properties. During the six months
ended June 30, 1999, the maker relating to one of the promissory notes prepaid
principal in the amount of $272,500 which was applied to the outstanding
principal balance.
3. Merger Transaction:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,021,318 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $39,843,631 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve
F-5
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
the Merger. In connection with their recommendation, the general partners will
solicit the consent of the limited partners at the special meeting. If the
limited partners reject the Merger, the Partnership will bear the portion of
the transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, a limited
partner in certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates on June
22, 1999 in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners CNL Income Fund VIII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund VIII, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 4, 1999, except for Note 11
for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $15,769,278 $13,960,232
Net investment in direct financing leases............. 7,802,785 10,044,975
Investment in joint ventures.......................... 2,809,759 2,877,717
Mortgage notes receivable............................. 1,811,726 1,853,386
Cash and cash equivalents............................. 1,809,258 1,602,236
Receivables, less allowance for doubtful accounts of
$24,636 and $19,228.................................. 84,265 51,393
Prepaid expenses...................................... 3,959 4,357
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1998 and 1997.................. 1,927,418 1,811,329
Other assets.......................................... 52,671 52,671
----------- -----------
$32,071,119 $32,258,296
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,258 $ 8,359
Escrowed real estate taxes payable.................... 27,838 24,459
Distributions payable................................. 1,137,501 787,501
Due to related parties................................ 75,266 59,649
Rents paid in advance and deposits.................... 62,349 53,556
----------- -----------
Total liabilities................................... 1,307,212 933,524
Minority interest..................................... 108,600 108,374
Partners' capital..................................... 30,655,307 31,216,398
----------- -----------
$32,071,119 $32,258,296
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases... $ 1,897,209 $ 1,804,273 $ 1,867,968
Earned income from direct financing
leases............................... 1,093,839 1,211,369 1,314,090
Contingent rental income.............. 101,911 85,735 31,712
Interest and other income............. 269,744 238,338 127,246
----------- ----------- -----------
3,362,703 3,339,715 3,341,016
----------- ----------- -----------
Expenses:
General operating and administrative.. 146,943 140,586 156,177
Professional services................. 24,837 23,284 27,682
State and other taxes................. 5,372 5,081 4,757
Depreciation.......................... 246,976 208,971 208,971
Transaction costs..................... 21,042 -- --
----------- ----------- -----------
445,170 377,922 397,587
----------- ----------- -----------
Income Before Minority Interest in
Income of Consolidated Joint Venture,
Equity in Earnings of Unconsolidated
Joint Ventures and Gain (Loss) on Sale
of Land and Buildings.................. 2,917,533 2,961,793 2,943,429
Minority Interest in Income of
Consolidated Joint Venture............. (13,518) (13,706) (13,906)
Equity in Earnings of Unconsolidated
Joint Ventures......................... 276,721 293,480 266,500
Gain (Loss) on Sale of Land and
Buildings.............................. 108,176 -- (99,031)
----------- ----------- -----------
Net Income.............................. $ 3,288,912 $ 3,241,567 $ 3,096,992
=========== =========== ===========
Allocation of Net Income:
General partners...................... $ 31,807 $ 32,416 $ 31,413
Limited partners...................... 3,257,105 3,209,151 3,065,579
----------- ----------- -----------
$ 3,288,912 $ 3,241,567 $ 3,096,992
=========== =========== ===========
Net Income Per Limited Partner Unit..... $ 0.093 $ 0.092 $ 0.088
=========== =========== ===========
Weighted Average Number of Limited
Partner Units Outstanding.............. 35,000,000 35,000,000 35,000,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $161,612 $35,000,000 $(15,772,138) $16,064,868 $(4,015,000) $31,440,342
Distributions to
limited partners
($0.098 per limited
partner unit)......... -- -- -- (3,412,500) -- -- (3,412,500)
Net income............. -- 31,413 -- -- 3,065,579 -- 3,096,992
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 193,025 35,000,000 (19,184,638) 19,130,447 (4,015,000) 31,124,834
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (3,150,003) -- -- (3,150,003)
Net income............. -- 32,416 -- -- 3,209,151 -- 3,241,567
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 225,441 35,000,000 (22,334,641) 22,339,598 (4,015,000) 31,216,398
Distributions to
limited partners
($0.110 per limited
partner unit)......... -- -- -- (3,850,003) -- -- (3,850,003)
Net income............. -- 31,807 -- -- 3,257,105 -- 3,288,912
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $257,248 $35,000,000 $(26,184,644) $25,596,703 $(4,015,000) $30,655,307
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,144,635 $ 3,114,439 $ 3,222,903
Distributions from unconsolidated joint
ventures.............................. 344,643 356,589 323,531
Cash paid for expenses................. (185,270) (163,215) (194,218)
Interest received...................... 258,584 235,243 110,452
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,562,592 3,543,056 3,462,668
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. 116,397 -- --
Additions to land and buildings on
operating leases...................... -- -- (1,135)
Investment in direct financing leases.. -- -- (1,326)
Investment in joint venture............ -- -- (234,059)
Collections on mortgage notes
receivable............................ 41,292 8,799 2,557
Other.................................. 36 -- (34,793)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................. 157,725 8,799 (268,756)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,500,003) (3,412,502) (3,325,000)
Distributions to holder of minority
interest.............................. (13,292) (13,391) (13,503)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,513,295) (3,425,893) (3,338,503)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 207,022 125,962 (144,591)
Cash and Cash Equivalents at Beginning
of Year................................ 1,602,236 1,476,274 1,620,865
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,809,258 $ 1,602,236 $ 1,476,274
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,288,912 $ 3,241,567 $ 3,096,992
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 246,976 208,971 208,971
Minority interest in income of
consolidated joint venture............ 13,518 13,706 13,906
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 67,922 63,109 57,031
Loss (gain) on sale of land and
buildings............................. (108,176) -- 99,031
Decrease (increase) in receivables..... (32,504) (25,641) 429
Decrease (increase) in prepaid
expenses.............................. 398 20 (1,465)
Decrease in net investment in direct
financing leases...................... 177,947 178,250 157,194
Increase in accrued rental income...... (116,089) (128,736) (219,757)
Increase (decrease) in accounts payable
and accrued expenses.................. (722) 9,987 12,203
Increase (decrease) in due to related
parties............................... 15,617 2,769 (4,505)
Increase (decrease) in rents paid in
advance and deposits.................. 8,793 (20,946) 42,638
----------- ----------- -----------
Total adjustments..................... 273,680 301,489 365,676
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,562,592 $ 3,543,056 $ 3,462,668
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings............ $ -- $ -- $ 1,375,000
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 1,137,501 $ 787,501 $ 1,050,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund VIII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-12
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continues to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and the allowance
for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 87.68%
interest in Woodway Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
The Partnership's investments in Asheville Joint Venture, CNL Restaurant
Investments II and Middleburg Joint Venture are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." Some of the leases have been
classified as operating leases and some of the leases have been classified as
direct financing leases. For property leases classified as direct financing
leases, the building portions of the majority of property leases are accounted
for as direct financing leases while the land portions of these leases are
accounted for as operating leases. Substantially all leases are for 15 to 20
years and provide for minimum and contingent rentals. In addition, the tenant
pays all
F-13
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
property taxes and assessments, fully maintains the interior and exterior of
the building and carries insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to four successive five-year periods subject to the
same terms and conditions of the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 9,159,115 $ 9,167,336
Buildings.......................................... 8,295,673 6,231,430
----------- -----------
17,454,788 15,398,766
Less accumulated depreciation...................... (1,685,510) (1,438,534)
----------- -----------
$15,769,278 $13,960,232
=========== ===========
</TABLE>
In July 1998, the Partnership received $116,397 as a settlement from the
Florida Department of Transportation for a right of way taking related to a
parcel of land on its property in Brooksville, Florida. In connection
therewith, the Partnership recognized a gain of $108,176 for financial
reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $116,089, $128,736 (net
$4,501 in reserves), and $219,757, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,889,012
2000............................................................. 1,919,651
2001............................................................. 2,017,044
2002............................................................. 2,065,510
2003............................................................. 2,096,121
Thereafter....................................................... 12,027,545
-----------
$22,014,883
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-14
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Minimum lease payments receivable................. $14,095,756 $ 18,939,788
Estimated residual values......................... 2,457,619 3,040,615
Less unearned income.............................. (8,750,590) (11,935,428)
----------- ------------
Net investment in direct financing leases......... $ 7,802,785 $ 10,044,975
=========== ============
</TABLE>
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified these leases from direct financing leases to
operating leases. In accordance with the Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded each of the
reclassified leases at the lower of original cost, present fair value, or
present carrying value. No losses on the termination of direct financing leases
were recorded for financial reporting purposes.
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,106,822
2000............................................................. 1,106,822
2001............................................................. 1,130,328
2002............................................................. 1,142,042
2003............................................................. 1,142,042
Thereafter....................................................... 8,467,700
-----------
$14,095,756
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
F-15
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
5. Investment in Joint Ventures:
The Partnership has an 85.54%, a 36.8%, and a 12.46% interest in the profits
and losses of Asheville Joint Venture, CNL Restaurant Investments II, and
Middleburg Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
Asheville Joint Venture and Middleburg Joint Venture each own and lease one
property, and CNL Restaurant Investments II owns and leases six properties to
an operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $6,320,059 $6,487,210
Net investment in direct financing lease............ 1,319,045 1,335,223
Cash................................................ 1,176 596
Receivables......................................... 17,395 14,169
Prepaid expenses.................................... 719 1,017
Accrued rental income............................... 162,857 128,993
Liabilities......................................... 580 864
Partners' capital................................... 7,820,671 7,966,344
Revenues............................................ 940,168 1,001,284
Net income.......................................... 762,579 824,576
</TABLE>
The Partnership recognized income totalling $276,721, $293,480, and $266,500
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Mortgage Notes Receivable:
As of December 31, 1995, the Partnership had accepted two promissory notes
in the principal sum totalling $460,000, in connection with the sale of two of
its properties in Jacksonville, Florida. The promissory notes, which are
collateralized by mortgages on the properties, bear interest at a rate of ten
percent per annum, and are being collected in 119 equal monthly installments of
$2,106 and $1,931, with balloon payments of $218,252 and $200,324,
respectively, due in December 2005.
In addition, in connection with the sale in 1996 of its property in Orlando,
Florida, the Partnership accepted a promissory note in the principal sum of
$1,388,568, representing the gross sales price of $1,375,000 plus tenant
closing costs of $13,568 that the Partnership financed on behalf of the tenant.
The promissory note bears interest at a rate of 10.75% per annum, is
collateralized by a mortgage on the property and is being collected in 12
monthly installments of interest only, in 24 monthly installments of $15,413
consisting of principal and interest, and thereafter in 144 monthly
installments of $16,220 consisting of principal and interest.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance..................................... $1,795,920 $1,837,212
Accrued interest receivable........................... 15,806 16,174
---------- ----------
$1,811,726 $1,853,386
========== ==========
</TABLE>
F-16
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The general partners believe that the estimated fair value of mortgage notes
receivable at December 31, 1998 and 1997, approximated the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; thereafter, 95 percent to the limited partners and five
percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,850,003, $3,150,003, and
$3,412,500, respectively. No distributions have been made to the general
partners to date.
F-17
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,288,912 $3,241,567 $3,096,992
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (166,412) (204,419) (219,372)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 177,946 178,250 157,197
Allowance for doubtful accounts........ 5,408 18,954 (23,716)
Accrued rental income.................. (116,089) (133,237) (219,757)
Rents paid in advance.................. 9,293 (21,446) 42,637
Gain or loss on sale of land and
buildings for tax reporting purposes
in excess of gain or loss for
financial reporting purposes.......... 3,170 670 99,031
Capitalized transaction costs for tax
reporting purposes.................... 21,042 -- --
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial reporting
purposes.............................. 15,563 (2,987) 13,320
Minority interest in timing differences
of consolidated joint venture......... 1,443 1,571 1,677
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,240,276 $3,078,923 $2,948,009
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or
F-18
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
three percent of the sales price if the Affiliate provides a substantial amount
of services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. During the year ended December 31,
1996, the Partnership incurred $41,250 in deferred, subordinated real estate
disposition fees as the result of the sale of the property in Orlando, Florida.
No deferred, subordinated real estate disposition fees were incurred for the
years ended December 31, 1998 and 1997.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $96,202, $80,461 and $89,317 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Due to Affiliates:
Accounting and administrative services.................... $20,216 $ 4,599
Deferred, subordinated real estate disposition fee........ 55,050 55,050
------- -------
$75,266 $59,649
======= =======
</TABLE>
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures) for
each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation....................... $728,641 $706,839 $663,889
Restaurant Management Services, Inc. ........... 527,360 531,110 533,990
Carrols Corporation............................. 482,081 523,517 526,034
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc. ............................. N/A N/A 356,720
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from the unconsolidated joint
ventures), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Burger King.................................... $961,542 $1,003,419 $989,480
Golden Corral Family Steakhouse Restaurants.... 750,869 735,949 681,042
Shoney's....................................... 603,304 607,054 609,072
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
F-19
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,042,635 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $39,843,631 as
of December 31, 1998.
The APF Shares are expected to be listed for trading on the New York Stock
Exchange concurrently with the consummation of the Merger, and, therefore,
would be freely tradable at the option of the former limited partners. At a
special meeting of the partners that is expected to be held in the third
quarter of 1999, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. The general partners intend to recommend that
the limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
12. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,021,318 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, the Advisor and CNL Restaurant
Financial Services Group. The pro forma balance sheet assumes that the
Acquisition occurred on June 30, 1999, and the pro forma consolidated
statements of earnings and statements of cash flows assume that the acquisition
of properties by APF from January 1, 1998 through July 31, 1999, the
acquisition of the Advisor, the CNL Restaurant Financial Services Group and the
Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0
Other Investments....... 16,197,812 0 16,197,812 0 0
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0
Receivables (net
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income... 5,875,698 0 5,875,698 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0
Distributions Payable... 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981
Income Tax Payable...... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income......... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0
Minority Interest....... 644,611 0 644,611 0 0
Common Stock............ 373,484 0 373,484 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital....... 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Fund VIII, Pro Forma Adjusted
Corp. Adjustments Combined APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $15,619,184 $ 8,012,333 (B2) $ 596,568,376
Net Investment in Direct
Financing Leases ...... 0 0 132,179,949 7,721,863 2,044,329 (B2) 141,946,141
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 1,507,221 0 355,381,399
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 2,776,099 1,416,815 (B2) 5,273,960
Cash and Cash
Equivalents............ 1,767,517 (8,950,306)(B1) 12,553,575 1,896,858 (2,941,694)(B2) 11,062,739
(446,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)/Due from
Related Party.......... 1,125,933 (6,614,629)(C) 9,247,098 5,426 (81,968)(E) 9,170,556
Accrued Rental Income... 0 0 5,875,698 1,976,584 (1,976,584)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 67,097 (67,097)(B2) 13,173,857
Goodwill................ 0 42,860,742(B1) 42,860,742 0 0 42,860,742
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $304,738,561 $ 24,720,015 $1,170,830,627 $31,570,332 5,960,134 $1,208,361,093
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 117,438 $ 0 $ 5,221,741
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 787,501 0 787,501
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 81,968 (81,968)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 60,950 0 1,678,317
Minority Interest....... 0 0 644,611 108,640 0 753,251
Common Stock............ 0 61,500(B1) 434,984 0 19,990 (B2) 454,974
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 36,435,947 (B2) 829,372,162
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,162)(B1) (88,026,310) 0 0 (88,026,310)
(73,199,795)(B1)
342,857(D)
Partners' Capital....... 0 0 0 30,413,835 (30,413,835)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,720,015 $1,170,830,627 $31,570,332 $ 5,960,134 $1,208,361,093
============ ============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 45,496,901(r)
==============
Shares Outstanding...... 45,497,482
==============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ----------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $23,564,432 $2,089,441 $25,653,873 $ 3,877,654 $ 42,804 $ (239,337)
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Cash Distributions
Declared............... $28,476,150 $ 0(s) $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VIII, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $1,474,403 $ 88,997(j) $32,520,914
Fees................... (9,812,516)(b),(c) 2,616,185 0 (27,894)(k) 2,588,291
Interest and Other
Income................ 144,014 (d) 16,269,383 111,409 0 16,380,792
----------- ----------- ---------- --------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $1,585,812 $ 61,103 $51,489,997
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 86,645 (52,494)(l),(m) 9,614,053
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0(n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 17,646 7,764(o) 490,376
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 150,094 92,181(p) 4,911,428
Amortization........... 1,071,519(h) 1,081,255 0 0 1,081,255
Transaction Costs...... 0 483,005 121,090 0 604,095
----------- ----------- ---------- --------- -----------
Total Expenses......... (3,360,240) 26,816,350 375,475 47,451 27,239,276
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,308,262) $23,026,732 $1,210,337 $ 13,652 $24,250,721
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 123,193 (28,666)(q) 125,768
Gain (Loss) on Sale of
Properties............ 0 (201,843) 0 0 (201,843)
Provision for Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (6,308,262) 22,315,608 1,333,530 (15,014) 23,634,124
Benefit/(Provision) for
Federal Income
Taxes................. 1,525,740(i) 0 0 0 0
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)... $(4,782,522) $22,315,608 $1,333,530 $ (15,014) $23,634,124
=========== =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.04 $ n/a $ 0.52
=========== =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 0.87 $ n/a $ 16.30
=========== =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.05 $ n/a $ 0.76
=========== =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.93x
=========== =========== ========== ========= ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,575,002 $ (50,791)(s) $34,689,613
=========== =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,999,018 45,496,901(r)
=========== =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,999,018 45,497,482
=========== =========== ========== ========= ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $ 22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ------------ ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $ 22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ------------ ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
and Provision for
Losses on Properties... $32,778,080 $ 16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ------------ ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ------------ ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $ 16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== ============ =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== ============ =========== =========== ========== ===========
Cash Distributions
Declared...............
$39,449,149 $ 11,557,727(t) $51,006,876 $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,580,012 34,228,231 n/a n/a n/a
=========== ============ =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== ============ =========== =========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF VIII, Ltd. Adjustments Pro Forma
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $3,092,959 $ 177,993 (j) $59,352,412
Fees................... (32,715,768)(b),(c) 3,226,263 0 (30,172)(k) 3,196,091
Interest and Other
Income................ 207,144 (d) 32,221,925 269,744 0 32,491,669
------------ ----------- ---------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $3,362,703 $ 147,821 $95,040,172
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 171,780 (78,332)(l),(m) 16,033,004
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 5,372 12,429 (o) 585,247
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 246,976 184,361 (p) 10,379,676
Amortization........... 2,143,037 (h) 2,307,038 0 0 2,307,038
Transaction Costs...... 0 157,054 21,042 0 178,096
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,259,911) 51,475,966 445,170 118,458 52,039,594
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
and Provision for
Losses on Properties... $(23,248,713) $40,053,682 $2,917,533 $ 29,363 $43,000,578
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 263,203 (57,332)(q) 191,733
Gain (Loss) on Sale of
Properties............ 0 0 108,176 0 108,176
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Provision For Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (23,248,713) 43,122,361 3,288,912 (27,969) 46,383,304
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,350,279) $43,122,361 $3,288,912 $ (27,969) $46,383,304
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.47 $ n/a $ 1.06
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.34 $ n/a $ 16.46
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.90 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.05x
============ =========== ========== ========= ===========
Cash Distribution
Declared............... $ 9,518,504 (t) $60,525,380 $3,600,004 $(451,578)(t) $63,673,806
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,378,231 n/a 2,098,272 42,476,503 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 2,098,272 45,586,199
============ =========== ========== ========= ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Aqcuisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,321,490) 12,878,347 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,450,692 $ 33,214,725 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF VIII Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,782,522)(a) $ 22,315,608 $ 1,333,530 $ (15,014)(a) $ 23,634,124
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,774,655 150,094 92,181 (b) 5,016,930
Amortization expense... 1,071,519 (c) 1,981,272 0 0 1,981,272
Minority interest in
income of consolidated
joint venture......... 0 17,610 6,685 0 24,295
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 33,660 28,666 (d) 87,446
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 0 0 201,843
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 81,541 0 (2,120,419)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (10,467) 0 (330,892)
Decrease in net
investment in direct
financing leases...... 0 721,624 80,922 0 802,546
Increase in accrued
rental income......... 0 (1,915,785) (49,166) 0 (1,964,951)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 85,342 0 (578,136)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 6,702 0 592,429
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (1,399) 0 665,320
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,071,519 (75,918,293) 383,914 120,847 (75,413,532)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,717,444 105,833 (51,779,408)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 0 0 3,696,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Aqcuisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 301,803 0 526,176
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) 301,803 0 (111,432,723)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) (6,645) 0 (27,750)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,925,002) 50,791 (g) (35,159,421)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,931,647) 50,791 178,382,619
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 87,600 156,624 15,170,488
Cash at beginning of
year................... (11,082,564) 5,997,742 1,809,258 (2,722,392) 5,084,608
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(15,030,567) $ 20,924,006 $ 1,896,858 $(2,565,768) $ 20,255,096
============ ============= =========== =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,557,727)(j) (51,006,876) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,187,871) 305,647,670 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,321,490) (34,708,430) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,321,490) $ 12,878,347 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Funds Pro Forma Adjusted
Adjustments APF VIII, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,350,279)(a) $ 43,122,361 $ 3,288,912 $ (27,969)(a) $ 46,383,304
Adjustments to reconcile
net income (loss) to
net cash provided
by(used in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 246,976 184,361 (b) 10,578,833
Amortization expense... 2,143,037 (c) 4,457,121 0 0 4,457,121
Minority interest in
income of consolidated
joint venture......... 0 30,156 13,518 0 43,674
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 67,922 57,332 (d) 109,814
Loss(gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (108,176) 0 (108,176)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 0 0 1,009,576
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease(increase) in
other receivables..... 0 (2,543,413) (32,504) 0 (2,575,917)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease(increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 398 0 7,644
Decrease in net
investment in direct
financing leases...... 0 1,971,634 177,947 0 2,149,581
Increase in accrued
rental income......... 0 (2,187,652) (116,089) 0 (2,303,741)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 846,680 (722) 0 845,958
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 15,617 0 (117,747)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 8,793 0 445,636
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,802,139 13,331,944 273,680 241,693 13,847,317
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 3,562,592 213,724 60,230,621
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 116,397 0 2,502,338
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) 0 0 (974,696)
Acquisition of
businesses............ (8,950,306)(f) (8,950,306) 0 (2,941,694)(g) (12,338,000)
(446,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 41,292 0 333,282
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 36 0 200,036
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) investing
activities............ 12,844,080 (387,706,562) 157,725 (3,387,694) (390,936,531)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) (13,292) 0 (47,365)
Distributions to
stockholders/limited
partners.............. (9,518,504)(j) (69,889,868) (3,500,003) 451,578 (j) (72,938,293)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (9,518,504) 287,280,869 (3,513,295) 451,578 284,219,152
Net increase(decrease)
in cash................ (11,082,564) (43,831,388) 207,022 (2,722,392) (46,346,758)
Cash at beginning of
year................... 0 49,829,130 1,602,236 0 $ 51,431,366
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(11,082,564) $ 5,997,742 $ 1,809,258 $(2,722,392) $ 5,084,608
============ ============= =========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price paid exceeds the
fair value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of March 31, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma properties acquired from July 1, 1999 through
July 31, 1999 as if these properties had been acquired on June 30, 1999.
Based on historical results through July 31, 1999, all interest costs
related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest
expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Funds Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of Considera-
tion Received.......... $81,530,270 $50,420,036 $39,843,631 $171,793,937
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $36,455,937 $159,455,937
Cash Consideration...... -- -- 446,000 446,000
APF Transaction Costs... 5,530,270 3,420,036 2,941,694 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.... $81,530,270 $50,420,036 $39,843,631 $171,793,937
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $30,413,835 $ 48,879,397
Purchase Price Adjust-
ments:
Land and buildings on
operating leases..... -- -- 8,012,333 8,012,333
Net investment in
direct financing
leases............... -- -- 2,044,329 2,044,329
Investment in joint
ventures............. -- -- 1,416,815 1,416,815
Accrued rental
income............... -- -- (1,976,584) (1,976,584)
Intangibles and other
assets............... -- (2,575,792) (67,097) (2,642,889)
Goodwill*............. -- 42,860,741 -- 42,860,741
Excess purchase
price................ 73,199,795 -- -- 73,199,795
----------- ----------- ----------- ------------
Total Allocation.... $81,530,270 $50,420,036 $39,843,631 $171,793,937
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,199,795 was expensed at June 30, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $42,860,341
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A.......... 8,600
Common Stock (CFA, CFS, CFC)--Class B........... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of
earnings................................. 73,199,795
Goodwill for CFC/CFS (Intangibles and other
assets).................................. 42,860,741
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 8,950,306
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 30,413,835
Land and buildings on operating leases.......... 8,012,333
Net investment in direct financing leases....... 2,044,329
Investment in joint ventures.................... 1,416,815
Accrued rental income......................... 1,976,584
Intangibles and other assets.................. 67,097
Cash to pay APF Transaction costs............. 2,941,694
Cash consideration to Income Funds............ 446,000
APF Common Stock.............................. 19,990
APF Capital in Excess of Par Value............ 36,435,947
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $81,968 in related
party payables recorded as receivables by the Advisor.
5.Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1999.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31, 1999
had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $(689,425)
Secured equipment lease fees................................. (67,967)
Advisory fees................................................ (126,788)
Reimbursement of administrative costs........................ (382,728)
Acquisition fees............................................. (4,452,252)
Underwriting fees............................................ (54,248)
Administrative, executive and guarantee fees................. (532,389)
Servicing fees............................................... (572,728)
Development fees............................................. (38,853)
Management fees.............................................. (1,681,870)
-----------
Total...................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term of
the loans originated in accordance with generally accepted accounting
principles. Total loan origination fees received by CNL Financial
Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which were
deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during the
period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................. $(1,681,870)
Administrative executive and guarantee fees................. (532,389)
Servicing fees.............................................. (572,728)
Advisory fees............................................... (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,071,519
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $88,997 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (27,894)
--------
$(27,894)
========
</TABLE>
(l) Represents the elimination of $27,894 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $24,600 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax
reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,764 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999 had
been acquired on January 1, 1998 and assuming that the shares issued
in conjunction with acquiring the Advisor, CNL Financial Services
Group and the Income Fund had been issued as of January 1, 1998 and
that these entities had operated under a REIT structure as of January
1, 1998.
(p) Represents an increase in depreciation expense of $92,181 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated
using the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$28,666 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture or
tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings owned
indirectly by the Income Fund is being depreciated using the
straight-line method over the remaining useful lives of the
properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term of
the loans originated in accordance with generally accepted accounting
principles. Total loan origination fees received by CNL Financial
Services, Inc. during the year ended December 31, 1998 of $3,107,164
are being deferred for pro forma purposes and are being amortized
over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are being
amortized and recorded as interest income over the terms of the
underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.................................................. $207,144
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during the
period under development.
<TABLE>
<S> <C>
General and administrative costs............................ $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill...................................... $2,143,037
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $177,993 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (30,172)
--------
$(30,172)
========
</TABLE>
(l) Represents the elimination of $30,172 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $48,160 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax
reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $12,429 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999 had
been acquired on January 1, 1998 and assuming that the shares issued
in conjunction with acquiring the Advisor, CNL Financial Services
Group and the Income Fund
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
had been issued as of January 1, 1998 and that these entities had
operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $184,361 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$57,332 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture or
tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings
owned indirectly by the Income Fund is being depreciated using the
straight-line method over the remaining useful lives of the
properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as part
of the basis of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have
been issued and outstanding as of January 1, 1998. For purposes of
the pro forma financial statements, it is assumed that the
stockholders approved a one-for-two reverse stock split proposal and
a proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses to
net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July 1,
1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant Financial
Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund VIII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund VIII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund VIII, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
Agreement:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such
limited partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the
Registration Statement) of the Share Consideration such Dissenting
Partners would have otherwise received had such partners not elected to
receive the Notes (the "Note Option"). The Notes will mature on the
fifth anniversary of the Closing Date and will bear interest at a fixed
rate equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable
to Dissenting Partners had such Dissenting Partners not elected the
Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
B-1
<PAGE>
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND VIII, Ltd.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund VIII, Ltd., a Florida limited
partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL
Realty Corporation, a Florida corporation (together with Messrs. Bourne and
Seneff, the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,042,635 fully paid and nonassessable APF Common
Shares (2,021,318 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $37,070,274, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,957,365 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 35,000,000 units of limited partnership interests. All of
the outstanding Fund Interests have been duly authorized, are validly issued,
fully paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,042,635 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $404,264 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND VIII, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND IX, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund IX, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and
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<PAGE>
mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,850,049 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's limited partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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<PAGE>
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,911.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,850,049 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF
S-3
<PAGE>
Shares have been approved for listing on the NYSE, subject to official notice
of issuance. Prior to listing, the existing APF stockholders have not had an
active trading market in which they could sell their APF Shares. Additionally,
any Limited Partners of the Income Funds who become APF stockholders as a
result of the Acquisition, will have transformed their investment in non-
tradable units into an investment in freely tradable APF Shares. Consequently,
some of these stockholders may choose to sell their APF Shares upon listing at
a time when demand for APF Shares may be relatively low. The market price of
the APF Shares may be volatile after the Acquisition, and the APF Shares could
trade at prices substantially less than the exchange value as a result of
increased selling activity following the issuance of the APF Shares, the
interest level of investors in purchasing the APF Shares after the Acquisition
and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $910, $920 and $900, respectively, to you per $10,000
investment. While historically, APF has made distributions equal to 7.625% per
APF Share, based on the exchange value, we cannot be sure that APF will be able
to maintain this level of distributions in the future. In the event that APF is
unable to maintain this level of distributions in the future, your
distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have four material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third,
assuming only your Income Fund is acquired in the Acquisition, we will receive
17,027 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
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<PAGE>
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,233 restaurant properties assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
S-5
<PAGE>
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.91%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.43x and its ratio of debt-to-total assets would
have been 34.89%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new
S-6
<PAGE>
restaurant properties, negotiating with new or existing tenants or securing
acceptable financing. In addition, investing in additional restaurant
properties is subject to many risks. For instance, if an additional restaurant
property is in a market in which APF has not invested before, APF will have
relatively little experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total return, interest and earned income, including lost rental, interest and
earned income, for such period.
S-7
<PAGE>
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
federal alternative minimum tax and various state income taxes. Unless APF is
entitled to relief under specific statutory provisions, it could not elect to
be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
S-8
<PAGE>
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited less
Partner Distributions of Number of Estimated Estimated Value
Investments Net Sales APF Value of of APF Shares
less Proceeds per Shares APF Estimated Value per Average
Distributions of $10,000 Offered to Shares Estimated of APF Shares $10,000 Original
Net Sales Original Income Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund Income Fund Expenses Expenses Investment
- ---------------- ---------------- ---------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 1,850,049 $37,000,980 $424,000 $36,576,980 $10,451
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1).................................................... $ 28,391
Appraisals and Valuation(2)...................................... 6,765
Fairness Opinions(3)............................................. 30,000
Solicitation Fees(4)............................................. 18,561
Printing and Mailing Fees(5)..................................... 104,098
Accounting and Other Fees(6)..................................... 55,968
--------
Subtotal....................................................... 243,783
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)........................ 88,878
Legal Closing Fees(8)............................................ 43,901
Partnership Liquidation Costs(9)................................. 47,438
--------
Subtotal....................................................... 180,217
--------
Total............................................................ $424,000
========
</TABLE>
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<PAGE>
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(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer fact sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (March 20, 1991). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
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Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the
solicitation, materials, which include the consent solicitation this supplement
and the other materials distributed to you, and the terms of APF's Acquisition
of your Income Fund, prior to voting on the Acquisition. The special meeting
will be held at 10:00 a.m., Eastern time, on , 1999, at . We and
members of APF's management intend to solicit actively your support for the
Acquisition and would like to use the special meeting to answer questions about
the Acquisition and the solicitation materials and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999 a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
S-11
<PAGE>
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued actually or paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
----------------------- June 30,
1996 1997 1998 1999
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions...... -- -- -- --
Accounting and Administrative
Services.......................... $82,487 $79,234 $94,808 $47,550
Broker/Dealer Commissions.......... -- -- -- --
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(1).... -- -- -- --
------- ------- ------- -------
Total historical................. $82,487 $79,234 $94,808 $47,550
Pro Forma Distributions to Be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF
Shares(2)......................... $24,044 $25,363 $25,966 $12,983
Salary Compensation................ -- -- -- --
------- ------- ------- -------
Total pro forma.................. $24,044 $25,363 $25,966 $12,983
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $850 $845 $837 $831 $646 $332 $268
Distributions from Return of
Capital(1)..................... 50 65 73 89 254 118 127
---- ---- ---- ---- ---- ---- ----
Total......................... $900 $910 $910 $920 $900 $450 $395
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
Cash distributions for the year ended December 31, 1997, include $70,000
earned in 1997, but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of
your Income Fund. After careful evaluation, we have concluded that the
Acquisition is the best way to maximize the value of your investment. We
recommend that you and the other Limited Partners approve the Acquisition and
receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is more
economically attractive to you and the other Limited Partners than such
alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or the notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to your Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg
S-14
<PAGE>
Mason that the APF Share consideration payable to each Income Fund is fair from
a financial point of view, we believe the Acquisition is fair regardless of the
number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value of fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts of allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Income Fund Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
- ----------- ------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund IX,
Ltd.................... 35,000,000 10,000 10,353 10,310 9,654 9,320
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
S-15
<PAGE>
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up
to 17,027 APF Shares in the aggregate in accordance with the terms of
your Income Fund's partnership agreement. The 17,027 APF Shares issued
to us will have an estimated value, based on the exchange value, of
approximately $340,540.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders.
The benefits that may be realized by Messrs. Seneff and Bourne are
likely to exceed the benefits that they would expect to derive from
the Income Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for
your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement
for your Income Fund prohibits the Income Fund from incurring
indebtedness, the only liabilities the Income Fund has are liabilities
with respect to its ongoing business operations. In the event that
your Income Fund is acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of Units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
S-17
<PAGE>
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner
Investment
----------------
<S> <C>
CNL Income Fund IX, Ltd........................................ $1,911
</TABLE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by
your Income Fund and (b) the amount of your Income Fund's liabilities,
if any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund
to the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is, real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231
S-18
<PAGE>
gains and losses that you recognize in that year. If the result is a net loss,
such loss is characterized as an ordinary loss. If the result is a net gain, it
is characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of
S-19
<PAGE>
the APF Shares, plus the issue price of the notes issued in the Acquisition,
plus the amount of any liabilities of the Income Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620 $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,073,349 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,358,410)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,310,092)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,310,092)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,784,352)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund IX, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $1,178,486 $ 45,876 (j) $32,181,876
Fees............. 2,616,185 0 (30,958)(k) 2,585,227
Interest and
Other Income..... 16,269,383 58,661 0 16,328,044
------------ ---------- ------------------ ------------
Total Revenue... $49,843,082 $1,237,147 $ 14,918 $51,095,147
Expenses:
General and
Administrative... 9,579,902 118,967 (50,623)(l),(m) 9,648,246
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 24,884 7,106 (o) 496,956
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 155,940 78,647 (p) 4,903,740
Amortization..... 1,083,085 750 0 1,083,835
Transaction
Costs............ 483,005 121,626 0 604,631
------------ ---------- ------------------ ------------
Total Expenses.. 26,818,180 422,167 35,130 27,275,477
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,024,902 $ 814,980 $(20,212) $23,819,670
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 284,057 (42,673)(q) 272,625
Gain (Loss) on
Sale of
Properties....... (201,843) 75,997 0 (125,846)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,313,778 1,175,034 (62,885) 23,425,927
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net
Earnings(Losses).. $22,313,778 $1,175,034 $(62,885) $23,425,927
============ ========== ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252(s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 $ 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 $ 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment from
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,601,619 (u1)(v)
Total liabilities/
minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v)(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,559,105 (u1)(w)
<CAPTION>
Historical
CNL Income
Combined Fund IX, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 40 n/a 621
============== =========== =================== =================
Earnings per
share/unit...... $ n/a $ $ 0.34 $ n/a $ 0.52
============== =========== =================== =================
Book value per
share/unit...... $ n/a $ 8.23 $ n/a $ 16.29
============== =========== =================== =================
Dividends per
share/unit...... $ n/a $ 0.45 $ n/a $ 0.76
============== =========== =================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.92x
============== =========== =================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,575,002 $ (180,541)(s) $ 34,559,863
============== =========== =================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,828,849 45,326,732(r)
============== =========== =================== =================
Shares
outstanding..... 43,498,464 n/a 1,828,849 45,327,313
============== =========== =================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $20,204,637 $7,713,935 (u2) $ 722,731,555
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 51,574 $ (22,000)(x) $ 9,276,672
Investment from
joint ventures.. $ 1,081,046 $ 6,387,805 $1,086,764 (u2) $ 8,555,615
Total assets.... $1,170,712,231 $29,785,504 $4,404,799 (u2)(x) $1,204,902,534
Total liabilities/
minority
interest........ $ 465,485,738 $ 971,554 $ (22,000)(x) $ 466,435,292
Total equity.... $ 705,226,493 $28,813,950 $4,426,799 (u2) $ 738,467,242
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
------------
Total..................................................... $(8,599,248)
============
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
Interest income............................................ $ 144,014
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
General and administrative costs........................... $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
------------
$(2,913,775)
============
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,073,349
</TABLE>
S-23
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $45,876 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees................................................ $ 0
Reimbursement of administrative costs.......................... (30,958)
--------
$(30,958)
========
</TABLE>
(l) Represents the elimination of $30,958 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $19,665 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $7,106 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $78,647 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $42,673
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from
July 1, 1999 through July 31, 1999 as if these properties had been
acquired on June 30, 1999. Based on historical results through July 31,
1999, all interest costs related to the borrowings under the credit
facility were eligible for capitalization, resulting in no pro forma
adjustments to interest expense.
S-24
<PAGE>
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,648,665 $50,493,254 $36,414,830 $168,556,749
=========== =========== =========== ============
Share Consideration..... 76,000,000 47,000,000 32,240,749 156,240,749
Cash Consideration...... -- -- 424,000 424,000
APF Transaction Costs... 5,648,665 3,493,254 2,750,081 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,648,665 $50,493,254 $36,414,830 $168,556,749
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets --
Historical............. $ 8,330,475 $10,135,087 $28,813,950 $ 47,279,512
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 6,145,838 6,145,838
Net investment in
direct financing
leases................ -- -- 1,568,097 1,568,097
Investment in joint
ventures.............. -- -- 1,086,764 1,086,764
Accrued rental income.. -- -- (1,170,144) (1,170,144)
Intangibles and other
assets................ -- (2,575,792) (29,675) (2,605,467)
Goodwill*.............. -- 42,933,959 -- 42,933,959
Excess purchase price.. 73,318,190 -- -- 73,318,190
----------- ----------- ----------- ------------
Total Allocation....... $81,648,665 $50,493,254 $36,414,830 $168,556,749
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $73,318,190 was expensed at
June 30, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations." Goodwill of $42,933,959 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A............ 8,600
Common Stock (CFA, CFS, CFC)--Class B............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)........ 12,568,974
Retained Earnings................................. 5,883,163
Accumulated distributions in excess of earnings... 73,318,190
Goodwill for CFC/CFS (Intangibles and other
assets).......................................... 42,933,959
CFC/CFS Organizational Costs/Other Assets........ 2,575,792
Cash to pay APF transaction costs................ 9,141,919
APF Common Stock................................. 61,500
APF Capital in Excess of Par Value............... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital................................ 28,813,950
Land and buildings on operating leases............ 6,145,838
Net investment in direct financing leases......... 1,568,097
Investment in joint ventures...................... 1,086,764
Accrued rental income............................ 1,170,144
Intangibles and other assets..................... 29,675
Cash to pay APF Transaction costs................ 2,750,081
Cash consideration to Income Funds............... 424,000
APF Common Stock................................. 18,288
APF Capital in Excess of Par Value............... 32,222,461
(To record acquisition of Income Funds)
</TABLE>
S-25
<PAGE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $22,000 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND IX, LTD.
The following table sets forth certain selected information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
IX, Ltd." in this Supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,521,204 $ 1,273,479 $ 3,100,685 $ 3,230,343 $ 3,404,066 $ 3,428,147 $ 3,362,394
Net income (2).......... 1,175,034 1,041,698 2,286,698 2,937,632 2,960,299 2,987,971 3,003,583
Cash distributions
declared (3)........... 1,575,002 1,645,002 3,220,004 3,150,004 3,185,004 3,185,004 3,150,002
Net income per Unit..... 0.33 0.29 0.65 0.83 0.84 0.85 0.85
Cash distributions
declared per Unit (3).. 0.45 0.47 0.92 0.90 0.91 0.91 0.90
GAAP book value per
Unit................... 8.23 8.44 8.35 8.61 8.67 8.74 8.79
Weighted average number
of Limited Partner
Units outstanding...... 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $29,785,504 $30,498,707 $30,099,078 $31,096,421 $31,343,847 $31,517,255 $31,735,391
Total partners'
capital................ 28,813,950 29,543,920 29,213,918 30,147,224 30,359,596 30,584,301 30,781,334
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures and adjustments to
accrued rental income as a result of a tenant filing for bankruptcy.
(2) Net income for the year ended December 31, 1998 includes $314,775 from
provision for loss on land and building and impairment in carrying value of
net investment in direct financing lease. Net income for the six months
ended June 30, 1999 and for the year ended December 31, 1997, includes
$75,997 and $199,643, respectively, from a gain on sale of land, buildings
and net investment in direct financing lease.
(3) Distributions for the six months ended June 30, 1998 and the year ended
December 31, 1998, included a special distribution to the Limited Partners
of $70,000 and distributions for the years ended December 31, 1996 and
1995, each includes a special distribution to the Limited Partners of
$35,000, which represented cumulative excess operating reserves.
S-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND IX, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on April
16, 1990, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of selected national and regional fast-food and family-style
restaurant chains. The leases are generally triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 40 restaurant properties,
which included interests in 13 restaurant properties owned by joint ventures in
which the Income Fund is a co-venturer and one restaurant property owned with
an affiliate as tenants in common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund generated cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses, during the six months ended June 30,
1999 and 1998, of $1,470,503 and $1,633,800, respectively. The decrease in cash
from operations for the six months ended June 30, 1999, as compared to the six
months ended June 30, 1998, is primarily a result of changes in the Income
Fund's working capital.
Other sources and uses of capital included the following during the quarter
and six months ended June 30, 1999.
During February and March 1999, the Income Fund sold its restaurant
properties in Corpus Christi, Texas and Rochester, New York, respectively, and
received sales proceeds of $1,350,000 and $1,250,000, respectively, resulting
in gains of $56,369 and $19,628, respectively, for financial reporting
purposes. These restaurant properties were originally acquired by the Income
Fund in 1991 and 1992 and had a total cost of approximately $2,288,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant properties for approximately $111,200 in
excess of their original purchase prices. In March 1999, the Income Fund
reinvested a majority of the net sales proceeds in a Golden Corral restaurant
property located in Albany, Georgia, at an approximate cost of $1,641,000. The
Income Fund intends to reinvest the remaining net sales proceeds in additional
restaurant properties.
Currently, rental income from the Income Fund's restaurant properties and
any net sales proceeds held by the Income Fund pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposits in
commercial banks, certificates of deposit, and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses, or to make distributions to the partners and, for net
sales proceeds, to reinvest in additional restaurant properties. At June 30,
1999, the Income Fund had $1,941,669 invested in such short-term investments,
as compared to $1,287,379 at December 31, 1998. The increase in cash and cash
equivalents for the six months ended June 30, 1999, was primarily attributable
to the fact that the Income Fund is holding the remaining net sales proceeds
relating to the restaurant property sales described above, pending reinvestment
in additional restaurant properties. The funds remaining at June 30, 1999,
after payment of distributions and other liabilities, will be used to invest in
additional restaurant properties and to meet the Income Fund's working capital
and other needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income
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Funds served a lawsuit against us, APF, CNL Group, Inc. and the CNL Restaurant
Businesses in connection with the Acquisition. We and APF believe that the
lawsuits are without merit and intend to defend vigorously against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital for the years ended December 31,
1998, 1997, and 1996, was cash from operations, which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses. Cash from operations was $3,253,390, $3,157,964, and
$3,356,240 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase in cash from operations during 1998, as compared to 1997, and the
decrease during 1997, as compared to 1996, is primarily a result of changes in
income and expenses as discussed in "Results of Operations" below and changes
in the Income Fund's working capital.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In December 1996, the tenant of the restaurant property in Woodmere, Ohio,
exercised its option under the terms of its lease agreement, to substitute the
existing restaurant property for a replacement restaurant property. In
conjunction therewith, the Income Fund exchanged the Burger King restaurant
property in Woodmere, Ohio, with a Burger King restaurant property in Carrboro,
North Carolina. The lease for the restaurant property in Woodmere, Ohio, was
amended to allow the restaurant property in Carrboro, North Carolina, to
continue under the terms of the original lease. All closing costs were paid by
the tenant. The Income Fund accounted for this as a non-monetary exchange of
similar assets and recorded the acquisition of the restaurant property in
Carrboro, North Carolina, at the net book value of the restaurant property in
Woodmere, Ohio. No gain or loss was recognized due to this being accounted for
as a non-monetary exchange of similar assets.
In June 1997, the Income Fund sold its restaurant property in Alpharetta,
Georgia, and received net sales proceeds of $1,053,571, resulting in a gain for
financial reporting purposes of $199,643. This restaurant property was
originally acquired by the Income Fund in September 1991 and had a cost of
approximately $711,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $342,400 in excess of its original purchase price. In July
1997, the Income Fund reinvested approximately $1,049,800 of these net sales
proceeds in an IHOP restaurant property in Englewood, Colorado, as tenants-in-
common, with one of our affiliates. In connection therewith, the Income Fund
and the affiliate entered into an agreement whereby each co-venturer will share
in the profits and losses of the restaurant property in proportion to each co-
venturer's percentage interest. As of December 31, 1998, the Income Fund owned
a 67 percent interest in the restaurant property. This transaction, or a
portion thereof, relating to the sale of the restaurant property in Alpharetta,
Georgia, and the reinvestment of the proceeds in an IHOP restaurant property in
Englewood, Colorado, was structured as a like-kind exchange transaction for
federal income tax purposes.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently rental income from the Income Fund's restaurant properties and net
sales proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
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Fund had $1,287,379 invested in such short-term investments as compared to
$1,250,388 at December 31, 1997. As of December 31, 1998, the average interest
rate earned on the rental income deposited in demand deposit accounts at
commercial banks was approximately two percent annually.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current and
anticipated future cash from operations, and for the six months ended June 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $1,575,002 and $1,645,002 for the six
months ended June 30, 1999 and 1998, respectively, or $787,501 for each of the
quarters ended June 30, 1999 and 1998. This represents distributions for the
six months ended June 30, 1999 and 1998 of $0.45 and $0.47 per unit,
respectively, or $0.23 per unit for each of the applicable quarters. No
distributions were made to us for quarter and the six months ended June 30,
1999 and 1998. No amounts distributed to the Limited Partners for the six
months ended June 30, 1999 and 1998 are required to be or have been treated by
the Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $971,554 at June 30, 1999, from $885,160 at December 31, 1998,
primarily as a result of the Income Fund accruing transaction costs relating to
the Acquisition. We believe that the Income Fund has sufficient cash on hand to
meet its current working capital needs.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purpose, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,220,004, $3,150,004, and $3,185,004 for the years ended
December 31, 1998, 1997, and 1996, respectively. This represents a distribution
of $0.92, $0.90, and $0.91 per Unit for the years ended December 31, 1998,
1997, and 1996, respectively. No amounts distributed to the Limited Partners
for the years ended December 31, 1998, 1997, and 1996, are required to be or
have been treated by the Income Fund as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions. The Income Fund intends to continue to make distributions of
cash available for distribution to the limited partners on a quarterly basis.
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During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $111,596, $77,999, and $97,032, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$24,187 and $4,619, respectively, to affiliates for such amounts and accounting
and administrative services. As of March 11, 1999, the Income Fund had
reimbursed the affiliates all such amounts. Other liabilities, including
distributions payable, decreased to $860,973 at December 31, 1998, from
$944,578 at December 31, 1997, partially as the result of a decrease in accrued
real estate tax expense and a decrease in rents paid in advance at December 31,
1998.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund owned and leased
27 wholly owned restaurant properties, and during the six months ended June 30,
1999, the Income Fund owned and leased 28 wholly owned restaurant properties,
including two restaurant properties which were sold during 1999, to operators
of fast-food and family-style restaurant chains. In connection with these
restaurant properties, during the six months ended June 30, 1999 and 1998, the
Income Fund earned $1,178,486 and $969,143, respectively, in rental income from
operating leases, net of adjustments to accrued rental income, and earned
income from direct financing leases, $586,503 and $282,249 of which was earned
during the quarters ended June 30, 1999 and 1998, respectively. Rental and
earned income were higher for the quarter and six months ended June 30, 1999,
as compared to the quarter and six months ended June 30, 1998, due to the fact
that in May 1998, the tenant of the restaurant properties in Williamsville and
Rochester, New York filed for bankruptcy, rejected the lease relating to the
restaurant property in Williamsville, New York and ceased making rental
payments on such lease. As a result, during the quarter and six months ended
June 30, 1998, the Income Fund wrote off approximately $267,600 of accrued
rental income, or non-cash accounting adjustments relating to the straight-
lining of future scheduled rent increases over the lease term in accordance
with generally accepted accounting principles, relating to both restaurant
properties. No such amounts were written-off during the quarter and six months
ended June 30, 1999. Rental and earned income were also higher during the
quarter and six months ended June 30, 1999, due to the fact that during the
quarter and six months ended June 30, 1998, the Income Fund increased the
allowance for doubtful accounts for past due rental amounts for these
restaurant properties in the amount of $114,600 due to financial difficulties
the tenant was experiencing. No such allowance was established during the
quarter and six months ended June 30, 1999. The increase in rental and earned
income during the quarter and six months ended June 30, 1999 was partially
offset by a decrease in rental and earned income of approximately $21,000 and
$63,900 for the quarter and six months ended June 30, 1999, respectively, due
to the fact that the tenant ceased making rental payments relating to the
restaurant property in Williamsville, New York in May 1998, as described above.
The lost revenues resulting from this restaurant property could have an adverse
effect on the results of operations of the Income Fund if the Income Fund is
unable to re-lease the restaurant property in a timely manner. The Income Fund
will not recognize rental income relating to this restaurant property until a
new tenant is located or until the restaurant property is sold and the proceeds
from such sale are reinvested in an additional restaurant property. We are
currently seeking either a new tenant or purchaser for this restaurant
property.
The increase in rental and earned income was also offset by a decrease of
approximately $39,000 and $48,000 during the quarter and six months ended June
30, 1999, respectively, due to the fact that the Income Fund sold the
restaurant property located in Rochester, New York, as described above in
"Capital Resources."
Rental and earned income were also higher during the quarter and six months
ended June 30, 1999 due to the fact that, during the quarter and six months
ended June 30, 1998, the Income Fund collected and recorded as income
approximately $14,600 and $29,300, respectively, of past due rental amounts for
which the Income
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Fund had previously established an allowance for doubtful accounts relating to
the restaurant property in Grand Prairie, Texas, in accordance with the Income
Fund's collection policy.
The increase in rental and earned income during the quarter and six months
ended June 30, 1999, was also partially offset by a decrease of approximately
$40,300 and $62,300, respectively, as a result of the sale of the restaurant
property in Corpus Christi, Texas, as described above in "Capital Resources."
In March 1999, the Income Fund reinvested a portion of these net sales proceeds
in a restaurant property in Albany, Georgia, as described above in "Capital
Resources," which resulted in an increase in rental and earned income of
approximately $44,100 and $48,900 during the quarter and six months ended June
30, 1999, respectively.
In addition, the increase in rental and earned income was partially offset
by a decrease of approximately $31,500 and $59,900 for the quarter and six
months ended June 30, 1999, respectively, due to the fact that the leases
relating to the Burger King restaurant properties in Shelby, North Carolina;
Maple Heights, Ohio; Watertown, New York and Carrboro, North Carolina were
amended to provide for rent reductions from August 1998 through the end of the
lease terms. Rental and earned income relating to these restaurant properties
are expected to remain at reduced amounts as a result of these amendments.
For the six months ended June 30, 1999 and 1998, the Income Fund also owned
and leased 13 restaurant properties indirectly through joint venture
arrangements and one restaurant property with one of our affiliates as tenants-
in-common. In connection therewith, during the six months ended June 30, 1999
and 1998, the Income Fund earned $284,057 and $276,668, respectively,
attributable to net income earned by these joint ventures, $148,155 and
$148,860 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively.
Operating expenses, including depreciation and amortization expense, were
$422,167 and $231,781 for the six months ended June 30, 1999 and 1998,
respectively, of which $227,496 and $114,677 were incurred for the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
was partially due to an increase in depreciation expense as a result of the
lease amendments requiring the reclassification of two of the four leases from
direct financing leases to operating leases during 1998 and the additional
depreciation expense relating to the restaurant property acquired in March
1999.
Operating expenses also increased during the quarter and six months ended
June 30, 1999, due to an increase in legal fees, insurance, real estate tax
expense and maintenance incurred in connection with the fact that the tenant of
the restaurant property in Williamsville, New York filed for bankruptcy,
rejected the lease, and ceased making rental payments. The Income Fund will
continue to incur these types of expenses until a replacement tenant or
purchaser is located. The Income Fund is currently seeking either a replacement
tenant or purchaser for this restaurant property.
The increase in operating expenses for the quarter and six months ended June
30, 1999, as compared to the quarter and six months ended June 30, 1998, was
also due to the fact that the Income Fund incurred $86,351 and $121,626, during
the quarter and six months ended June 30, 1999, respectively, in transaction
costs related to our retaining financial and legal advisors to assist us in
evaluating and negotiating the Acquisition with APF. If the Limited Partners
reject the Acquisition, the Income Fund will bear the portion of the
transaction costs based upon the percentage of "For" votes and we will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
As a result of the sales of the restaurant properties in Corpus Christi,
Texas and Rochester, New York, as described above in "Capital Resources," the
Income Fund recognized a total gain of $75,997 for financial reporting purposes
during the quarter and six months ended June 30, 1999. No restaurant properties
were sold during the quarter and six months ended June 30, 1998.
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
owned and leased 28 wholly-owned restaurant properties, including one
restaurant property in Alpharetta, Georgia, which was sold in
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June 1997. In addition, during 1998, 1997, and 1996, the Income Fund was a co-
venturer in two separate joint ventures that each owned and leased six
restaurant properties and one joint venture that owned and leased one
restaurant property. During 1998 and 1997, the Income Fund also owned and
leased one restaurant property with an affiliate as tenants-in-common. As of
December 31, 1998, the Income Fund owned, either directly or through joint
venture arrangements, 41 restaurant properties, which are subject to long-term,
triple-net leases. The leases of the restaurant properties provide for minimum
base annual rental amounts, payable in monthly installments, ranging from
approximately $51,500 to $171,400. Generally, the leases provide for percentage
rent based on sales in excess of a specified amount. In addition, a majority of
the leases provide that, commencing in specified lease years ranging from the
third to the sixth lease year, the annual base rent required under the terms of
the lease will increase.
During the years ended December 31, 1998, 1997 and 1996, the Income Fund
earned $2,354,610, $2,572,954, and $2,771,319, respectively, in rental income
from operating leases, net of adjustments to accrued rental income, and earned
income from direct financing leases from the Income Fund's wholly owned
restaurant properties. The decrease in rental and earned income during 1998 and
1997, each as compared to the previous year, is due to the fact that the Income
Fund established an allowance for doubtful accounts of approximately $93,800
and $68,800 during 1998 and 1997, respectively, relating to the Perkins
restaurant properties in Williamsville and Rochester, New York, which were
leased by the same tenant, due to financial difficulties the tenant is
experiencing. No such allowance was established during 1996. In May 1998, the
tenant of these restaurant properties filed for bankruptcy and rejected the
lease relating to one of the restaurant properties. As a result, during 1998,
the Income Fund wrote off approximately $267,600 of accrued rental income, or
non-cash accounting adjustments relating to the straight-lining of future
scheduled rent increases over the lease term in accordance with generally
accepted accounting principles relating to both restaurant properties. The
Income Fund will not recognize rental and earned income from the rejected
restaurant property until a new tenant is located or until the restaurant
property is sold and the proceeds from such sale are reinvested in an
additional restaurant property. The lost revenues resulting from the lease that
was rejected could have an adverse effect on the results of operations of the
Income Fund if the Income Fund is unable to re-lease the restaurant property in
a timely manner. We are currently seeking either a new tenant or purchaser for
the restaurant property with the rejected lease. The Income Fund continued
receiving rental payments on the lease that was not rejected and in March 1999,
the Income Fund sold this restaurant property to a third party. The Income Fund
intends to reinvest the net sales proceeds in an additional restaurant
property.
The decrease during 1998, as compared to 1997, is also partially
attributable to a decrease of approximately $52,000 during 1998, due to the
fact that the leases relating to the Burger King restaurant
properties in Shelby, North Carolina; Maple Heights, Ohio; Watertown, New York
and Carrboro, North Carolina were amended to provide for rent reductions.
Rental and earned income relating to these restaurant properties are expected
to remain at reduced amounts as a result of these amendments.
The decrease in rental and earned income during 1998, as compared to 1997,
is partially offset by an increase of approximately $93,800 for rental amounts
relating to the Income Fund's restaurant properties in Blufton, Alliance and
North Baltimore, Ohio, during 1998. During 1994, the leases relating to these
restaurant properties were amended to provide for the payment of reduced annual
base rent with no scheduled rent increases. In accordance with a provision in
the amendments, as a result of the former tenant assigning the leases to a new
tenant during 1998, the rents under the assigned leases, reverted back to those
that were required under the original lease agreements.
In addition, rental and earned income decreased approximately $47,700 and
$51,800 during 1998 and 1997, respectively, as a result of the sale of the
restaurant property in Alpharetta, Georgia, in June 1997. In July 1997, the
Income Fund reinvested the net sales proceeds in a restaurant property in
Englewood, Colorado, as tenants-in-common, with one of our affiliates, as
discussed above in "Capital Resources."
The decrease in rental and earned income during 1998, as compared to 1997,
is partially offset by an increase in rental and earned income of approximately
$49,100 during 1998, as a result of the Income Fund
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re-leasing the restaurant property in Copley Township, Ohio, for which rent
commenced in 1997. The former operator of the restaurant property ceased
operations of the restaurant property in April 1997, resulting in a decrease in
rental income of approximately $65,000 during 1997, as compared to 1996.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $79,780, $74,867, and $120,999, respectively, in contingent
rental income. The decrease in contingent rental income for 1997, as compared
to 1996, is primarily attributable to a change, beginning in 1997, in the
contingent rent formula, consisting of an increase to the sales breakpoint on
which contingent rents are computed, in accordance with the terms of the
leases, for certain restaurant properties requiring the payment of contingent
rental income.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $596,166, $537,853, and $460,400, respectively, in income
attributable to net income earned by joint ventures in which the Income Fund is
a co-venturer. The increase in net income earned by joint ventures during 1998
and 1997, each as compared to the previous year, is primarily due to the fact
that in July 1997, the Income Fund reinvested the net sales proceeds it
received from the sale of the restaurant property in Alpharetta, Georgia, in an
IHOP restaurant property located in Englewood, Colorado, as tenants-in-common,
with one of our affiliates.
During the year ended December 31, 1998, five of the Income Fund's lessees,
or group of affiliated lessees, Carrols Corporation, TPI Restaurants, Inc.,
Flagstar Enterprises, Inc., Golden Corral Corporation and Burger King
Corporation, each contributed more than ten percent of the Income Fund's total
rental income, including the Income Fund's share of rental income from 13
restaurant properties owned by joint ventures and one restaurant property owned
as tenants-in-common. As of December 31, 1998, Carrols Corporation was the
lessee under leases relating to four restaurants, TPI Restaurants, Inc. was the
lessee under leases relating to five restaurants, Flagstar Enterprises, Inc.
was the lessee under leases relating to five restaurants, Burger King Corp. was
the lessee under leases relating to the 13 restaurants owned by joint ventures
and Golden Corral Corporation was the lessee under leases relating to two
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, these five lessees or groups of affiliated lessees each
will continue to contribute more than ten percent of the Income Fund's total
rental income in 1999. In addition, four restaurant chains, Burger King,
Hardee's, Golden Corral, Family Steakhouse Restaurants, and Shoney's, each
accounted for more than ten percent of the Income Fund's total rental income
during 1998, including the Income Fund's share of the rental income from 13
restaurant properties owned by joint ventures and one restaurant property owned
as tenants-in-common. It is anticipated that these four restaurant chains each
will continue to account for more than ten percent of the total rental income
to which the Income Fund is entitled under the terms of its
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income if the Income Fund is not able to re-lease the
restaurant properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$499,212, $492,354, and $443,767 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997 is partially attributable to the fact that the Income Fund
incurred $19,041 in transaction costs related to our retaining financial and
legal advisors to assist us in evaluating and negotiating the Acquisition. The
increase in operating expenses during 1998 was also attributable to an increase
in legal fees incurred in conjunction with the tenant of the restaurant
properties in Williamsville and Rochester, New York filing for bankruptcy, as
described above.
The increase during 1998, as compared to 1997, is partially offset by, and
the increase for 1997, as compared to 1996, is partially attributable to, the
fact that during 1997, the Income Fund recorded bad debt expense of $21,000
relating to the restaurant property in Copley Township, Ohio. The former tenant
ceased operating the restaurant property in April 1997, and we ceased
collection efforts. In addition, the increase in operating expenses during
1997, as compared to 1996, was partially due to the fact that, the Income Fund
recorded past due real estate taxes relating to the restaurant property in
Copley Township, Ohio of $23,191 and $9,906 during 1997 and 1996, respectively.
Due to the fact that the restaurant property was re-leased to a new tenant in
September 1997, no such expenses were recorded during 1998.
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During the year ended December 31, 1998, the Income Fund established an
allowance for loss on building and an impairment in carrying value of net
investment in direct financing lease for a total of $314,775 for financial
reporting purposes relating to the restaurant properties in Williamsville and
Rochester, New York, due to the fact that, during 1998, the tenant, Brambury
Associates, filed for bankruptcy. The losses represent the difference between
each restaurant property's carrying value at December 31, 1998, and the current
estimate of net realizable value at December 31, 1998 for each restaurant
property. No such allowance was established during the years ended December 31,
1997 and 1996.
As a result of the 1997 sale of the restaurant property in Alpharetta,
Georgia, as described above in "Capital Resources," the Income Fund recognized
a gain for financial reporting purposes of $199,643 for the year ended December
31, 1997. No restaurant properties were sold during 1998 or 1996.
The Income Fund's leases as of December 31, 1998, in general, are triple-net
leases and contain provisions that we believe mitigate the adverse effect of
inflation. Such provisions include clauses requiring the payment of percentage
rent based on certain restaurant sales above a specified level and/or automatic
increases in base rent at specified times during the term of the lease.
Management expects that increases in restaurant sales volumes due to inflation
and real sales growth should result in an increase in rental income over time.
Continued inflation also may cause capital appreciation of the Income Fund's
restaurant properties. Inflation and changing prices, however, also may have an
adverse impact on the sales of the restaurants and on potential capital
appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted
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inspections, interviews and tests to identify which of the Income Fund's
systems could have a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
S-36
<PAGE>
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-37
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of June 30, 1998..................... F-22
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-32
</TABLE>
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,741,537 and
$1,711,187, respectively, and allowance for loss on
building of $249,368 for 1999 and 1998.............. $14,853,524 $15,066,178
Net investment in direct financing leases, less
allowance for impairment in carrying value of
$65,407 for 1998.................................... 5,351,113 5,905,995
Investment in joint ventures......................... 6,387,805 6,473,381
Cash and cash equivalents............................ 1,941,669 1,287,379
Receivables, less allowance for doubtful accounts of
$92,952 and $206,052, respectively ................. 51,574 93,569
Prepaid expenses..................................... 17,002 3,185
Lease costs, less accumulated amortization of $2,327
and $1,577.......................................... 12,673 13,423
Accrued rental income................................ 1,170,144 1,255,968
----------- -----------
$29,785,504 $30,099,078
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................... $ 92,339 $ 1,103
Escrowed real estate taxes payable................... 11,377 9,022
Distributions payable................................ 787,501 787,501
Due to related parties............................... 22,000 24,187
Rents paid in advance and deposits................... 58,337 63,347
----------- -----------
Total liabilities.................................. 971,554 885,160
Commitments and Contingencies (Note 4)
Partners' capital.................................... 28,813,950 29,213,918
----------- -----------
$29,785,504 $30,099,078
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 346,107 $ 417,741 $ 764,902 $ 894,478
Adjustments to accrued rental
income.......................... -- (267,598) -- (267,598)
Earned income from direct
financing leases................ 240,396 132,106 413,584 342,263
Interest and other income........ 35,410 16,047 58,661 27,668
--------- --------- ---------- ----------
621,913 298,296 1,237,147 996,811
--------- --------- ---------- ----------
Expenses:
General operating and
administrative.................. 42,662 37,701 84,635 71,079
Bad debt expense................. -- 5,133 -- 5,133
Professional services............ 16,879 8,406 25,941 14,742
Real estate taxes ............... 699 -- 8,391 --
State and other taxes............ 125 192 24,884 14,337
Depreciation and amortization.... 80,780 63,245 156,690 126,490
Transaction costs................ 86,351 -- 121,626 --
--------- --------- ---------- ----------
227,496 114,677 422,167 231,781
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures and Gain on Sale of
Land and Building................. 394,417 183,619 814,980 765,030
Equity in Earnings of Joint
Ventures.......................... 148,155 148,860 284,057 276,668
Gain on Sale of Land and Building
.................................. -- -- 75,997 --
--------- --------- ---------- ----------
Net Income......................... $ 542,572 $ 332,479 $1,175,034 $1,041,698
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 5,426 $ 3,325 $ 11,554 $ 10,417
Limited partners................. 537,146 329,154 1,163,480 1,031,281
--------- --------- ---------- ----------
$ 542,572 $ 332,479 $1,175,034 $1,041,698
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.15 $ 0.09 $ 0.33 $ 0.29
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 3,500,000 3,500,000 3,500,000 3,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 214,763 $ 190,772
Net income..................................... 11,554 23,991
----------- -----------
226,317 214,763
----------- -----------
Limited partners:
Beginning balance.............................. 28,999,155 29,956,452
Net income..................................... 1,163,480 2,262,707
Distributions ($0.45 and $0.92 per limited
partner unit, respectively)................... (1,575,002) (3,220,004)
----------- -----------
28,587,633 28,999,155
----------- -----------
Total partners' capital.......................... $28,813,950 $29,213,918
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 1,470,503 $1,633,800
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building .......... 2,400,000 --
Additions to land and buildings on operating
leases........................................... (1,641,211) --
----------- ----------
Net cash provided by investing activities....... 758,789 --
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (1,575,002) (1,645,002)
----------- ----------
Net cash used in financing activities........... (1,575,002) (1,645,002)
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.. 654,290 (11,202)
Cash and Cash Equivalents at Beginning of Period...... 1,287,379 1,250,388
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 1,941,669 $1,239,186
=========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of period.. $ 787,501 $ 787,501
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
IX, Ltd. (the "Partnership") for the year ended December 31, 1998.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications had no
effect on partners' capital or net income.
2. Land and Buildings on Operating Leases:
During February and March 1999, the Partnership sold its properties in
Corpus Christi, Texas and Rochester, New York, respectively, received net sales
proceeds of $1,350,000 and $1,050,000, respectively, resulting in a gain of
$56,369 and $19,628, respectively for financial reporting purposes (see Note
3). These properties were originally acquired by the Partnership in 1991 and
1992 and had a total cost of approximately $2,288,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold
the properties for a total of approximately $111,200 in excess of their
original purchase prices. In March 1999, the Partnership reinvested a portion
of the net sales proceeds it received from these sales, in a Golden Corral
property located in Albany, Georgia, at an approximate cost of $1,641,000.
3. Net Investment in Direct Financing Leases:
At December 31, 1998, the Partnership had recorded an allowance of $65,407
for impairment in the carrying value of the property in Rochester, New York,
due to the tenant filing for bankruptcy. The allowance represented the
difference between the carrying value of the property at December 31, 1998 and
the estimated net realizable value for this property. In March 1999, the
Partnership sold this property and received net sales proceeds of $1,050,000
and recorded a gain of $19,628 for financial reporting purposes, resulting in a
net loss of approximately $45,800. The building portion of this property had
been classified as a direct financing lease. In connection therewith, the gross
investment (minimum lease payments receivable and the estimated residual
value), unearned income and the allowance for impairment in carrying value
relating to the building were removed from the accounts and the gain from the
sale of the property was reflected in income (see Note 2.)
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,850,049 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger
F-5
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
consideration, have been valued by APF at $20.00 per APF Share, the price paid
by APF investors (after an adjustment for a one for two reverse stock split
which occurred on June 3, 1999) in three previous public offerings, the most
recent of which was completed in December 1998. In order to assist the general
partners in evaluating the proposed merger consideration, the general partners
retained Valuation Associates, a nationally recognized real estate appraisal
firm, to appraise the Partnership's restaurant property portfolio. Based on
Valuation Associates' appraisal, the Partnership's property portfolio and other
assets were valued on a going concern basis (meaning the Partnership continues
unchanged) at $36,414,830 as of December 31, 1998. Legg Mason Wood Walker,
Incorporated has rendered a fairness opinion that the APF Share consideration,
payable by APF, is fair to the Partnership from a financial point of view. The
APF Shares are expected to be listed for trading on the New York Stock Exchange
concurrently with the consummation of the Merger, and, therefore, would be
freely tradable at the option of the former limited partners. At a special
meeting of the partners that is expected to be held in the fourth quarter of
1999, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. If the limited partners at the special meeting
approve the Merger, APF will own the properties and other assets of the
Partnership. The general partners intend to recommend that the limited partners
of the Partnership approve the Merger. In connection with their recommendation,
the general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
On May 11 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners believe
that the lawsuits are without merit and intend to defend vigorously against the
claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund IX, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund IX, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 2, 1999, except for Note 10
for which the date is March 11, 1999 and
Note 11 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.............................................. $15,066,178 $14,163,111
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 5,905,995 7,482,757
Investment in joint ventures........................... 6,473,381 6,619,364
Cash and cash equivalents.............................. 1,287,379 1,250,388
Receivables, less allowance for doubtful accounts of
$206,052 and $108,316................................. 93,569 96,134
Prepaid expenses....................................... 3,185 3,924
Lease costs, less accumulated amortization of $1,577
and $77............................................... 13,423 14,923
Accrued rental income.................................. 1,255,968 1,465,820
----------- -----------
$30,099,078 $31,096,421
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 1,103 $ 4,490
Accrued and escrowed real estate taxes payable......... 9,022 45,591
Distributions payable.................................. 787,501 787,501
Due to related parties................................. 24,187 4,619
Rents paid in advance and deposits..................... 63,347 106,996
----------- -----------
Total liabilities.................................... 885,160 949,197
Partners' capital...................................... 29,213,918 30,147,224
----------- -----------
$30,099,078 $31,096,421
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,804,248 $1,742,351 $1,854,245
Adjustments to accrued rental income....... (267,600) -- --
Earned income from direct financing
leases.................................... 826,962 830,603 917,074
Contingent rental income................... 79,780 74,867 120,999
Interest and other income.................. 61,129 44,669 51,348
---------- ---------- ----------
2,504,519 2,692,490 2,943,666
---------- ---------- ----------
Expenses:
General operating and administrative....... 142,996 153,175 152,437
Professional services...................... 43,685 24,658 26,610
Bad debt expense........................... 5,133 21,000 --
Real estate taxes.......................... 6,247 30,835 9,906
State and other taxes...................... 14,337 11,126 2,775
Depreciation and amortization.............. 267,773 251,560 252,039
Transaction costs.......................... 19,041 -- --
---------- ---------- ----------
499,212 492,354 443,767
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and Building,
and Provision for Loss on Building and
Impairment in Carrying Value of Net
Investment in Direct Financing Lease........ 2,005,307 2,200,136 2,499,899
Equity in Earnings of Joint Ventures......... 596,166 537,853 460,400
Gain on Sale of Land and Building............ -- 199,643 --
Provision for Loss on Building and Carrying
Value of Net Investment in Direct Financing
Lease....................................... (314,775) -- --
---------- ---------- ----------
Net Income................................... $2,286,698 $2,937,632 $2,960,299
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 23,991 $ 27,380 $ 29,603
Limited partners........................... 2,262,707 2,910,252 2,930,696
---------- ---------- ----------
$2,286,698 $2,937,632 $2,960,299
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.65 $ 0.83 $ 0.84
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 3,500,000 3,500,000 3,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $132,789 $35,000,000 $(13,505,579) $13,146,091 $(4,190,000) $30,584,301
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,185,004) -- -- (3,185,004)
Net income............. -- 29,603 -- -- 2,930,696 -- 2,960,299
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 162,392 35,000,000 (16,690,583) 16,076,787 (4,190,000) 30,359,596
Distributions to
limited partners
($0.90 per limited
partner unit)......... -- -- -- (3,150,004) -- -- (3,150,004)
Net income............. -- 27,380 -- -- 2,910,252 -- 2,937,632
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 189,772 35,000,000 (19,840,587) 18,987,039 (4,190,000) 30,147,224
Distributions to
limited partners
($0.92 per limited
partner unit)......... -- -- -- (3,220,004) -- -- (3,220,004)
Net income............. -- 23,991 -- -- 2,262,707 -- 2,286,698
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $213,763 $35,000,000 $(23,060,591) $21,249,746 $(4,190,000) $29,213,918
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 2,695,934 $ 2,666,373 $ 2,900,048
Distributions from joint ventures..... 738,544 676,806 603,833
Cash paid for expenses................ (223,753) (229,884) (186,126)
Interest received..................... 42,665 44,669 38,485
----------- ----------- -----------
Net cash provided by operating
activities.......................... 3,253,390 3,157,964 3,356,240
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................. -- 1,053,571 --
Investment in joint venture........... 3,605 (1,049,762) --
Payment of lease costs................ -- (15,000) --
----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 3,605 (11,191) --
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,220,004) (3,185,003) (3,185,004)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,220,004) (3,185,003) (3,185,004)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 36,991 (38,230) 171,236
Cash and Cash Equivalents at Beginning
of Year............................... 1,250,388 1,288,618 1,117,382
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,287,379 $ 1,250,388 $ 1,288,618
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................ $ 2,286,698 $ 2,937,632 $ 2,960,299
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... 5,133 21,000 --
Depreciation.......................... 266,273 251,483 251,483
Amortization.......................... 1,500 77 556
Equity in earnings of joint ventures,
net of distributions................. 142,378 138,953 143,433
Gain on sale of land and building..... -- (199,643) --
Provision for loss on building and
impairment in carrying value of net
investment in direct financing
lease................................ 314,775 -- --
Decrease (increase) in receivables.... (2,568) (41,878) 87,823
Decrease (increase) in prepaid
expenses............................. 739 (79) (2,913)
Decrease in net investment in direct
financing leases..................... 92,647 121,311 89,696
Decrease (increase) in accrued rental
income............................... 209,852 (70,837) (225,434)
Increase (decrease) in accounts
payable and accrued expenses......... (39,956) (16,524) 12,111
Increase (decrease) in due to related
parties.............................. 19,568 3,214 (4,639)
Increase (decrease) in rents paid in
advance and deposits................. (43,649) 13,255 43,825
----------- ----------- -----------
Total adjustments.................... 966,692 220,332 395,941
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ $ 3,253,390 $ 3,157,964 $ 3,356,240
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Land and building under operating
lease exchanged for land and building
under operating lease................ $ -- $ -- $ 406,768
=========== =========== ===========
Distributions declared and unpaid at
December 31.......................... $ 787,501 $ 787,501 $ 822,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund IX, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
method. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (see
Note 4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the assets are
adjusted to their fair value. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-12
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continued to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in three joint
ventures and a property in Englewood, Colorado, for which the property is held
as tenants-in-common with an affiliate, are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease costs--Lease costs associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. The more significant areas requiring the use
of management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
F-13
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while a
majority of the land portion of these leases are operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 8,207,939 $ 8,207,939
Buildings.......................................... 8,818,794 7,452,942
----------- -----------
17,026,733 15,660,881
Less accumulated depreciation...................... (1,711,187) (1,497,770)
----------- -----------
$15,315,546 $14,163,111
Less allowance for loss on building................ (249,368) --
----------- -----------
$15,066,178 $14,163,111
=========== ===========
</TABLE>
In June 1997, the Partnership sold its property in Alpharetta, Georgia, and
received net sales proceeds of $1,053,571, resulting in a gain of $199,643 for
financial reporting purposes. This property was originally acquired by the
Partnership in September 1991 and had a cost of approximately $711,200,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $342,400 in excess of its
original purchase price.
During 1998, the Partnership recorded a provision for loss on building in
the amount of $249,368 for financial reporting purposes relating to the
property in Williamsville, New York. The tenant of this property filed for
bankruptcy during 1998, and rejected the lease. The allowance represents the
difference between the carrying value of the property at December 31, 1998 and
the current estimated net realizable value for this property.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $209,852 (net of $267,600 in
write-offs) and for the years ended December 31, 1997 and 1996, the Partnership
recognized income of $70,837, and $225,434, respectively, of such rental
income.
F-14
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,726,921
2000............................................................. 1,726,921
2001............................................................. 1,763,564
2002............................................................. 1,889,001
2003............................................................. 1,897,501
Thereafter....................................................... 9,771,187
-----------
$18,775,095
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................. $11,521,454 $13,764,606
Estimated residual values......................... 2,091,629 2,495,379
Less unearned income.............................. (7,641,681) (8,777,228)
----------- -----------
5,971,402 7,482,757
Less allowance for impairment in carrying value... (65,407) --
----------- -----------
Net investment in direct financing leases......... $ 5,905,995 $ 7,482,757
=========== ===========
</TABLE>
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified the direct financing leases to operating leases.
In accordance with Statement of Financial Accounting Standards #13, "Accounting
for Leases," the Partnership recorded each of the reclassified leases at the
lower of original cost, present fair value, or present carrying amount. No loss
on termination of direct financing lease was recorded for financial reporting
purposes.
During 1998, the Partnership recorded a provision for loss on investment in
direct financing lease of $65,407 for financial reporting purposes relating to
the Property in Rochester, New York, due to the fact that the tenant filed for
bankruptcy during 1998. The allowance represents the difference between the
carrying value of the Property at December 31, 1998 and the current estimated
net realizable value for this Property.
F-15
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 832,979
2000............................................................. 832,979
2001............................................................. 844,812
2002............................................................. 890,607
2003............................................................. 890,607
Thereafter....................................................... 7,229,470
-----------
$11,521,454
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 45.2%, a 50 percent and a 27.33% interest in the
profits and losses of CNL Restaurant Investments II, CNL Restaurant Investments
III and Ashland Joint Venture, respectively. The remaining interests in these
joint ventures are held by affiliates of the Partnership which have the same
general partners.
In July 1997, the Partnership used the net sales proceeds from the sale of
the property in Alpharetta, Georgia, to acquire a 67 percent interest in an
IHOP property located in Englewood, Colorado, as tenants-in-common with an
affiliate of the general partners. The Partnership accounts for its investment
in this property using the equity method since the Partnership shares control
with an affiliate, and amounts relating to its investment are included in
investment in joint ventures.
CNL Restaurant Investments II and CNL Restaurant Investments III each own
and lease six properties to an operator of national fast-food restaurants and
Ashland Joint Venture owns and leases one property to an operator of national
fast-food restaurants. The Partnership and an affiliate, as tenants in common
own and lease one property to an operator of a national family-style
restaurant. The following presents the joint ventures' combined, condensed
financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $12,253,332 $12,582,754
Net investment in direct financing lease.......... 991,524 1,003,680
Cash.............................................. 1,196 15,124
Receivables....................................... 23,283 35,773
Prepaid expenses.................................. 24,790 23,544
Accrued rental income............................. 36,855 11,620
Liabilities....................................... 1,641 14,280
Partners' capital................................. 13,329,339 13,658,215
Revenues.......................................... 1,576,778 1,506,380
Net income........................................ 1,208,451 1,141,755
</TABLE>
The Partnership recognized income totalling $596,166, $537,853, and $460,400
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
F-16
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their 10% Preferred Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from the sale of a property, not in
liquidation of the Partnership, is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,220,004, $3,150,004, and
$3,185,004, respectively. No distributions have been made to the general
partners to date.
F-17
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,286,698 $2,937,632 $2,960,299
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (97,473) (116,620) (123,734)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 92,647 121,311 89,696
Gain on sale of land and building for
financial reporting purposes in excess
of gain for tax reporting purposes..... -- (195,820) --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
equity in earnings of joint ventures
for financial reporting purposes....... 8,256 36,745 37,469
Capitalization of transaction costs for
tax reporting purposes................. 19,041 -- --
Accrued rental income................... 209,852 (70,837) (225,434)
Rents paid in advance................... (44,149) 13,255 43,825
Allowance for loss on building and
investment in direct financing leases.. 314,775 -- --
Allowance for doubtful accounts......... 97,736 79,333 14,221
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,887,383 $2,804,999 $2,796,342
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners have not received their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the
F-18
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
sale. However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate 10% Preferred Return, plus their adjusted
capital contributions. No deferred, subordinated real estate disposition fees
have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $94,808, $79,234, and $82,487 for the years
ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties at December 31, 1998 and 1997, totalled $24,187
and $4,619, respectively.
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Burger King Corporation and BK Acquisition,
Inc........................................... $647,953 $649,445 $623,949
TPI Restaurants, Inc........................... 557,000 556,700 565,351
Carrols Corporation............................ 388,121 440,057 442,286
Flagstar Enterprises, Inc...................... 367,211 436,312 460,762
Golden Corral Corporation...................... 360,555 337,337 N/A
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures), for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Burger King............................... $1,143,522 $1,249,715 $1,310,994
Shoney's.................................. 805,729 808,675 889,148
Hardees................................... 438,324 436,312 460,762
Golden Corral Family Steakhouse
Restaurants.............................. 360,555 337,337 N/A
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
F-19
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,700,097 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $36,414,830 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
11. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 1,850,049 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc, ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net
depreciation).......... $569,567,003 $3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing
Leases................. 132,179,949 0 132,179,949 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0
Other Investments....... 16,197,812 0 16,197,812 0 0
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0
Cash and Cash
Equivalents............ 18,764,033 0 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0
Receivables (net
allowances)
/Due from Related
Party.................. 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income... 5,875,698 0 5,875,698 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486
Goodwill................ 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued
Liabilities............ $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0
Distributions Payable... 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981
Income Tax Payable...... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income......... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0
Minority Interest....... 644,611 0 644,611 0 0
Common Stock............ 373,484 0 373,484 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital....... 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Liabilities and
Equity................ $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund IX, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $14,853,524 $ 6,145,838 (B2) $ 593,936,221
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 5,351,113 1,568,097 (B2) 139,099,159
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 0 0 353,874,178
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 6,387,805 1,086,764 (B2) 8,555,615
Cash and Cash
Equivalents............ 1,767,517 (9,141,919)(B1) 12,361,962 1,941,669 (2,750,081)(B2) 11,129,550
(424,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)/Due from
Related Party.......... 1,125,933 (6,614,629)(C) 9,247,098 51,574 (22,000)(E) 9,276,672
Accrued Rental Income... 0 0 5,875,698 1,170,144 (1,170,144)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 29,675 (29,675)(B2) 13,173,857
Goodwill................ 0 42,933,959 (B1) 42,933,959 0 0 42,933,959
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $304,738,561 $ 24,601,619 $1,170,712,231 $29,785,504 $ 4,404,799 $1,204,902,534
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 103,716 $ 0 $ 5,208,019
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 787,501 0 787,501
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 22,000 (22,000)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 58,337 0 1,675,704
Minority Interest....... 0 0 644,611 0 0 644,611
Common Stock............ 0 61,500 (B1) 434,984 0 18,288 (B2) 453,272
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 33,222,461 (B2) 826,158,676
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,163)(B1) (88,144,706) 0 0 (88,144,706)
(73,318,190)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 28,813,950 (28,813,950)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,601,619 $1,170,712,231 $29,785,504 $ 4,409,799 $1,204,902,534
============ ============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 45,326,732(r)
==============
Shares Outstanding...... 45,327,313
==============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ----------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties .. 23,564,432 2,089,441 25,653,873 3,877,654 42,804 $ (239,337)
Equity in Earnings of
Joint
Ventures/Minority
Interest ............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Cash Distributions
declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF IX, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $1,178,486 $ 45,876 (j) $32,181,876
Fees................... (9,812,516)(b),(c) 2,616,185 0 (30,958)(k) 2,585,227
Interest and Other
Income................ 144,014 (d) 16,269,383 58,661 0 16,328,044
----------- ----------- ---------- --------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $1,237,147 $ 14,918 $51,095,147
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 118,967 (50,623)(l),(m) 9,648,246
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 24,884 7,106 (o) 496,956
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 155,940 78,647 (p) 4,903,740
Amortization........... 1,073,349 (h) 1,083,085 750 0 1,083,835
Transaction Costs...... 0 483,005 121,626 0 604,631
----------- ----------- ---------- --------- -----------
Total Expenses......... (3,358,410) 26,818,180 422,167 35,130 27,275,477
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties .. $(6,310,092) $23,024,902 $ 814,980 $ (20,212) $23,819,670
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 284,057 (42,673) (q) 272,625
Gain (Loss) on Sale of
Properties............ 0 (201,843) 75,997 0 (125,846)
Provision for Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (6,310,092) 22,313,778 1,175,034 (62,885) 23,425,927
Benefit/(Provision) for
Federal Income Taxes.. (1,525,740)(i) 0 0 0 0
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)... $(4,784,352) $22,313,778 $1,175,034 $ (62,885) $23,425,927
=========== =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.34 $ n/a $ 0.52
=========== =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.23 $ n/a $ 16.29
=========== =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ .45 $ n/a $ 0.76
=========== =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.92x
=========== =========== ========== ========= ===========
Cash Distributions
declared .............. $ 4,689,252 (s) $33,165,402 $1,575,002 $(180,541)(s) $34,559,863
=========== =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,828,849 45,326,732 (r)
=========== =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,828,849 45,327,313
=========== =========== ========== ========= ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Provision
for Losses on
Properties and Gain on
Securitization......... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision for Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... 39,449,149 11,556,167(t) 51,005,316 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,578,013 34,226,232 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund IX, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $2,443,390 $ 91,752 (j) $58,616,602
Fees................... (32,715,768)(b),(c) 3,226,263 0 (32,477)(k) 3,193,786
Interest and Other
Income................ 207,144 (d) 32,221,925 61,129 0 32,283,054
------------ ----------- ---------- ---------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $2,504,519 $ 59,275 $94,093,442
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 198,061 (76,088)(l),(m) 16,061,529
Management and advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 14,337 11,375 (o) 593,158
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 266,273 157,295 (p) 10,371,907
Amortization........... 2,146,698 (h) 2,310,699 1,500 0 2,312,199
Transaction Costs...... 0 157,054 19,041 0 176,095
------------ ----------- ---------- ---------- -----------
Total Expenses......... (9,256,250) 51,479,627 499,212 92,582 52,071,421
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Provision
for
Losses on Properties
and Gain on
Securitization......... (23,252,374) 40,050,021 2,005,307 (33,307) 42,022,021
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 596,166 (85,347)(q) 496,681
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Provision For Losses on
Properties............ 0 (611,534) (314,775) 0 (926,309)
------------ ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit(Provision) for
Federal Income Taxes... (23,252,374) 43,118,700 2,286,698 (118,654) 45,286,744
Benefit/(Provision) for
Federal Income
Taxes................. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- ---------- -----------
Net Earnings (Losses)... $(16,353,940) $43,118,700 $2,286,698 $ (118,654) $45,286,744
============ =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ .65 $ n/a $ 1.07
============ =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.35 $ n/a $ 16.44
============ =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ .90 $ n/a $ 1.50
============ =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.06x
============ =========== ========== ========== ===========
Cash Distributons
declared............... $ 9,378,504 (t) $60,383,820 $3,150,004 $ (361,082)(t) $63,172,741
============ =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,376,232 n/a 1,828,849 42,205,081
============ =========== ========== ========== ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,828,849 45,316,776
============ =========== ========== ========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss on sale of land,
buildings, and net
investment in direct
financing leases...... 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (36,946) (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,319,930) 12,879,907 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,452,252 $ 33,216,285 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF IX, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,784,352)(a) $ 22,313,778 $ 1,175,034 $ (62,885)(a) $ 23,425,927
Adjustments to reconcile
net income to net cash
provided by
operating activities:
Depreciation........... 0 4,774,655 155,940 78,647 (b) 5,009,242
Amortization expense... 1,073,349 (c) 1,983,102 750 0 1,983,852
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 85,576 42,673 (d) 153,369
Loss on sale of land,
buildings, and net
investment in direct
financing leases...... 0 201,843 (75,997) 0 125,846
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 41,995 0 (2,159,965)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (13,817) 0 (334,242)
Decrease in net
investment in direct
financing leases...... 0 721,624 29,717 0 751,341
Increase in accrued
rental income......... 0 (1,915,785) (15,089) 0 (1,930,874)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 93,591 0 (569,887)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 (2,187) 0 583,540
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (5,010) 0 661,709
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ----------- ----------- ------------
Total adjustments...... 1,073,349 (75,916,463) 295,469 121,320 (75,499,674)
------------ ------------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,470,503 58,435 (52,073,747)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 2,400,000 0 6,096,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) (1,641,211) (45,647,994)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- ----------- ----------- ------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) 758,789 0 (110,975,737)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,575,002) 180,541(g) (34,679,671)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,575,002) 180,541 178,869,014
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 654,290 238,976 15,819,530
Cash at beginning of
year................... (11,274,177) 5,807,689 1,287,379 (2,689,011) 4,406,057
------------ ------------- ----------- ----------- ------------
Cash at end of year..... $(15,222,180) $ 20,733,953 $ 1,941,669 $(2,450,035) $ 20,225,587
============ ============= =========== =========== ============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase (decrease) in
accrued rental
income................ (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase (decrease) in
rents paid in advance
and deposits.......... 436,843 0 436,843 0 0 0
Increase in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments..... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities........... 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities........... (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,556,167)(j) (51,005,316) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities........... 313,835,541 (8,186,311) 305,649,230 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,319,930) 34,706,870 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 (110,319,930) $ 12,879,907 $ 713,308 962,573 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Funds IX, Ltd. Adjustments Pro Forma
------------ ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,353,940)(a) $ 43,118,700 $2,286,698 $ (118,654)(a) $ 45,286,744
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 266,273 157,295 (b) 10,571,064
Amortization expense... 2,146,698 (c) 4,460,782 1,500 0 4,462,282
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 142,378 85,347 (d) 212,285
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 314,775 0 1,324,351
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease (increase) in
other receivables..... 0 (2,543,413) 2,565 0 (2,540,848)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 739 0 7,985
Decrease in net
investment in direct
financing leases...... 0 1,971,634 92,647 0 2,064,281
Increase (decrease) in
accrued rental
income................ 0 (2,187,652) 209,852 0 (1,977,800)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 0 846,680 (39,956) 0 806,724
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 19,568 0 (113,796)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase (decrease) in
rents paid in advance
and deposits.......... 0 436,843 (43,649) 0 393,194
Increase in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,805,800 13,335,605 966,692 242,642 14,544,939
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 3,253,390 123,988 59,831,683
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 0 0 2,385,941
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) 3,605 0 (971,091)
Acquisition of
businesses............ (9,141,919)(f) (9,141,919) 0 (2,750,081)(g) (12,316,000)
(424,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 0 0 200,000
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 12,652,467 (387,898,175) 3,605 (3,174,081) (391,068,651)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,748,308)(j) (3,220,004) 361,082 (j) (72,607,230)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (9,378,504)(j) 287,422,429 (3,220,004) 361,082 284,563,507
Net increase (decrease)
in cash................ (11,274,177) (44,021,441) 36,991 (2,689,011) (46,673,461)
Cash at beginning of
year................... 0 49,829,130 1,250,388 0 51,079,518
------------ ------------- ---------- ----------- -------------
Cash at end of year..... (11,274,177) 5,807,689 1,287,379 $(2,689,011) $ 4,406,057
============ ============= ========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of Consideration
Received.................. $81,648,665 $50,493,254 $36,414,830 $168,556,749
=========== =========== =========== ============
Share Consideration........ $76,000,000 $47,000,000 $32,240,749 $156,240,749
Cash Consideration......... -- -- 424,000 424,000
APF Transaction Costs...... 5,648,665 3,493,254 2,750,081 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,648,665 $50,493,254 $36,414,830 $168,556,749
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical..... $ 8,330,475 $10,135,087 $28,813,950 $ 47,279,512
Purchase Price Adjustments:
Land and buildings on
operating leases........ -- -- 6,145,838 6,145,838
Net investment in direct
financing leases........ -- -- 1,568,097 1,568,097
Investment in joint ven-
tures................... -- -- 1,086,764 1,086,764
Accrued rental income.... -- -- (1,170,144) (1,170,144)
Intangibles and other as-
sets.................... -- (2,575,792) (29,675) (2,605,467)
Goodwill*................ -- 42,933,959 -- 42,933,959
Excess purchase price.... 73,318,190 -- -- 73,318,190
----------- ----------- ----------- ------------
Total Allocation....... $81,648,665 $50,493,254 $36,414,830 $168,556,749
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $73,318,190 was expensed at
June 30, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of $42,933,959 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC) - Class A.......... 8,600
Common Stock (CFA, CFS, CFC) - Class B.......... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of earn-
ings........................................... 73,318,190
Goodwill for CFC/CFS (Intangibles and other as-
sets).......................................... 42,933,959
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 9,141,919
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 28,813,950
Land and buildings on operating leases.......... 6,145,838
Net investment in direct financing leases....... 1,568,097
Investment in joint ventures.................... 1,086,764
Accrued rental income......................... 1,170,144
Intangibles and other assets.................. 29,675
Cash to pay APF Transaction costs............. 2,750,081
Cash consideration to Income Fund............. 424,000
APF Common Stock.............................. 18,288
APF Capital in Excess of Par Value............ 32,222,461
(To record acquisition of the Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompnay balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the Acquisition since the Acquisition
Agreement requires that the Advisor and CNL Restaurant Financial
Services Group have no accumulated or current earnings and profits for
federal income tax purposes at the time of the Acquisition.
(E) Represents the elimination by the Income Fund of $22,000 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1999.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (689,425)
Secured equipment lease fees............................. (67,967)
Advisory fees............................................ (126,788)
Reimbursement of administrative costs.................... (382,728)
Acquisition fees......................................... (4,452,252)
Underwriting fees........................................ (54,248)
Administrative, executive and guarantee fees............. (532,389)
Servicing fees........................................... (572,728)
Development fees......................................... (38,853)
Management fees.......................................... (1,681,870)
-----------
Total.................................................. $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which
were deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,681,870)
Administrative executive and guarantee fees.............. (532,389)
Servicing fees........................................... (572,728)
Advisory fees............................................ (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,073,349
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $45,876 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ 0
Reimbursement of administrative costs....................... (30,958)
--------
$(30,958)
========
</TABLE>
(l) Represents the elimination of $30,958 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $19,665 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,106 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1998
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $78,647 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $42,673 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1999.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $207,144
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs......................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,851,004)
Administrative executive and guarantee fees.............. (1,233,043)
Servicing fees........................................... (1,269,357)
Advisory fees............................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,146,698
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $91,752 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $ 0
Reimbursement of administrative costs....................... (32,477)
--------
$(32,477)
========
</TABLE>
(l) Represents the elimination of $32,477 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $43,611 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $11,375 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $157,295 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $85,347 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1999.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund IX, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund IX, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund IX, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, (the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2 (ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
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1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2.
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
----------------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
----------------------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
----------------------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND IX, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
----------------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
----------------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
----------------------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
----------------------------------
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund IX, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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<PAGE>
(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,700,097 fully paid and nonassessable APF Common
Shares (1,850,049 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $33,776,342, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OP
General Partner and the Operating Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,299,903 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 3,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,700,097 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $370,010 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
---------------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
---------------------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
---------------------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND IX, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
---------------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
---------------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
---------------------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
---------------------------------
James M. Seneff, Jr., as General
Partner
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CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND X, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund X, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
to each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners of
the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of your
Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage financing to site selection, construction management
and build-to-suit development. If APF acquires all of the Income Funds in the
Acquisition, APF expects to have total assets of approximately $1.5 billion at
the time of the consummation of the Acquisition and will be one of the largest
triple-net lease REITs in the United States.
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How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,121,622 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your Units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
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greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,773.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 2,121,622 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
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Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $910, $920, and $900, respectively, to you per $10,000
investment. While historically, APF has made distributions equal to 7.625% per
APF Share, based on the exchange value, we cannot be sure that APF will be able
to maintain this level of distributions in the future. In the event that APF is
unable to maintain this level of distributions in the future, your
distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have four material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne, have a different interest in the completion of the Acquisition
which may conflict with your interest as a Limited Partner of the Income Fund
or with their own positions as the general partners of your Income Fund.
Second, as stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited Partner of
the Income Fund and with their own as general partners of your Income Fund.
Third, assuming only your Income Fund is acquired in the Acquisition, we will
receive 19,725 APF Shares. Finally, in the event that your Income Fund is not
acquired, however, we may be required to pay all or a substantial portion of
the Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If and
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If and independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,242 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future
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acquisitions of restaurant properties that it may be unable to repay and it may
make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive notes.
Real Estate/Business Risk
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
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APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.90%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.45x and its ratio of debt-to-total assets would
have been 34.73%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their business. Various factors, many of
which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
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. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. change or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had a tenant of
one Boston Market restaurant property and no Long John Silver's restaurant
properties of which one Boston Market restaurant property had ceased to pay
lease payments to your Income Fund. The aggregate lost rental, interest and
earned income of the leases of these properties for the six months ended June
30, 1999 was $73,628, which constitutes 4.53% of total rental, interest and
earned income, including lost rental, interest and earned income, for such
period.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of
S-7
<PAGE>
determining taxable income, APF may be required to include interest payments,
rent and other items it has not yet received and exclude payments attributable
to expenses that are deductible in a different taxable year. As a result, APF
could have taxable income in excess of cash available for distribution. If this
occurred, APF would have to borrow funds or liquidate some of its assets in
order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive the notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Original Limited
Limited Partner Investments Estimated Value
Partner less Estimated of APF Shares
Investments Distributions of Estimated Value of per
less Net Sales Proceeds Number of Value of APF Shares Average $10,000
Distributions per $10,000 APF Shares APF Shares Estimated after Original
of Net Sales Original Offered to Payable to Acquisition Acquisition Limited Partner
Proceeds(1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 2,121,622 $42,432,440 $467,000 $41,965,440 $10,393
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
S-8
<PAGE>
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................... $ 32,532
Appraisals and Valuation(2)..................................... 7,750
Fairness Opinions(3)............................................ 30,000
Solicitation Fees(4)............................................ 19,267
Printing and Mailing(5)......................................... 108,055
Accounting and Other Fees(6).................................... 63,083
--------
Subtotal.................................................. 260,687
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)....................... 101,925
Legal Closing Fees(8)........................................... 50,345
Partnership Liquidation Costs(9)................................ 54,043
--------
Subtotal.................................................. 206,313
--------
Total........................................................... $467,000
========
</TABLE>
- --------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
S-9
<PAGE>
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the partnership
agreement to include a transaction or series of transactions resulting in the
transfer of 80% or more in value of your Income Fund's restaurant properties
acquired within two years of the initial date of the prospectus (September
1991). Because the Acquisition of your Income Fund is a "Liquidating Sale"
within the meaning of the partnership agreement, it may not be consummated
without the approval of Limited Partners representing greater than 50% of the
outstanding units.
Consequence of Failure to Approve the Acquisition
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition, the Acquisition may
not be consummated under the terms of the partnership agreement. In such event,
we plan to continue to operate your Income Fund as a going concern and to
eventually dispose of your Income Fund's restaurant properties approximately 7
to 12 years after they were acquired or as soon thereafter if, in our opinion,
market conditions permit, as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
S-10
<PAGE>
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about ,
1999 and will continue until the later of (a) , 1999 a date not less than
60 calendar days from the initial delivery of the solicitation materials, or
(b) such later date as we may select and as to which we give you notice. At our
discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
S-11
<PAGE>
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to be Paid to the
General Partners following the Acquisition":
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June
------------------------ 30,
1996 1997 1998 1999
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions........... -- -- -- --
Accounting and Administrative Services.. $94,496 $87,967 $105,445 $51,378
Broker/Dealer Commissions...............
Due Diligence and Marketing Support
Fee.................................... -- -- -- --
Acquisition Fees........................ -- -- -- --
Asset Management Fees................... -- -- -- --
Real Estate Disposition Fees(1)......... -- -- -- --
------- ------- -------- -------
Total historical...................... $94,496 $87,967 $105,445 $51,378
Pro Forma Distributions to be Paid to the
General Partners following the
Acquisition:
Cash Distributions on APF Shares(2)..... $27,853 $29,381 $ 30,079 $15,040
Salary Compensation..................... -- -- -- --
------- ------- -------- -------
Total pro forma....................... $27,853 $29,381 $ 30,079 $15,040
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $906 $879 $857 $874 $464 $339 $270
Distributions from Return of
Capital(1)..................... -- 31 53 46 436 111 126
---- ---- ---- ---- ---- ---- ----
Total......................... $906 $910 $910 $920 $900 $450 $396
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
Cash distributions for the year ended December 31, 1997 include $80,000
earned in 1997, but declared payable in the first quarter of 1998.
S-12
<PAGE>
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired, all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the
Income Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict
with yours as a Limited Partner of the Income Fund and with their own
as general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
S-13
<PAGE>
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
S-14
<PAGE>
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales Average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund X,
Ltd.................... 40,000,000 10,000 10,393 10,349 9,649 9,340
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
S-15
<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
19,725 APF Shares in the aggregate in accordance with the terms of your
Income Fund's partnership agreement. The 19,725 APF Shares issued to us
will have an estimated value, based on the exchange value, of
approximately $394,500.
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all of
your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement for
your Income Fund prohibits the Income Fund from incurring indebtedness,
the only liabilities the Income Fund has are liabilities with respect to
their ongoing business operations. In the event that your Income Fund is
acquired by APF, we would be relieved of our legal obligation to satisfy
the liabilities of the acquired Income Fund.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or Notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner Investment
------------------
<S> <C>
CNL Income Fund X, Ltd. ..................................... $1,773
</TABLE>
S-17
<PAGE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one more individuals or entities in exchange for the stock of that corporation,
and (2) immediately after the exchange, such individuals or entities are in
control of the corporation. For purposes of section 351(a), control is defined
as the ownership of stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares of all other classes of stock of the corporation.
APF has represented to Shaw Pittman, APF's tax counsel, that, following the
Acquisition, the Limited Partners of the Income Funds will not own stock
possessing at least 80 percent of the total combined voting power of all
classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," (which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
S-18
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition: including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the Notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the Notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-19
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,070,482 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,361,277)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,307,225)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,307,225)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,781,485)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund X, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ----------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 1,519,275 $ 133,588 (j) $32,610,377
Fees............. 2,616,185 0 (32,338)(k) 2,583,847
Interest and
Other Income..... 16,269,383 31,462 0 16,300,845
------------ ----------- ------------------ ------------
Total Revenue... $49,843,082 $1,550,737 $ 101,250 $51,495,069
Expenses:
General and
Administrative... 9,579,902 133,711 (56,229)(l),(m) 9,657,384
Management and
Advisory Fees.... 0 0 0 (n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 14,682 8,149 (o) 487,797
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 156,550 81,731 (p) 4,907,434
Amortization..... 1,080,218 0 0 1,080,218
Transaction
Costs............ 483,005 124,449 0 607,454
------------ ----------- ------------------ ------------
Total Expenses.. 26,815,313 429,392 33,651 27,278,356
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,027,769 $ 1,121,345 $ 67,599 $24,216,713
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 172,516 (29,672)(q) 174,085
Gain (Loss) on
Sale of
Properties....... (201,843) 74,640 0 (127,203)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ----------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/
(Provision) for
Federal Income
Taxes............ 22,316,645 1,368,501 37,927 23,723,073
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ----------- ------------------ ------------
Net
Earnings(Losses).. $22,316,645 $ 1,368,501 $ 37,927 $23,723,073
============ =========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,787,075 (u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,744,561 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund X, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 49 n/a 630
============== =========== ==================== =================
Earnings per
share/unit...... $ n/a $ 0.34 $ n/a $ 0.52
============== =========== ==================== =================
Book value per
share/unit...... $ n/a $ 8.23 $ n/a $ 16.31
============== =========== ==================== =================
Dividends per
share/unit...... $ n/a $ 0.45 $ n/a $ 0.76
============== =========== ==================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.94x
============== =========== ==================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,800,002 $ (200,112)(s) $ 34,765,292
============== =========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 2,098,272 45,596,155(r)
============== =========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 2,098,272 45,596,736
============== =========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $27,319,361 $ 9,030 (u2) $ 731,162,668
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 54,716 $ (29,076)(x) $ 9,272,738
Investment in
joint ventures.. $ 1,081,046 $ 4,179,673 $1,272,221 (u2) $ 6,532,940
Total assets.... $1,170,897,687 $34,134,791 $5,311,563 (u2),(x) $1,210,344,041
Total
liabilities/minority
interest........ $ 465,485,738 $ 1,213,395 $ (29,076)(x) $ 466,670,057
Total equity.... $ 705,411,949 $32,921,396 $5,340,639 (u2) $ 743,673,984
</TABLE>
S-21
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation expense
of $967,179 as if restaurant properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any restaurant properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total..................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial Corp. On a
historical basis, CNL Financial Services, Inc. records all of the loan
origination fees received as revenue. For purposes of presenting pro forma
financial statements of these entities on a combined basis, these loan
origination fees are required to be deferred and amortized into revenues
over the term of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services Inc. from borrowers during the six months ended June 30,
1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and the
CNL Restaurant Financial Services Group resulting from agreements between
these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in footnote (u)
below:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,070,482
</TABLE>
S-22
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
(j) Represents $133,588 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (32,338)
--------
$(32,338)
========
</TABLE>
(l) Represents the elimination of $32,338 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $23,891 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income Fund to
the Advisor.
(o) Represents additional state income taxes of $8,149 resulting from assuming
that acquisitions of restaurant properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group and
the Income Fund had been issued as of January 1, 1998 and that these
entities had operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $81,731 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $29,672 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma restaurant properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June 30,
1999. Based on historical results through July 31, 1999, all interest costs
related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
S-23
<PAGE>
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... 81,463,210 50,378,563 41,779,262 173,621,035
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $38,262,035 $161,262,035
Cash Consideration...... -- -- 467,000 467,000
APF Transaction Costs... 5,463,210 3,378,563 3,050,227 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,463,210 $50,378,563 $41,779,262 $173,621,035
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets --
Historical............ $ 8,330,475 $10,135,087 $32,921,396 $ 51,386,958
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 7,194,629 7,194,629
Net investment in
direct financing
leases................ -- -- 1,835,694 1,835,694
Investment in joint
ventures.............. -- -- 1,272,221 1,272,221
Accrued rental income.. -- -- (1,388,814) (1,388,814)
Intangibles and other
assets................ -- (2,575,792) (55,864) (2,631,656)
Goodwill*.............. -- 42,819,268 -- 42,819,268
Excess purchase price.. 73,132,735 -- -- 73,132,735
----------- ----------- ----------- ------------
Total Allocation....... $81,463,210 $50,378,563 $41,779,262 $173,621,035
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,132,735 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $42,819,268 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC) -- Class A..... 8,600
Common Stock (CFA, CFS, CFC) -- Class B....... 4,825
Additional Paid-in Capital (CFA, CFS, CFC).... 12,568,974
Retained Earnings............................. 5,883,163
Accumulated distributions in excess of
earnings..................................... 73,132,735
Goodwill for CFC/CFS (Intangibles and other
assets)...................................... 42,819,268
CFC/CFS Organizational Costs/Other Assets.... 2,575,792
Cash to pay APF transaction costs............ 8,841,773
APF Common Stock............................. 61,500
APF Capital in Excess of Par Value........... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners' Capital........................... 32,921,396
Land and buildings on operating leases........ 7,194,629
Net investment in direct financing leases..... 1,835,694
Investment in joint ventures.................. 1,272,221
Accrued rental income........................ 1,388,814
Intangibles and other assets................. 55,864
Cash to pay APF Transaction costs............ 3,050,227
Cash consideration to Income Fund............ 467,000
APF Common Stock............................. 20,983
APF Capital in Excess of Par Value........... 38,241,052
(To record acquisition of Income Fund)
</TABLE>
S-24
<PAGE>
(v) Represents the elimination by APF of $1,444,444 in related party payables
recorded as receivables by the Advisor, and the elimination of intercompany
balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857 from
liabilities assumed in the acquisition since the Merger Agreement requires
that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes
at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $29,076 in related party
payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND X, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund X,
Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,723,253 $ 1,289,733 $ 3,169,493 $ 3,813,248 $ 3,871,869 $ 3,875,779 $ 4,020,289
Net income (2).......... 1,368,501 1,221,595 1,878,858 3,531,381 3,461,812 3,552,067 3,672,841
Cash distributions
declared (3)............ 1,800,002 1,880,002 3,680,004 3,600,003 3,640,003 3,640,003 3,625,017
Net income per unit
(2).................... 0.34 0.30 0.46 0.87 0.86 0.88 0.91
Cash distributions
declared per
unit (3)............... 0.45 0.47 0.92 0.90 0.91 0.91 0.91
GAAP book value per
unit................... 8.23 8.62 8.34 8.79 8.81 8.85 8.87
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $34,134,791 $35,688,216 $34,480,865 $36,289,727 $36,437,560 $36,563,796 $36,722,696
Total partners'
capital................ 32,921,396 34,495,636 33,352,897 35,154,043 35,222,665 35,400,856 35,488,792
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures,
minority interest in income of the consolidated joint venture and
adjustments to accrued rental income as a result of certain tenants filing
for bankruptcy and rejecting the leases related to these restaurant
properties.
(2) Net income for the six months ended June 30, 1999 and 1998, and for the
years ended December 31, 1998, 1997 and 1995, include $74,640, $171,159,
$218,960, $132,238 and $67,214, respectively, from gains on sale of land
and buildings. Net income for the year ended December 31, 1998 includes
$1,001,846 from provision for loss on land, building and net investment in
direct financing lease.
(3) Distributions for the six months ended June 30, 1998, and the years ended
December 31, 1998, 1996 and 1995, each include a special distribution to
the Limited Partners of $80,000, $80,000, $40,000 and $40,000,
respectively, which represented cumulative excess operating reserves.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND X, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on April
16, 1990, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of selected national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 49 restaurant properties,
which included interests in ten restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and two properties owned with our
affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998 was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,654,349 and
$1,908,622 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, is
primarily a result of changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In January 1999, the Income Fund used a portion of the net proceeds from the
sales of properties during 1998 and 1997 to enter into a joint venture
arrangement, Ocean Shores Joint Venture, with CNL Income Fund XVII, Ltd., one
of our affiliates, to own and lease one restaurant property. The Income Fund
contributed approximately $802,400 to the joint venture and as of June 30,
1999, owned a 69.06% interest in the profits and losses of the joint venture.
In March 1999, the Income Fund sold its restaurant property in Amherst, New
York and received net sales proceeds of $1,150,000. The Income Fund had
recorded an allowance for impairment in the carrying value relating to this
restaurant property of $93,328 at December 31, 1998 due to the tenant filing
for bankruptcy. The allowance represented the difference between the carrying
value of the property at December 31, 1998 and the estimated net realizable
value for this property. At March 31, 1999 the Income Fund recorded a gain
relating to the sale of this restaurant property of $74,460, for financial
reporting purposes, resulting in an aggregate net loss relating to the sale of
this restaurant property of approximately $18,700. In March 1999, the Income
Fund reinvested the net sales proceeds from the sale of this restaurant
property, plus additional funds, in a Golden Corral restaurant property in
Fremont, Nebraska.
Currently, rental income from the Income Fund's restaurant properties and
any net sales proceeds held by the Income Fund pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts at
commercial banks, certificates of deposit and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At June 30,
1999, the Income Fund had $1,136,363 invested in such short-term investments,
as compared to $1,835,972 at December 31, 1998. The decrease in cash and cash
equivalents is primarily attributable to the fact that in January 1999 the
Income Fund used uninvested net sales proceeds from the 1997 and 1998 sales of
restaurant properties to enter into a joint venture arrangement with one of our
affiliates, as described above. The funds remaining at June 30, 1999, after
payment of distributions and other liabilities, will be used to meet the Income
Fund's working capital and other needs.
S-27
<PAGE>
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital for the years ended December 31,
1998, 1997 and 1996 was cash from operations, which includes cash received from
tenants, distributions from joint ventures and interest received, less cash
paid for expenses. Cash from operations was $3,604,438, $3,596,417 $3,695,802
for the years ended December 31, 1998, 1997 and 1996, respectively. The
increase in cash from operations during 1998, as compared to 1997, is primarily
a result of changes in the Income Fund's working capital. The decrease in cash
from operations during 1997, as compared to 1996, is primarily a result of
changes in income and expenses as described in "Results of Operations" below
and changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997 and 1996.
In January 1996, the Income Fund reinvested the remaining net sales proceeds
from the 1995 sale of the restaurant property in Denver, Colorado, and the
proceeds from the granting of an easement relating to the restaurant property
in Hendersonville, North Carolina, in a Golden Corral restaurant property
located in Clinton, North Carolina, with certain of our affiliates as tenants-
in-common. In connection therewith, the Income Fund and its affiliates entered
into an agreement whereby each co-venturer will share in the profits and losses
of the restaurant property in proportion to its applicable percentage interest.
As of December 31, 1998, the Income Fund owned a 13% interest in this
restaurant property.
In September 1997, the Income Fund sold its restaurant property in Fremont,
California, to the franchisor, for $1,420,000 and received net sales proceeds,
net of $2,745, which represents amounts due to the former tenant for prorated
rent, of $1,363,805, resulting in a gain of $132,238 for financial reporting
purposes. This restaurant property was originally acquired by the Income Fund
in March 1992 and had a cost of approximately $1,116,900, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $249,700 in excess of its original
purchase price. In October 1997, the Income Fund reinvested approximately
$1,277,300 of the net proceeds in a Boston Market restaurant propery in
Homewood, Alabama. The Income Fund acquired the Boston Market restaurant
property from one of our affiliates. The affiliate had purchased and
temporarily held title to the restaurant property in order to facilitate the
acquisition of the restaurant property by the Income Fund. The purchase price
paid by the Income Fund represented the costs incurred by the affiliate to
acquire the restaurant property, including closing costs. The we believe that
the transaction, or a portion thereof, relating to the sale of the restaurant
property in Fremont, California, and the reinvestment of the proceeds in a
Boston Market restaurant property in Homewood, Alabama, will qualify as a like-
kind exchange transaction for federal income tax purposes. However, the Income
Fund will distribute amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any, at a level reasonably assumed by us,
resulting from the sale. The Income Fund intends to reinvest the remaining net
sales proceeds in an additional restaurant property or use such amounts to pay
Income Fund liabilities.
In December 1997, the Income Fund used approximately $130,400 that had been
previously reserved for working capital purposes, to invest in a Chevy's Fresh
Mex restaurant property located in Miami, Florida, with certain of our
affiliates as tenants-in-common. In connection therewith, the Income Fund and
its affiliates entered into an agreement whereby each co-venturer will share in
the profits and losses of the restaurant property in proportion to its
applicable percentage interest. As of December 31, 1998, the Income Fund owned
a 6.69% interest in this restaurant property.
S-28
<PAGE>
In January 1998, the Income Fund sold its property in Sacramento,
California, to the tenant for $1,250,000 and received net sales proceeds of
$1,230,672, resulting in a gain of $163,350 for financial reporting purposes.
This property was originally acquired by the Income Fund in December 1991 and
had a cost of approximately $969,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
property for approximately $261,300 in excess of its original purchase price.
In November 1998, the Income Fund reinvested the majority of the net sales
proceeds it received from the sale of the restaurant property in Sacramento,
California in a Jack in the Box restaurant property located in San Marcos,
Texas. The Income Fund will distribute amounts sufficient to enable the Limited
Partners to pay federal state income taxes, if any, at a level reasonably
assumed by us, resulting from the sale.
In October 1995, the tenant of the Income Fund's restaurant property located
in Austin, Texas, entered into a sublease agreement for a vacant parcel of land
under which the subtenant has the option to purchase such land. The subtenant
exercised the purchase option and, in accordance with the terms of the sublease
agreement, the tenant assigned the purchase contract, together with the
purchase contract payment of $69,000, less closing costs of $1,000 that were
incurred in anticipation of the sale, from the subtenant, to the Income Fund.
In March 1998, the sale for the vacant parcel of land was consummated and the
Income Fund recorded the net sales proceeds of $68,434, $68,000 of which had
been received as a deposit in 1995, resulting in a gain of $7,810 for financial
reporting purposes.
In October 1998, the Income Fund sold its restaurant property in Billings,
Montana to the tenant for $362,000 and received net sales proceeds of $360,688,
resulting in a gain of $47,800 for financial reporting purposes. This property
was originally acquired by the Income Fund in April 1992 and had a cost of
approximately $302,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $58,700 in excess of its original purchase price. In January
1999, the Income Fund reinvested the majority of these proceeds plus remaining
net proceeds from other sales of properties in a joint venture, Ocean Shores
Joint Venture, with one of our affiliates, to hold one restaurant property, as
described above. The Income Fund distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes, if any, at a level
reasonably assumed by us, resulting from the sale.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties or payment of Income Fund liabilities, are
invested in money market accounts or other short-term highly liquid investments
such as demand deposit accounts at commercial banks, CDs and money market
accounts with less than a 30-day maturity date, pending the Income Fund's use
of such funds to pay Income Fund expenses or to make distributions to partners.
At December 31, 1998, the Income Fund had $1,835,972 invested in such short-
term investments as compared to $1,583,883 at December 31, 1997. The increase
in cash is primarily attributable to the Income Fund using only a portion of
the net sales proceeds from the sale of the restaurant property in Sacramento,
California to purchase the restaurant property in San Marcos, Texas, as
described above. In January 1999, the Income Fund reinvested the remaining net
proceeds in Ocean Shores Joint Venture, as described above. As of December 31,
1998, the average interest rate earned on the rental income deposited in demand
deposit accounts at commercial banks was approximately two percent annually.
The funds remaining at December 31, 1998, after payment of distributions and
other liabilities and excluding amounts invested in January 1999 in Ocean
Shores Joint Venture, will be used to meet the Income Fund's working capital
and other needs.
S-29
<PAGE>
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current and
anticipated future cash from operations, and, for the six months ended June 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to Limited Partners of $1,800,002 and $1,880,002 for the six
months ended June 30, 1999 and 1998, respectively, or $900,001 for each of the
quarters ended June 30, 1999 and 1998. This represents distributions of $0.45
and $0.47 per unit for the six months ended June 30, 1999 and 1998,
respectively, or $ 0.23 per unit for each quarter ended June 30, 1999 and 1998.
No distributions were made to us for the quarters and six months ended June 30,
1999 and 1998. No amounts distributed to the Limited Partners for the six
months ended June 30, 1999 and 1998 are required to be or have been treated by
the Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $1,148,970 at June 30, 1999, from $1,063,223 at December 31, 1998,
primarily as a result of the Income Fund accruing transaction costs relating to
the Acquisition. We believe that the Income Fund has sufficient cash on hand to
meet its current working capital needs.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purpose, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based on cash from operations, and during the years ended December 31, 1998
and 1996, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,680,004, $3,600,003, and $3,640,003
for each of the years ended December 31, 1998, 1997, and 1996, respectively.
This represents distributions of $0.92, $0.90, $0.91 per unit for the years
ended December 31, 1998, 1997, and 1996, respectively. No amounts distributed
to the Limited Partners for the years ended December 31, 1998, 1997, and 1996,
are required to be or have been treated by the Income Fund as a return of
capital for purposes of calculating the Limited Partners' return on their
adjusted capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
During 1998, 1997, and 1996, certain of our affiliates incurred $125,405,
$86,327, and $112,363, respectively, for certain operating expenses. As of
December 31, 1998 and 1997, the Income Fund owed $29,987 and $4,946,
respectively, to affiliates for such amounts and accounting and administrative
services. As
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of March 11, 1999, the Income Fund had reimbursed the affiliates all such
amounts. Other liabilities, including distributions payable, decreased to
$1,033,236 at December 31, 1998, from $1,066,237 at December 31, 1997,
primarily as a result of a decrease in rents paid in advance at December 31,
1998. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund and its
consolidated joint venture, Allegan Real Estate Joint Venture, owned and leased
39 wholly owned restaurant properties, including one restaurant property in
Sacramento, California, which was sold in January 1998, to operators of fast-
food and family-style restaurant chains. During the six months ended June 30,
1999, the Income Fund and Allegan Real Estate Joint Venture owned and leased 39
wholly owned restaurant properties, including one restaurant property in
Amherst, New York, which was sold in March 1999. During the six months ended
June 30, 1999 and 1998, the Income Fund and Allegan Real Estate Joint Venture
earned $1,519,275 and $1,097,953, respectively, in rental income from operating
leases, net of adjustments to accrued rental income, and earned income from
direct financing leases from these restaurant properties, $793,960 and $291,843
of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. Rental and earned income was higher for the quarter and six
months ended June 30, 1999, due to the fact that in May 1998, the tenant of the
restaurant properties in Lancaster and Amherst, New York filed for bankruptcy,
rejected the lease relating to the restaurant property in Lancaster, New York
and ceased making rental payments on such lease. As a result, during the
quarter and six months ended June 30, 1998, the Income Fund wrote off
approximately $292,600 of accrued rental income, or non-cash accounting
adjustment relating to the straight-lining of future scheduled rent increases
over the lease term in accordance with generally accepted accounting
principles, relating to both restaurant properties. No such amounts were
written off during the quarter and six months ended June 30, 1999. Rental and
earned income was also higher during the quarter and six months ended June 30,
1999, due to the fact that during the quarter and six months ended June 30,
1998, the Income Fund increased the allowance for doubtful accounts for past
due rental amounts for these restaurant properties in the amount of $126,100
and $138,600, respectively, due to financial difficulties the tenant was
experiencing. No such allowance was established during the quarter and six
months ended June 30, 1999. The increase in rental and earned income during the
quarter and six months ended June 30, 1999 was partially offset by a decrease
in rental and earned income of approximately $35,900 and $71,900 for the
quarter and six months ended June 30, 1999, respectively, due to the fact that
the tenant ceased making rental payments relating to the restaurant property in
Lancaster, New York, in May 1998, as described above. The lost revenues
resulting from this restaurant property could have an adverse effect on the
results of operations of the Income Fund if the Income Fund is unable to re-
lease the restaurant property in a timely manner. The Income Fund will not
recognize rental income relating to this restaurant property until a new tenant
is located or until the restaurant property is sold and the proceeds from such
sale are reinvested in an additional restaurant property. We are currently
seeking either a new tenant or purchaser for this restaurant property.
The increase in rental and earned income was also offset by a decrease of
approximately $37,400 and $49,300 during the quarter and six months ended June
30, 1999, respectively, due to the fact that the Income Fund sold the
restaurant property located in Amherst, New York, as described above in
"Capital Resources." In addition, rental and earned income was higher during
the quarter and six months ended June 30, 1999, due to the fact that the Income
Fund collected and recognized as income some of the past due rental amounts for
which the Income Fund had previously established an allowance for doubtful
accounts relating to the Amherst restaurant property.
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The increase in rental and earned income was partially offset by a decrease
in rental and earned income of approximately $36,800 and $73,600 for the
quarter and six months ended June 30, 1999, respectively, due to the fact that
in October 1998, the tenant of the Boston Market restaurant property in
Homewood, Alabama, filed for bankruptcy, rejected the lease relating to this
restaurant property and ceased making rental payments to the Income Fund. The
Income Fund will not recognize rental and earned income from this restaurant
property until a new tenant for this restaurant property is located or until
the restaurant property is sold and the proceeds from such a sale are
reinvested in an additional restaurant property. The lost revenues resulting
from the rejection of this lease could have an adverse effect on the results of
operations of the Income Fund if the Income Fund is not able to re-lease this
restaurant property in a timely manner. We are currently seeking either a new
tenant or purchaser for this restaurant property.
The increase in rental and earned income was also partially offset by a
decrease of $22,300 and $44,700 for the quarter and six months ended June 30,
1999, respectively, due to the fact that the leases relating to three Burger
King restaurant properties were amended to provide for rent reductions from
August 1998 through the end of the lease term. In addition, the increase in
rental and earned income was offset by a decrease of approximately $10,600 and
$26,800 for the quarter and six months ended June 30, 1999, respectively, as a
result of the sale of the restaurant property in Billings, Montana in October
1998. However, rental and earned income increased by approximately $59,400 and
$68,100 during the quarter and six months ended June 30, 1999, respectively,
due to the reinvestment of net sales proceeds from the 1998 sale of the
restaurant property in Sacramento, California in a restaurant property in San
Marcos, Texas and the reinvestment of net sales proceeds from the 1999 sale of
the restaurant property in Amherst, New York, in a restaurant property in
Fremont, Nebraska.
The increase in rental and earned income during the quarter and six months
ended June 30, 1999, was also due to an increase of approximately $15,170 and
$58,610 for the quarter and six months ended June 30, 1999, respectively,
because in January 1999, the rents under the lease relating to the Perkins
restaurant property in Ft. Pierce, Florida, which had been amended in a prior
year to provide for rent reductions from May 1997 through December 31, 1998,
reverted back to the amounts due under the original lease agreement. Rental and
earned income during the quarter and six months ended June 30, 1999 were higher
due to the fact that due to the lease amendment and questionable collectibility
of future scheduled rent increases from this tenant, the Income Fund increased
its reserve for accrued rental income, or non-cash accounting adjustment
relating to the straight-lining of future scheduled rent increases over the
lease term in accordance with generally accepted accounting principles, by
approximately $133,500 and $139,600 during the quarter and six months ended
June 30, 1998, respectively, as compared to approximately $6,100 and $12,200
during the quarter and six months ended June 30, 1999, respectively.
During the six months ended June 30, 1999 and 1998, the Income Fund earned
$31,462 and $58,766, respectively, in interest and other income, $17,748 and
$32,294 of which was earned during the quarters ended June 30, 1999 and 1998.
The decrease in interest and other income during the quarter and six months
ended June 30, 1999, as compared to the quarter and six months ended June 30,
1998, was primarily attributable to the fact that during the quarter and six
months ended June 30, 1998, the Income Fund earned interest on the net sales
proceeds relating to the sale of the restaurant property in Sacramento,
California, pending the reinvestment of the net sales proceeds in an additional
restaurant property. The net sales proceeds were reinvested in November 1998.
For the quarter and six months ended June 30, 1999 and 1998, the Income Fund
also owned and leased eight restaurant properties indirectly through joint
venture arrangements and two restaurant properties as tenants-in-common with
our affiliates. For the quarter and six months ended June 30, 1999, the Income
Fund also owned and leased one additional restaurant property indirectly
through a joint venture arrangement. In connection therewith, during the six
months ended June 30, 1999 and 1998, the Income Fund earned $176,494 and
$137,269, respectively, $95,090 and $74,135 of which was earned during the
quarters ended June 30, 1999 and 1998, respectively. The increase in net income
earned by unconsolidated joint ventures during the quarter and six months ended
June 30, 1999, was primarily attributable to the Income Fund investing in a
joint venture
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arrangement, Ocean Shores Joint Venture, in January 1999, with CNL Income Fund
XVII, Ltd., one of our affiliates.
Operating expenses, including depreciation expense, were $429,392 and
$239,297 for the six months ended June 30, 1999 and 1998, respectively, of
which $236,729 and $125,359 were incurred for the quarters ended June 30, 1999
and 1998, respectively. The increase in operating expenses during the quarter
and six months ended June 30, 1999, as compared to the quarter and six months
ended June 30, 1998, was primarily the result of an increase in depreciation
expense due to the purchase of the restaurant property in Fremont, Nebraska in
March 1999 and the fact that during 1998, the Income Fund reclassified the
leases relating to three restaurant properties from direct financing leases to
operating leases due to lease amendments. The increase in operating expenses
was also partially due to the fact that the Income Fund accrued insurance, real
estate tax expense, and legal fees as a result of the fact that two tenants
filed for bankruptcy and rejected two leases relating to the restaurant
properties in Lancaster, New York and Homewood, Alabama, as described above.
The Income Fund will continue to incur these types of expenses, until
replacement tenants or purchasers are located. The Income Fund is currently
seeking either replacement tenants or purchasers for these restaurant
properties.
In addition, the increase in operating expenses for the quarter and six
months ended June 30, 1999 was partially due to the fact that the Income Fund
incurred $90,788 and $124,449 in transaction costs for the quarter and six
months ended June 30, 1999, respectively, related to our retaining financial
and legal advisors to assist us in evaluating and negotiating the Acquisition
with APF. If the Limited Partners reject the Acquisition, the Income Fund will
bear the portion of the transaction costs based upon the percentage of "For"
votes and we will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
As a result of the sale of the restaurant property in Amherst, New York, as
described above in "Capital Resources," the Income Fund recorded a gain of
$74,640 for financial reporting purposes during the six months ended June 30,
1999. As a result of the sale of the restaurant property in Sacramento,
California, and the sale of the parcel of land in Austin, Texas, the Income
Fund recognized a gain of $171,159 for financial reporting purposes for the six
months ended June 30, 1998.
The Years Ended December 31, 1998, 1997 and 1996
During 1996, the Income Fund and its consolidated joint venture, Allegan
Real Estate Joint Venture, owned and leased 39 wholly-owned restaurant
properties, and during 1997, the Income Fund owned and leased 40 wholly-owned
restaurant properties, including one restaurant property in Fremont,
California, which was sold in September 1997. During 1998, the Income Fund
owned and leased 40 wholly-owned restaurant properties, including two
restaurant properties sold in 1998. In addition, during 1998, 1997, and 1996,
the Income Fund was a co-venturer in two separate joint ventures that each
owned and leased one restaurant property and one joint venture which owned and
leased six restaurant properties. During 1996, the Income Fund also owned and
leased one restaurant property with affiliates as tenants-in-common and during
1997 and 1998, the Income Fund owned and leased two restaurant properties with
affiliates as tenants-in-common. As of December 31, 1998, the Income Fund
owned, either directly or through joint venture arrangements 48 restaurant
properties which are subject to long-term, triple-net leases. The leases of the
restaurant properties provide for minimum base annual rental amounts, payable
in monthly installments, ranging from approximately $26,160 to $198,500. The
majority of the leases provide for percentage rent based on sales in excess of
a specified amount. In addition, a majority of the leases provide that,
commencing in specified lease years, ranging from the second to the sixth lease
year, the annual base rent required under the terms of the lease will increase.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
and its consolidated joint venture, Allegan Real Estate Joint Venture, earned
$2,710,790, $3,402,320, and $3,481,139, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease
during the year ended December 31, 1998, as compared to the year ended December
31, 1997, was partially due to a
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decrease in rental and earned income of approximately $33,300 due to the fact
that the tenant of the restaurant properties in Lancaster and Amherst, New
York, filed for bankruptcy and rejected the lease relating to one of the two
restaurant properties leased by Brambury Associates. As a result, the tenant
ceased making rental payments, on the one rejected lease. The Income Fund wrote
off approximately $292,600 of accrued rental income, or non-cash accounting
adjustment relating to the straight-lining of future scheduled rent increases
over the lease term in accordance with generally accepted accounting
principles, relating to both restaurant properties. The Income Fund also
increased the allowance for doubtful accounts for past due rental amounts for
these restaurant properties in the amount of approximately $82,700 for the year
ended December 31, 1998, as compared to the increase in allowance for doubtful
accounts of approximately $64,600 for the year ended December 31, 1997 due to
the fact that collection of such amounts is questionable. The Income Fund
continued receiving rental payments relating to the lease that was not rejected
until the Income Fund sold this restaurant property in March 1999. The lost
revenues resulting from the lease that was rejected, as described above, could
have an adverse effect on the results of operations of the Income Fund if the
Income Fund is unable to re-lease these restaurant properties in a timely
manner. We are currently seeking either a new tenant or purchaser for the
restaurant property with the rejected lease. The decrease in rental and earned
income during 1997, as compared to 1996, is partially attributable to the
Income Fund increasing its allowance for doubtful accounts by approximately
$64,600 during 1997, for rental amounts relating to these restaurant properties
located in Lancaster and Amherst, New York. Rental and earned income also
decreased by approximately $436,600 during 1997, as compared to 1996, due to
the fact that the Income Fund sold its restaurant property in Fremont,
California in September 1997, as described above in "Capital Resources."
Additionally, the decrease in rental and earned income during the year ended
December 31, 1998, as compared to the year ended December 31, 1997, is
partially due to a decrease of approximately $68,800 in rental and earned
income due to the fact that the lease relating to the Perkins restaurant
property in Ft. Pierce, Florida, was amended to provide for rent reductions
from May 1997 through December 31, 1998. Due to the lease amendment and
questionable collectibility of future scheduled rent increases from this
tenant, the Income Fund increased its reserve for accrued rental income, or
non-cash accounting adjustment relating to the straight-lining of future
scheduled rent increases over the lease term in accordance with generally
accepted accounting principles, by approximately $151,800 during 1998, as
compared to approximately $28,800 during 1997. In January 1999, the rents
reverted back to the amounts due under the original lease agreement. In
addition, rental and earned income decreased by approximately $210,100 during
the year ended December 31, 1998, as a result of the sale of the restaurant
properties in Fremont and Sacramento, California in September 1997 and January
1998 and the sale of the restaurant property in Billings, Montana in October
1998. The decrease in rental and earned income for 1998 was partially offset by
the fact that the Income Fund recognized rental income of approximately
$143,800 and $28,100 during 1998 and 1997, respectively, due to the
reinvestment of a portion of the net sales proceeds from the 1997 sale of the
restaurant property in Fremont, California, in a restaurant property in
Homewood, Alabama in October 1997.
In addition, rental and earned income decreased by approximately $3,800 due
to the fact that in October 1998, Boston Chicken, Inc., the tenant of the
Boston Market restaurant property in Homewood, Alabama, filed for bankruptcy
and rejected the lease relating to this restaurant property and ceased making
payments to the Income Fund, as described above. In conjunction with the
rejected lease, the Income Fund wrote off approximately $13,200 of accrued
rental income, or non-cash accounting adjustments relating to the straight-
lining of future scheduled rent increases over the lease term in accordance
with generally accepted accounting principles.
The decrease in rental and earned income for the year ended December 31,
1998, as compared to the year ended December 31, 1997, is also partially due to
a decrease of approximately $39,900 for 1998, due to the fact that the leases
relating to the Burger King restaurant properties in Irondequoit, New York,
Ashland, Ohio and Henderson, North Carolina were amended to provide for rent
reductions from August 1998 through the end of the lease term.
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During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $67,511, $51,678, and $45,126, respectively, in contingent rental
income. The increase in contingent rental income during 1998, as compared to
1997, is partially attributable to an (i) increase in gross sales relating to
certain restaurant properties during 1998 and due to (ii) adjusting estimated
contingent rental amounts accrued at December 31, 1997, to actual amounts
during the year ended December 31, 1998. The increase in contingent rental
income during 1997, as compared to 1996, is primarily attributable to a change
in the percentage rent formula in accordance with the terms of the lease
agreement for one of the Income Fund's leases during 1997.
For the years ended December 31, 1998, 1997, and 1996, the Income Fund also
earned $292,013, $278,919, and $278,371, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Income Fund is a
co-venturer. The increase in net income earned by unconsolidated joint ventures
during 1998, as compared to 1997, is primarily attributable to the Income Fund
investing in a restaurant property in Miami, Florida, in December 1997, with
certain of our affiliates as tenants-in-common, as described above in "Capital
Resources."
During the year December 31, 1998, two lessees of the Income Fund and its
consolidated joint venture, Golden Corral Corporation and Foodmaker, Inc., each
contributed more than 10% of the Income Fund's total rental income, including
rental income from the Income Fund's consolidated joint venture and the Income
Fund's share of rental income from eight restaurant properties owned by
unconsolidated joint ventures and two restaurant properties owned with
affiliates as tenants-in-common. As of December 31, 1998, Golden Corral
Corporation was the lessee under leases relating to four restaurants and
Foodmaker, Inc. was the lessee under leases relating to six restaurants. It is
anticipated that based on the minimum rental payments required by the leases,
these two lessees will continue to contribute more than 10% of the Income
Fund's total rental income during 1999. In addition, during the year ended
December 31, 1998, five restaurant chains, Golden Corral, Hardee's, Burger
King, Shoney's and Jack in the Box, each accounted for more than 10% of the
Income Fund's total rental income, including rental income from the Income
Fund's consolidated joint venture and the Income Fund's share of rental income
from eight restaurant properties owned by unconsolidated joint ventures and two
restaurant properties owned with affiliates as tenants-in-common. In 1999, it
is anticipated that these five restaurant chains will continue to account for
more than 10% of the Income Fund's total rental income to which the Income Fund
is entitled under the terms of the leases. Any failure of these lessess or
restaurant chains could materially affect the Income Fund's income if the
Income Fund is not able to re-lease the restaurant properties in a timely
manner.
Operating expenses, including depreciation and amortization expense, were
$507,749, $414,105, and $410,057 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during the year
ended December 31, 1998, as compared to the year ended December 31, 1997, is
partially the result of an increase in depreciation expense due to the purchase
of the restaurant property in Homewood, Alabama, in October 1997 and the fact
that during 1998, the Income Fund reclassified the leases relating to the
restaurant properties in Irondequoit, New York, Ashland, Ohio, and Henderson,
North Carolina from direct financing leases to operating leases due to lease
amendments. In addition, the increase in operating expenses is partially due to
the fact that the Income Fund recorded legal expenses relating to the
restaurant properties in Lancaster and Amherst, New York due to the fact that
the tenant of these restaurant properties filed for bankruptcy, as described
above.
In addition, the increase in operating expenses for 1998 is due to the fact
that the Income Fund incurred $23,779 in transaction costs related to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the proposed Acquisition with APF.
During 1998, two tenants of the Income Fund, Brambury Associates and Boston
Chicken, Inc. filed for bankruptcy and rejected the leases relating to two of
their three leases. The Income Fund will incur certain expenses, such as real
estate taxes, insurance and maintenance relating to these restaurant properties
with rejected leases until replacement tenants or purchasers are located. The
Income Fund is currently seeking either replacement tenants or purchasers for
these restaurant properties with rejected leases.
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As a result of the sale of the restaurant properties in Sacramento,
California and Billings, Montana, and the sale of the parcel of land in Austin,
Texas, as described above in "Capital Resources," the Income Fund recognized a
gain of $218,960 for financial reporting purposes during the year ended
December 31, 1998. As a result of the sale of the restaurant property in
Fremont, California, as discussed above in "Capital Resources," the Income Fund
recognized a gain of $132,238 for financial reporting purposes for the year
ended December 31, 1997. No restaurant properties were sold during the year
ended December 31, 1996.
During the year ended December 31, 1998, the Income Fund recorded a
provision for loss on land, building, and impairment in carrying value of net
investment in direct financing lease for financial reporting purposes relating
to the restaurant properties in Lancaster, New York, Amherst, New York, and
Homewood, Alabama. The tenants of these restaurant properties filed for
bankruptcy during 1998, and rejected two of the three leases related to these
restaurant properties. The allowance represents the difference between the
carrying value of the restaurant properties at December 31, 1998, and the
estimated net realizable value for these restaurant properties.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we Partners believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
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Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
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The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
S-38
<PAGE>
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-39
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-8
Balance Sheets as of December 31, 1998 and 1997........................... F-9
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-10
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-13
Unaudited Pro Forma Financial Information................................. F-23
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-24
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-34
</TABLE>
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December
1999 31, 1998
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,486,382 and
$1,329,832, respectively and allowance for loss on
land and building of $908,518 in 1999 and 1998....... $17,278,201 $16,685,182
Net investment in direct financing leases, less
allowance for impairment in carrying value of $93,328
in 1998.............................................. 10,041,160 10,713,000
Investment in joint ventures.......................... 4,179,673 3,421,329
Cash and cash equivalents............................. 1,136,363 1,835,972
Restricted cash....................................... -- 361,403
Receivables, less allowance for doubtful accounts of
$113,570 and $236,810, respectively.................. 54,716 81,100
Prepaid expenses...................................... 20,280 5,229
Accrued rental income, less allowance for doubtful
accounts of $281,618 and $269,421, respectively...... 1,388,814 1,342,166
Other assets.......................................... 35,584 35,484
----------- -----------
$34,134,791 $34,480,865
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 95,764 $ 2,403
Accrued and escrowed real estate taxes payable........ 24,270 27,418
Distributions payable................................. 900,001 900,001
Due to related party.................................. 29,076 29,987
Rents paid in advance and deposits.................... 99,859 103,414
----------- -----------
Total liabilities................................... 1,148,970 1,063,223
Commitments and contingencies (Note 5)
Minority interest..................................... 64,425 64,745
Partners' capital..................................... 32,921,396 33,352,897
----------- -----------
$34,134,791 $34,480,865
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 513,902 $ 453,539 $ 968,457 $ 906,911
Adjustments to accrued rental
income........................ (6,099) (426,116) (12,197) (432,215)
Earned income from direct
financing leases.............. 286,157 264,420 563,015 623,257
Interest and other income...... 17,748 32,294 31,462 58,766
--------- --------- ---------- ----------
811,708 324,137 1,550,737 1,156,719
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 36,293 45,324 86,775 83,561
Bad debt expense............... -- 3,854 -- 5,887
Professional services.......... 19,981 8,160 30,026 13,359
Real estate taxes.............. 5,306 9,574 16,910 9,574
State and other taxes.......... 105 249 14,682 10,520
Depreciation................... 84,256 58,198 156,550 116,396
Transaction costs.............. 90,788 -- 124,449 --
--------- --------- ---------- ----------
236,729 125,359 429,392 239,297
--------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures,
and Gain on Sale of Land and
Buildings....................... 574,979 198,778 1,121,345 917,422
Minority Interest in Income of
Consolidated Joint Venture...... (2,099) (2,069) (3,978) (4,255)
Equity in Earnings of
Unconsolidated Joint Ventures... 95,090 74,135 176,494 137,269
Gain on Sale of Land and
Buildings....................... -- -- 74,640 171,159
--------- --------- ---------- ----------
Net Income....................... $ 667,970 $ 270,844 $1,368,501 $1,221,595
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 6,680 $ 2,708 $ 12,941 $ 10,504
Limited partners............... 661,290 268,136 1,355,560 1,211,091
--------- --------- ---------- ----------
$ 667,970 $ 270,844 $1,368,501 $1,221,595
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.17 $ 0.07 $ 0.34 $ 0.30
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December
1999 31, 1998
---------------- -----------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 229,725 $ 208,709
Net income..................................... 12,941 21,016
----------- -----------
242,666 229,725
----------- -----------
Limited partners:
Beginning balance.............................. 33,123,172 34,945,334
Net income..................................... 1,355,560 1,857,842
Distributions ($0.45 and $0.92 per limited
partner unit, respectively)................... (1,800,002) (3,680,004)
----------- -----------
32,678,730 33,123,172
----------- -----------
Total partners' capital.......................... $32,921,396 $33,352,897
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,654,349 $ 1,908,622
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 1,150,000 1,231,106
Additions to land and buildings on operating
leases.......................................... (1,257,217) --
Investment in joint venture...................... (802,431) --
Decrease (increase) in restricted cash........... 359,990 (1,140,970)
----------- -----------
Net cash provided by (used in) investing
activities.................................... (549,658) 90,136
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,800,002) (1,880,002)
Distributions to holder of minority interest..... (4,298) (4,268)
----------- -----------
Net cash used in financing activities.......... (1,804,300) (1,884,270)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (699,609) 114,488
Cash and Cash Equivalents at Beginning of Period..... 1,835,972 1,583,883
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,136,363 $ 1,698,371
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period............................................ $ 900,001 $ 900,001
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
X, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 88.26% interest in Allegan Real Estate
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications had no
effect on partners' capital or net income.
2. Land and Buildings on Operating Leases:
In March 1999, the Partnership sold its property in Amherst, New York, and
received net sales proceeds of $1,150,000 and recorded a gain of $74,640 for
financial reporting purposes (see Note 3). In March 1999, the Partnership
reinvested the net sales proceeds, plus additional funds, in a Golden Corral
property in Fremont, Nebraska.
3. Net Investment in Direct Financing Leases:
At December 31, 1998, the Partnership had recorded an allowance of $93,328
for the impairment in the carrying value of the Property in Amherst, New York,
due to the tenant filing for bankruptcy. The allowance represented the
difference between the carrying value of the property at December 31, 1998 and
the estimated net realizable value for this property. In March 1999, the
Partnership sold this property, received net sales proceeds of $1,150,000 and
recorded a gain of $74,640 for financial reporting purposes, resulting in an
aggregate net loss of approximately $18,700. The building portion of this
property had been classified as a direct financing lease. In connection
therewith, the gross investment (minimum lease payments receivable and the
estimated residual value), unearned income and the allowance for impairment in
carrying value relating to the building were removed from the accounts and the
gain from the sale of the property was reflected in income (see Note 2).
4. Investment in Joint Ventures:
In January 1999, the Partnership entered into a joint venture arrangement,
Ocean Shores Joint Venture, with CNL Income Fund XVII, Ltd., an affiliate of
the general partners, to own and lease one restaurant property. The Partnership
contributed approximately $802,400 to the joint venture and as of June 30,
1999,
F-5
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
owned a 69.06% interest in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the equity
method since the Partnership shares control with an affiliate.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures and properties held as
tenants-in-common at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $ 9,575,806 $ 9,340,944
Net investment in direct financing leases........ 1,462,165 657,426
Cash............................................. 3,753 2,935
Receivables...................................... 32 7,597
Prepaid expenses................................. 12,018 24,337
Accrued rental income............................ 37,436 19,880
Liabilities...................................... 1,478 3,119
Partners' capital................................ 11,089,732 10,050,000
Revenues......................................... 615,270 1,115,856
Net income....................................... 468,911 843,914
</TABLE>
The Partnership recognized income totalling $176,494 and $137,269 for the
six months ended June 30, 1999 and 1998, respectively, from these joint
ventures, $95,090 and $74,135 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,121,622 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $41,779,262 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of
F-6
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
the transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-7
<PAGE>
Report of Independent Certified Public Accountants
To the Partners CNL Income Fund X, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund X, Ltd. (a Florida
limited partnership) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 30, 1999, except for the second paragraph of Note 11 which the date is
March 11, 1999 and Note 12 for which the date is June 3, 1999
F-8
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $16,685,182 $15,709,899
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 10,713,000 13,460,125
Investment in joint ventures........................... 3,421,329 3,505,326
Cash and cash equivalents.............................. 1,835,972 1,583,883
Restricted cash........................................ 361,403 92,236
Receivables, less allowance for doubtful accounts of
$236,810 and $137,856................................. 81,100 123,903
Prepaid expenses....................................... 5,229 5,877
Accrued rental income, less allowance for doubtful
accounts of $269,421 and $117,593..................... 1,342,166 1,775,374
Other assets........................................... 35,484 33,104
----------- -----------
$34,480,865 $36,289,727
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,403 $ 6,033
Accrued and escrowed real estate taxes payable......... 27,418 27,784
Distributions payable.................................. 900,001 900,001
Due to related parties................................. 29,987 4,946
Rents paid in advance and deposits..................... 103,414 132,419
----------- -----------
Total liabilities.................................... 1,063,223 1,071,183
Minority interest...................................... 64,745 64,501
Partners' capital...................................... 33,352,897 35,154,043
----------- -----------
$34,480,865 $36,289,727
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $ 1,886,761 $1,896,607 $1,921,562
Adjustments to accrued rental income.... (457,567) (28,812) (88,781)
Earned income from direct financing
leases................................. 1,281,596 1,534,525 1,648,358
Contingent rental income................ 67,511 51,678 45,126
Interest and other income............... 108,481 88,853 75,896
----------- ---------- ----------
2,886,782 3,542,851 3,602,161
----------- ---------- ----------
Expenses:
General operating and administrative.... 163,189 153,672 166,049
Bad debt expense........................ 5,887 -- --
Professional services................... 44,309 26,890 33,692
Real estate taxes....................... 199 9,703 --
State and other taxes................... 10,520 9,372 2,357
Depreciation and amortization........... 259,866 214,468 207,959
Transaction costs....................... 23,779 -- --
----------- ---------- ----------
507,749 414,105 410,057
----------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, Gain on Sale of Land and
Building and Provision for Loss on Land,
Building, and Impairment in Carrying
Value of Net Investment in Direct
Financing Lease.......................... 2,379,033 3,128,746 3,192,104
Minority Interest in Income of
Consolidated Joint Venture............... (9,302) (8,522) (8,663)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 292,013 278,919 278,371
Gain on Sale of Land and Building......... 218,960 132,238 --
Provision for Loss on Land, Building, and
Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (1,001,846) -- --
----------- ---------- ----------
Net Income................................ $ 1,878,858 $3,531,381 $3,461,812
=========== ========== ==========
Allocation of Net Income:
General partners........................ $ 21,016 $ 33,991 $ 34,618
Limited partners........................ 1,857,842 3,497,390 3,427,194
----------- ---------- ----------
$ 1,878,858 $3,531,381 $3,461,812
=========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.46 $ 0.87 $ 0.86
=========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 4,000,000 4,000,000 4,000,000
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $139,100 $40,000,000 $(13,723,133) $13,773,889 $(4,790,000) $35,400,856
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,640,003) -- -- (3,640,003)
Net income............. -- 34,618 -- -- 3,427,194 -- 3,461,812
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 173,718 40,000,000 (17,363,136) 17,201,083 (4,790,000) 35,222,665
Distributions to
limited partners
($0.90 per limited
partner unit)......... -- -- -- (3,600,003) -- -- (3,600,003)
Net income............. -- 33,991 -- -- 3,497,390 -- 3,531,381
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 207,709 40,000,000 (20,963,139) 20,698,473 (4,790,000) 35,154,043
Distributions to
limited partners
($0.92 per limited
partner unit)......... -- -- -- (3,680,004) -- -- (3,680,004)
Net income............. -- 21,016 -- -- 1,857,842 -- 1,878,858
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $228,725 $40,000,000 $(24,643,143) $22,556,315 $(4,790,000) $33,352,897
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $3,382,562 $3,380,391 $3,491,064
Distributions from unconsolidated joint
ventures................................. 373,004 353,207 354,648
Cash paid for expenses.................... (221,284) (190,902) (211,345)
Interest received......................... 70,156 53,721 61,435
---------- ---------- ----------
Net cash provided by operating
activities.............................. 3,604,438 3,596,417 3,695,802
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building... 1,591,794 1,363,805 --
Additions to land and buildings on
operating leases......................... (1,020,329) (1,277,308) (978)
Investment in direct financing leases..... -- -- (1,542)
Investment in joint venture............... -- (130,404) (108,952)
Increase in restricted cash............... (237,758) (89,702) --
Other..................................... 3,006 -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. 336,713 (133,609) (111,472)
---------- ---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners......... (3,680,004) (3,640,002) (3,640,003)
Distributions to holder of minority
interest................................. (9,058) (8,406) (7,697)
---------- ---------- ----------
Net cash used in financing activities.... (3,689,062) (3,648,408) (3,647,700)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 252,089 (185,600) (63,370)
Cash and Cash Equivalents at Beginning of
Year...................................... 1,583,883 1,769,483 1,832,853
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,835,972 $1,583,883 $1,769,483
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,878,858 $3,531,381 $3,461,812
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Bad debt expense.......................... 5,887 -- --
Depreciation.............................. 259,866 214,468 206,497
Amortization.............................. -- -- 1,462
Minority interest in income of
consolidated joint venture............... 9,302 8,522 8,663
Equity in earnings of unconsolidated joint
ventures, net of distributions........... 80,991 74,288 75,898
Gain on sale of land and building......... (218,960) (132,238) --
Provision for loss on land, building, and
impairment in carrying value of net
investment in direct financing lease..... 1,001,846 -- --
Decrease (increase) in receivables........ 8,312 (71,222) 46,834
Decrease (increase) in prepaid expenses... 648 (374) (3,852)
Decrease in net investment in direct
financing leases......................... 219,237 211,942 160,007
Decrease (increase) in accrued rental
income................................... 300,791 (201,022) (315,029)
Increase in other assets.................. (2,380) -- --
Increase (decrease) in accounts payable
and accrued expenses..................... (3,996) (14,156) 14,318
Increase (decrease) in due to related
parties.................................. 25,041 3,337 (5,395)
Increase (decrease) in rents paid in
advance and deposits..................... 38,995 (28,509) 44,587
---------- ---------- ----------
Total adjustments........................ 1,725,580 65,036 233,990
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,604,438 $3,596,417 $3,695,802
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31.............................. $ 900,001 $ 900,001 $ 940,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund X, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs. If an impairment is indicated, the
assets are adjusted to their fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership
F-13
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
continued to pursue collection of such amounts. If amounts are subsequently
determined to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 88.26%
interest in Allegan Real Estate Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's proportionate
share of the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been eliminated.
The Partnership's investments in CNL Restaurant Investments III, Williston
Real Estate Joint Venture and Ashland Joint Venture, and the property in
Clinton, North Carolina, and the property in Miami, Florida, for which each
property is held as tenants-in-common with affiliates, are accounted for using
the equity method since the Partnership shares control with affiliates which
have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing
F-14
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
leases, the building portions of the property leases are accounted for as
direct financing leases while the land portions of the majority of these leases
are operating leases. Substantially all leases are for 15 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant pays all
property taxes and assessments, fully maintains the interior and exterior of
the building and carries insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to five successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $ 9,741,686 $ 9,947,295
Buildings.......................................... 8,588,903 6,875,851
Construction in process............................ 592,943 --
----------- -----------
18,923,532 16,823,146
Less accumulated depreciation...................... (1,329,832) (1,113,247)
----------- -----------
17,593,700 15,709,899
Less allowance for loss on land and building....... (908,518) --
----------- -----------
$16,685,182 $15,709,899
=========== ===========
</TABLE>
During 1997, the Partnership sold its property in Fremont, California, to
the franchisor, for $1,420,000 and received net sales proceeds of $1,363,805,
resulting in a gain of $132,238 for financial reporting purposes. This property
was originally acquired by the Partnership in March 1992 and had a cost of
approximately $1,116,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $249,700 in excess of its original purchase price. In October
1997, the Partnership reinvested approximately $1,277,300 in a Boston Market
property located in Homewood, Alabama.
In March 1998, a vacant parcel of land relating to the property in Austin,
Texas, was sold to a third party who had previously subleased the land from the
Partnership's lessee. In connection therewith, the Partnership received net
sales proceeds of $68,434 ($68,000 of which had been received and recorded as a
deposit in 1995), resulting in a gain of $7,810 for financial reporting
purposes.
During 1998, the Partnership sold two properties for a total of $1,612,000
and received net sales proceeds totalling $1,591,360, resulting in a total gain
of $211,150 for financial reporting purposes. These properties were originally
acquired by the Partnership in 1991 and 1992 and had total costs of
approximately $1,271,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the properties for
approximately $320,000 in excess of their original purchase prices. In November
1998, the Partnership reinvested the majority of the net sales proceeds from
the sale of its property in Sacramento, California in a Jack in the Box
property in San Marcos, Texas.
During the year ended December 31, 1998, the Partnership recorded a
provision for loss on land and building totalling $908,518 for financial
reporting purposes relating to the Properties in Lancaster, New York, Amherst,
New York and Homewood, Alabama, respectively. The tenants of these Properties
filed for
F-15
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
bankruptcy during 1998, and rejected the leases related to two of these
Properties. The allowance represents the difference between the carrying value
of the Properties at December 31, 1998 and the estimated net realizable value
for these Properties.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the year ended December
31, 1998, the Partnership recognized a loss of $300,791 (net of $151,828 in
reserves and $305,739 in write-offs) and for the years ended December 31, 1997
and 1996, the Partnership recognized income of $201,022 and $315,029,
respectively, (net of reserves of $28,812 and $88,781, respectively).
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,725,916
2000............................................................. 1,737,475
2001............................................................. 1,781,312
2002............................................................. 1,896,469
2003............................................................. 1,908,568
Thereafter....................................................... 13,254,521
-----------
$22,304,261
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales. These amounts do not include minimum lease payments
that will become due when the property under development is completed.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Minimum lease payments receivable.............. $ 18,740,085 $ 25,273,063
Estimated residual values...................... 3,553,036 4,225,008
Less unearned income........................... (11,486,793) (16,037,946)
------------ ------------
10,806,328 13,460,125
Less allowance for impairment in carrying
value......................................... (93,328) --
------------ ------------
Net investment in direct financing leases...... $ 10,713,000 $ 13,460,125
============ ============
</TABLE>
During 1997, the Partnership sold its property in Fremont, California, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payment receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to the land
portion of the property was reflected in income (Note 3).
F-16
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During 1998, the Partnership sold a property, for which the building portion
had been classified as a direct financing lease. In connection therewith, the
gross investment (minimum lease payments receivable and the estimated residual
value) and unearned income relating to the building were removed from the
accounts and the gain from the sale of the property was reflected in income
(see Note 3).
During 1998, three of the Partnership's leases were amended and one of the
Partnership's leases that was classified as a direct financing lease was
rejected in connection with the tenant filing for bankruptcy. As a result, the
Partnership reclassified the two of the three amended leases and the rejected
lease from direct financing leases to operating leases. In accordance with the
Statement of Financial Accounting Standards #13, "Accounting for Leases," the
Partnership recorded the reclassified leases at the lower of original costs,
present fair value, or present carrying amount. No losses on the termination of
direct financing leases were recorded for financial reporting purposes.
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,389,897
2000............................................................. 1,391,381
2001............................................................. 1,398,824
2002............................................................. 1,429,020
2003............................................................. 1,440,530
Thereafter....................................................... 11,690,433
-----------
$18,740,085
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 50 percent, a 10.51%, a 40.95%, and a 13% interest in
the profits and losses of CNL Restaurant Investments III, Ashland Joint
Venture, Williston Real Estate Joint Venture and a property in Clinton, North
Carolina, held as tenants-in-common with affiliates of the general partners.
The remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In December 1997, the Partnership acquired and leased a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 6.69% interest in this property.
CNL Restaurant Investments III owns and leases six properties to an operator
of national fast-food restaurants. Ashland Joint Venture, Williston Real Estate
Joint Venture and the Partnership and affiliates as tenants-in-common in two
separate tenancy-in-common arrangements, each own and lease one property to an
F-17
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $ 9,340,944 $ 9,573,341
Net investment in direct financing lease.......... 657,426 661,991
Cash.............................................. 2,935 8,197
Receivables....................................... 7,597 26,766
Prepaid expenses.................................. 24,337 22,852
Accrued rental income............................. 19,880 --
Liabilities....................................... 3,119 7,415
Partners' capital................................. 10,050,000 10,285,732
Revenues.......................................... 1,115,856 930,470
Net income........................................ 843,914 695,878
</TABLE>
The Partnership recognized income totalling $292,013, $278,919, and $278,371
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
As of December 31, 1997, net sales proceeds of $89,702 from the sale of the
property in Fremont, California, plus accrued interest of $2,534, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property. The funds were released by the
escrow agent in 1998 and were used to acquire an additional property. (See Note
3).
As of December 31, 1998, the net sales proceeds of $359,990 from the sale of
a property, plus accrued interest of $1,413 were being held in an interest-
bearing escrow account pending the release of funds by the escrow agent to
acquire an additional property.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their 10%
Preferred Return, plus the return of their adjusted capital contributions. The
general partners will then receive, to the extent previously subordinated and
unpaid, a one percent interest in all prior distributions of net cash flow and
a return of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property not in liquidation of the
Partnership is, in general, allocated in the same manner as net sales proceeds
are distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners and
five percent to the general partners.
F-18
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital account balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,680,004, $3,600,003, and
$3,640,003, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,878,858 $3,531,381 $3,461,812
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (228,986) (289,098) (298,518)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 219,237 211,942 160,007
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of equity in
earnings of unconsolidated joint
ventures for financial
reporting purposes.................... 12,612 15,294 10,839
Gain on sale of land and building for
financial reporting purposes less than
(in excess of) gain for tax
reporting purposes.................... 65,474 (42,996) --
Allowance for loss on land and
building.............................. 1,001,846 -- --
Allowance for doubtful accounts........ 98,954 133,428 --
Accrued rental income.................. 300,791 (201,022) (315,029)
Rents paid in advance.................. 38,995 (22,593) 45,447
Minority interest in timing differences
of consolidated joint venture......... 413 1,461 2,184
Capitalization of transaction costs for
tax reporting purposes................ 23,779 -- --
Other.................................. -- -- (7,738)
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,411,973 $3,337,797 $3,059,004
========== ========== ==========
</TABLE>
F-19
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross revenues from joint
ventures, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. In addition, the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $105,445, $87,967, and $94,496 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership acquired a property for a purchase price of
$1,277,300 from CNL BB Corp., an affiliate of the general partners. CNL BB
Corp. had purchased and temporarily held title to this property in order to
facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $29,987
and $4,946, respectively.
F-20
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from unconsolidated
joint ventures and the properties held as tenants-in-common with affiliates),
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $578,430 $548,399 $568,164
Foodmaker, Inc................................... 436,577 646,477 684,277
Flagstar Enterprises, Inc. (and Denny's Inc.
during the years ended December 31, 1997 and
1996)........................................... N/A 602,913 668,919
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Burger King...................................... $758,178 $777,378 $714,792
Golden Corral Family Steakhouse Restaurants...... 578,430 548,399 568,164
Shoney's......................................... 440,333 441,052 439,330
Jack in the Box.................................. 436,577 646,477 684,277
Hardees.......................................... 400,716 403,882 468,037
Perkins.......................................... N/A N/A 393,046
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
11. Subsequent Events:
In January 1999, the Partnership used the net proceeds from the sales of
properties during 1998 and 1997 to enter into a joint venture arrangement,
Ocean Shores Joint Venture, with an affiliate of the general partners, to hold
one restaurant property. The Partnership contributed approximately $802,400 to
acquire the restaurant property. The Partnership owns a 69.06% interest in the
profits and losses of the joint venture. The Partnership will account for its
investment in this joint venture under the equity method since the Partnership
will share control with an affiliate.
F-21
<PAGE>
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,243,243 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF'smost recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $41,779,262 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,121,622 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC") and should be read
in conjunction with the selected historical financial data and accompanying
notes of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group.
The pro forma balance sheet assumes that the Acquisition occurred on June 30,
1999, and the pro forma consolidated statements of earnings and statements of
cash flows assume that the acquisition of properties by APF from January 1,
1998 through July 31, 1999, the acquisition of the Advisor, the CNL Restaurant
Financial Services Group and the Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0
Other Investments....... 16,197,812 0 16,197,812 0 0
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0
Receivables (net
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income... 5,875,698 0 5,875,698 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486
Goodwill................ 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,963
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0
Distributions Payable... 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981
Income Tax Payable...... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income......... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0
Minority Interest....... 644,611 0 644,611 0 0
Common Stock............ 373,484 0 373,484 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital....... 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Liabilities and
Equity................ $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical
CNL Combining Historical CNL
Financial Pro Forma Income Funds Pro Forma Adjusted
Corp. Adjustments Combined APF X, Ltd. Adjustments Pro Forma
------------ ------------ -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $17,278,201 $ 7,194,629 (B2) $ 597,409,689
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 10,041,160 1,835,694 (B2) 144,056,803
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 0 0 353,874,178
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 4,179,673 1,272,221 (B2) 6,532,940
Cash and Cash
Equivalents............ 1,767,517 (8,841,773)(B1) 12,662,108 1,136,363 (3,050,227)(B2) 10,281,244
(467,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 0 0 4,488,731
Receivables (net
allowances) Due from
Related Party.......... 1,125,933 (6,614,629)(C) 9,247,098 54,716 (29,076)(E) 9,272,738
Accrued Rental Income... 0 0 5,875,698 1,388,814 (1,388,814)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 55,864 (55,864)(B2) 13,173,857
Goodwill................ 0 42,819,269 (B1) 42,819,269 0 0 42,819,269
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $304,738,561 $ 24,787,075 $1,170,897,687 $34,134,791 $ 5,311,563 $1,210,344,041
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 0 $ 5,104,303 $ 120,034 0 $ 5,224,337
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 900,001 0 900,001
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 29,076 (29,076)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 99,859 0 1,717,226
Minority Interest....... 0 0 644,611 64,425 0 709,036
Common Stock............ 0 61,500 (B1) 434,984 0 20,983 (B2) 455,967
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 38,241,052 (B2) 831,177,267
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,162)(B1) (87,959,250) 0 0 (87,959,250)
(73,132,735)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 32,921,396 (32,921,396)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,787,075 $1,170,897,687 $34,134,791 $ 5,311,563 $1,210,344,041
============ ============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 45,596,155
==============
Shares Outstanding...... 45,596,736
==============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ---------- ---------- -----------
Total Revenue.......... $32,150,355 $3,056,620 $35,206,975 $9,541,606 $3,212,412 $11,550,591
Expenses:
General and
Administrative ....... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337)
Equity in Earnings of
Joint
Ventures/Minority
Interest ............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Cash Distributions
Declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== ========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining
Pro Forma Combined Historical CNL Pro Forma Adjusted
Adjustments APF Income Fund X, Ltd. Adjustments Pro Forma
----------- ----------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $1,519,275 $ 133,588 (j) $32,610,377
Fees................... (9,812,516)(b),(c) 2,616,185 0 (32,338)(k) 2,583,847
Interest and Other
Income................ 144,014 (d) 16,269,383 31,462 0 16,300,845
----------- ----------- ---------- ---------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $1,550,737 $ 101,250 $51,495,069
Expenses:
General and
Administrative ....... (774,311)(e) 9,579,902 133,711 (56,229)(l),(m) 9,657,384
Management and Advisory
Fees.................. (2,913,775)(f) 0 0 0 (n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 14,682 8,149 (o) 487,797
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 156,550 81,731 (p) 4,907,434
Amortization........... 1,070,482 (h) 1,080,218 0 0 1,080,218
Transaction Costs...... 0 483,005 124,449 0 607,454
----------- ----------- ---------- ---------- -----------
Total Expenses......... (3,361,277) 26,815,313 429,392 33,651 27,278,356
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,307,225) $23,027,769 $1,121,345 $ 67,599 $24,216,713
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 172,516 (29,672)(q) 174,085
Gain (Loss) on Sale of
Properties............ 0 (201,843) 74,640 0 (127,203)
Provision for Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,307,225) 22,316,645 1,368,501 37,927 23,723,073
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $(4,781,485) $22,316,645 $1,368,501 $ 37,927 $23,723,073
=========== =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.34 n/a $ 0.52
=========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.23 n/a $ 16.31
=========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.45 n/a $ 0.76
=========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.94x
=========== =========== ========== ========== ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,800,002 $ (200,112)(s) $34,765,292
=========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 2,098,272 45,596,155 (r)
=========== =========== ========== ========== ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,098,272 45,596,736
=========== =========== ========== ========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,559,215(t) $51,008,364 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,580,012 34,228,231 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund X, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $ 2,778,301 $ 267,176 (j) $59,126,937
Fees................... (32,715,768)(b),(c) 3,226,263 0 (34,727)(k) 3,191,536
Interest and Other
Income................ 207,144 (d) 32,221,925 108,481 0 32,330,406
------------ ----------- ----------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $ 2,886,782 $ 232,449 $94,648,879
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 213,584 (84,885)(l),(m) 16,068,255
Management and Advisory
Fees.................. (4,658,434)(f) 0 0 0 (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 10,520 13,045 (o) 591,011
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation-- 163,461
Property.............. (340,898)(r) 9,948,339 259,866 (p) 10,371,666
Amortization........... 2,140,963 (h) 2,304,964 0 0 2,304,964
Transaction Costs...... 0 157,054 23,779 0 180,833
------------ ----------- ----------- --------- -----------
Total Expenses......... (9,261,985) 51,473,892 507,749 91,621 52,073,262
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties .. $(23,246,639) $40,055,756 $ 2,379,033 $ 140,828 $42,575,617
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 282,711 (59,345)(q) 209,228
Gain (Loss) on Sale of
Properties............ 0 0 218,960 0 218,960
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Provision For Losses on
Properties............ 0 (611,534) (1,001,846) 0 (1,613,380)
------------ ----------- ----------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,246,639) 43,124,435 1,878,858 81,483 45,084,776
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ----------- --------- -----------
Net Earnings (Losses)... $(16,348,205) $43,124,435 $ 1,878,858 $ 81,483 $45,084,776
============ =========== =========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.47 $ n/a $ 1.06
============ =========== =========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.34 $ n/a $ 16.46
============ =========== =========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ .90 $ n/a $ 1.50
============ =========== =========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.05x
============ =========== =========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,386,868 $ 3,600,004 $(400,223)(t) $63,586,649
============ =========== =========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,378,231 n/a 2,098,272 42,476,503 (s)
============ =========== =========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 2,098,272 45,586,199
============ =========== =========== ========= ===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ (36,946) (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------- ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,322,978) 12,876,859 713,308 962,573 2,526,078
------------- ------------- ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,449,204 $ 33,213,237 $ 333,295 $ 639,036 $ 1,767,517
============= ============= ============= =========== ========= ============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF X, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,781,485)(a) $ 22,316,645 $1,368,501 $ 37,927 (a) $ 23,723,073
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,774,655 156,550 81,731 (b) 5,012,936
Amortization expense... 1,070,482 (c) 1,980,235 0 0 1,980,235
Minority interest in
income of consolidated
joint venture......... 0 17,610 3,978 0 21,588
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 44,087 29,672 (d) 98,879
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 (74,640) 0 127,203
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 27,797 0 (2,174,163)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (15,051) 0 (335,476)
Decrease in net
investment in direct
financing leases...... 0 721,624 104,128 0 825,752
Increase in accrued
rental income......... 0 (1,915,785) (46,648) 0 (1,962,433)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) (100) 0 (88,894)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 90,213 0 (573,265)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 (911) 0 584,816
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (3,555) 0 663,164
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,070,482 (75,919,330) 285,848 111,403 (75,522,079)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,654,349 149,330 (51,799,006)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 1,150,000 0 4,846,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) (1,257,217) (45,264,000)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) (802,431) 0 (920,094)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 359,990 0 359,990
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) (549,658) 0 (112,284,184)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) (4,298) 0 (25,403)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,800,002) 200,112 (g) (34,885,100)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,804,300) 200,112 178,659,287
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (699,609) 349,442 14,576,097
Cash at beginning of
year................... (10,974,031) 6,104,787 1,835,972 (2,812,715) 5,128,044
------------ ------------- ---------- ----------- -------------
Cash at end of year..... $(14,922,034) $ 21,031,051 $1,136,363 $(2,463,273) $ 19,704,141
============ ============= ========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,559,215)(j) (51,008,364) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,189,359) 305,646,182 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,322,978) (34,709,918) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,322,978) $ 12,876,859 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund Pro Forma Adjusted
Adjustments APF X, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,348,205)(a) $ 43,124,435 $ 1,878,858 $ 81,483 (a) $ 45,084,776
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 259,866 163,461 (b) 10,570,823
Amortization expense... 2,140,963 (c) 4,455,047 0 0 4,455,047
Minority interest in
income of consolidated
joint venture......... 0 30,156 9,302 0 39,458
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 80,991 59,345 (d) 124,896
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (218,960) 0 (218,960)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 1,001,846 0 2,011,422
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease(increase) in
other receivables..... 0 (2,543,413) 14,199 0 (2,529,214)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease(increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 648 0 7,894
Decrease in net
investment in direct
financing leases...... 0 1,971,634 219,237 0 2,190,871
Increase in accrued
rental income......... 0 (2,187,652) 300,791 0 (1,886,861)
Increase in intangibles
and other assets...... 0 (154,351) (2,380) 0 (156,731)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 0 846,680 (3,996) 0 842,684
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 25,041 0 (108,323)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 38,995 0 475,838
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,800,065 13,329,870 1,725,580 222,806 15,278,256
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 3,604,438 304,289 60,363,032
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 1,591,794 0 3,977,735
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) (1,020,329) 0 (305,031,071)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) 0 0 (974,696)
Acquisition of
businesses............ (8,841,773)(f) (8,841,773) (3,050,227)(g) (12,359,000)
(467,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 (237,758) 0 (237,758)
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 3,006 0 203,006
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 12,952,613 (387,598,029) 336,713 (3,517,227) (390,778,543)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) (9,058) 0 (43,131)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,751,356) (3,680,004) 400,223 (j) (73,031,137)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) financing
activities............ (9,378,504) 287,419,381 (3,689,062) 400,223 (284,130,542)
Net increase (decrease)
in cash................ (10,974,031) (43,724,343) 252,089 (2,812,715) (46,284,969)
Cash at beginning of
year................... 0 49,829,130 1,583,883 0 51,413,013
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(10,974,031) $ 6,104,787 $ 1,835,972 $(2,812,715) $ 5,128,044
============ ============= =========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition. (A) Represents the use of $3,369,856 borrowed under
APF's credit facility at June 30, 1999 to pro forma properties acquired from
July 1, 1999 through July 31, 1999 as if these properties had been acquired on
June 30, 1999. Based on historical results through July 31, 1999, all interest
costs related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... 81,463,210 50,378,563 41,779,262 173,621,035
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $38,262,035 $161,262,035
Cash Consideration...... -- -- 467,000 467,000
APF Transaction Costs... 5,463,210 3,378,563 3,050,227 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,463,210 $50,378,563 $41,779,262 $173,621,035
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $32,921,396 $ 51,386,958
Purchase Price
Adjustments:
Land and buildings on
operating leases....... -- -- 7,194,629 7,194,629
Net investment in direct
financing leases....... -- -- 1,835,694 1,835,694
Investment in joint
ventures............... -- -- 1,272,221 1,272,221
Accrued rental income... -- -- (1,388,814) (1,388,814)
Intangibles and other
assets................. -- (2,575,792) (55,864) (2,631,656)
Goodwill*............... -- 42,819,268 -- 42,819,268
Excess purchase price... 73,132,735 -- -- 73,132,735
----------- ----------- ----------- ------------
Total Allocation...... $81,463,210 $50,378,563 $41,779,262 $173,621,035
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is assumed
to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,132,735 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of $42,819,268 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A............ 8,600
Common Stock (CFA, CFS, CFC)--Class B.............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)......... 12,568,974
Retained Earnings.................................. 5,883,163
Accumulated distributions in excess of earnings.... 73,132,735
Goodwill for CFC/CFS (Intangibles and other
assets)........................................... 42,819,268
CFC/CFS Organizational Costs/Other Assets......... 2,575,792
Cash to pay APF transaction costs................. 8,841,773
APF Common Stock.................................. 61,500
APF Capital in Excess of Par Value................ 122,938,500
(To record acquisition of CFA, CFS and CFC)
</TABLE>
<TABLE>
<S> <C> <C>
2. Partners Capital................................... 32,921,396
Land and buildings on operating leases............... 7,194,629
Net investment in direct financing leases............ 1,835,694
Investment in joint ventures......................... 1,272,221
Accrued rental income............................... 1,388,814
Intangibles and other assets........................ 55,864
Cash to pay APF Transaction costs................... 3,050,227
Cash consideration to Income Fund................... 467,000
APF Common Stock.................................... 20,983
APF Capital in Excess of Par Value.................. 38,241,052
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of
$342,857 from liabilities assumed in the acquisition since the Merger
Agreement requires that the Advisor and CNL Restaurant Financial Services
Group have no accumulated or current earnings and profits for federal
income tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $29,076 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $ (689,425)
Secured equipment lease fees................................. (67,967)
Advisory fees................................................ (126,788)
Reimbursement of administrative costs........................ (382,728)
Acquisition fees............................................. (4,452,252)
Underwriting fees............................................ (54,248)
Administrative, executive and guarantee fees................. (532,389)
Servicing fees............................................... (572,728)
Development fees............................................. (38,853)
Management fees.............................................. (1,681,870)
-----------
Total...................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended June
30, 1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired during
the period as if costs relating to properties developed by APF were subject
to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................... $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees................................................ $(1,681,870)
Administrative executive and guarantee fees.................... (532,389)
Servicing fees................................................. (572,728)
Advisory fees.................................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,070,482
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $133,588 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $ 0
Reimbursement of administrative costs......................... (32,338)
--------
$(32,338)
========
</TABLE>
(l) Represents the elimination of $32,338 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $23,891 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $8,149 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1999 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $81,731 as a
result of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings is being depreciated using the straight-line
method over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$29,672 as a result of adjusting the historical basis of the real estate
owned by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Fund is being depreciated using the straight-line method over the remaining
useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational when they
were acquired by APF from January 1, 1998 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any properties for the periods prior to their construction completion
and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.............................. $ (1,773,406)
Secured equipment lease fees.................................. (54,998)
Advisory fees................................................. (305,030)
Reimbursement of administrative costs......................... (408,762)
Acquisition fees.............................................. (21,794,386)
Underwriting fees............................................. (388,491)
Administrative, executive and guarantee fees.................. (1,233,043)
Servicing fees................................................ (1,570,331)
Development fees.............................................. (229,153)
Management fees............................................... (1,851,004)
------------
Total....................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL Financial
Corp. On a historical basis, CNL Financial Services, Inc. records all of
the loan origination fees received as revenue. For purposes of presenting
pro forma financial statements of these entities on a combined basis, these
loan origination fees are required to be deferred and amortized into
revenues over the term of the loans originated in accordance with generally
accepted accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended December
31, 1998, which were deferred for pro forma purposes as described in
5(II)(c). These deferred loan origination fees are being amortized and
recorded as interest income over the terms of the underlying loans (15
years).
<TABLE>
<S> <C>
Interest income..................................................... $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
acquired during the period as if costs relating to properties developed by
APF were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees................................................ $(1,851,004)
Administrative executive and guarantee fees.................... (1,233,043)
Servicing fees................................................. (1,269,357)
Advisory fees.................................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to in
footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill......................................... $2,140,963
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure that
exists within APF. APF expects to continue to qualify as a REIT and does
not expect to incur federal income taxes.
(j) Represents $267,176 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms for
the leases acquired from the Income Fund as if the leases had been acquired
on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees................................................... $ 0
Reimbursement of administrative costs............................. (34,727)
--------
$(34,727)
========
</TABLE>
(l) Represents the elimination of $34,727 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $50,158 in historical professional services
and administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $0 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $13,045 resulting from
assuming that acquisitions of properties that had been operational when APF
acquired them from January 1, 1998 through July 31, 1999 had been acquired
on January 1, 1998 and assuming that the shares issued in conjunction with
acquiring the Advisor, CNL Financial Services Group and the Income Fund had
been issued as of January 1, 1998 and that these entities had operated
under a REIT structure as of January 1, 1998.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $163,461 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in common
arrangements with affiliates or unrelated third parties, to fair value as a
result by the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings is being depreciated using the
straight-line method over the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$59,345 as a result of adjusting the historical basis of the real estate
owned by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method. The
adjustment to the basis of the buildings owned indirectly by the Income
Fund is being depreciated using the straight-line method over the remaining
useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the basis
of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a one-for-
two reverse stock split proposal and a proposal to increase the number of
authorized common shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for properties
that had been operational upon acquisition by APF since it is assumed
that these properties had been acquired on January 1, 1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant Financial
Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land and
building.
(i) Represents the adjustment for property acquisition from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund X, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund X, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
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(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund X, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
Recitals:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
Agreement:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its
entirety and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and
restated as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2
is hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
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1.7 The reference to "December 31, 1999" in the lead in of Section 10.3
is hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2
is hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to
any choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Florida.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
______________________________
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
______________________________
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
______________________________
By: Robert A. Bourne
Its: President
CNL INCOME FUND X, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
______________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
______________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
______________________________
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
______________________________
James M. Seneff, Jr., as General
Partner
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund X, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,243,243 fully paid and nonassessable APF Common
Shares (2,121,622 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $38,583,104, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,756,757 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,243,243 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $424,324 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
______________________________
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
______________________________
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
______________________________
By: Robert A. Bourne
Its: President
CNL INCOME FUND X, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
______________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
______________________________
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
______________________________
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
______________________________
James M. Seneff, Jr., as General
Partner
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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XI, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XI, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This Supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
.Uncertainty about the value at which APF Shares will trade following
listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
.Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
.The Acquisition is a taxable transaction.
.The acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties, APF has the
ability to offer a complete range of restaurant property services to operators
of national and regional restaurant chains, from triple-net leasing and
mortgage financing
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to site selection, construction management and build-to-suit development. If
APF acquires all of the Income Funds in the Acquisition, APF expects to have
total assets of approximately $1.5 billion at the time of the consummation of
the Acquisition and will be one of the largest triple-net lease REITs in the
United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,197,098 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the
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exchange value, that would otherwise have been paid to your Income Fund. Please
note that you may only receive the notes if you vote "Against" the Acquisition,
and you elect to receive the notes on your consent form. You will receive APF
Shares if your Income Fund elects to be acquired in the Acquisition and you
vote "For" the Acquisition, or you vote "Against" the Acquisition and do not
affirmatively select the notes on your consent form. In addition, if Limited
Partners in your Income Fund elect to receive notes in an amount greater than
15% of the estimated value of APF Shares, based on the exchange value, to be
paid to your Income Fund, then APF has the right to decline to acquire your
Income Fund. The notes will not be listed on any exchange or automated
quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the gain per average
original $10,000 investment in your Income Fund will be $1,940.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 2,197,098 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a
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<PAGE>
time when demand for APF Shares may be relatively low. The market price of the
APF Shares may be volatile after the Acquisition, and the APF Shares could
trade at prices substantially less than the exchange value as a result of
increased selling activity following the issuance of the APF Shares, the
interest level of investors in purchasing the APF Shares after the Acquisition
and the amount of distributions to be paid by APF.
Your distribution may decrease
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed, $885, $885 and $905, respectively, to you per $10,000
investment. While historically, APF has made distributions equal to 7.62% per
APF Share, based on the exchange value, we cannot be sure that APF will be able
to maintain this level of distributions in the future. In the event that APF is
unable to maintain this level of distributions in the future, your
distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have four material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne, have a different interest in the completion of the Acquisition
which may conflict with your interest as a Limited Partner of the Income Fund
or with their own positions as the general partners of your Income Fund.
Second, as stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited Partner of
the Income Fund and with their own as general partners of your Income Fund.
Third, assuming only your Income Fund is acquired in the Acquisition, we will
receive 21,328 APF Shares. Finally, in the event that your Income Fund is not
acquired, however, we may be required to pay all or a substantial portion of
the Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interest of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interest of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of
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restaurant properties in which you participate in the profits from the
operation of its restaurant properties, to holding common stock of APF, an
operating company, that will own an interest in 1,233 restaurant properties,
assuming only your Income Fund and the CNL Restaurant Businesses were acquired
as of June 30, 1999. The risks inherent in investing in an operating company
such as APF include that APF may invest in new restaurant properties that are
not as profitable as APF anticipated, it may incur substantial indebtedness to
make future acquisitions of restaurant properties that it may be unable to
repay and it may make mortgage loans to prospective operators of national and
regional restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds, if any, could be higher than the amount
realized from the sale of your APF Shares or from the combination of cash paid
to and payments on any notes if you elect to receive notes.
Real Estate/Business Risks
If APF's borrower's default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely effect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF's gains on any completed securitizations may be overstated if prepayment or
defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after
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considering the effects of prepayments and credit losses. The capitalized
mortgage servicing rights and mortgage-related securities would be valued using
prepayment, default, and interest rate assumptions that APF believes are
reasonable. The amount of revenue recognized upon the sale of loans or loan
participations will vary depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholders distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.90%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.46x and its ratio of debt-to-total assets would
have been 34.68%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the
S-6
<PAGE>
obligations of the tenant or the borrower. The ability of the tenants or
borrowers to pay their obligations to APF in a timely manner will depend on a
number of factors, including the successful operation of their businesses.
Various factors, many of which are beyond the control of a restaurant chain,
may adversely affect the economic viability of the restaurant chain, including
but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience, services
and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or that
of its franchisor or vendors, to adequately address year 2000 issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains that have
filed for bankruptcy protection may adversely affect APF's total rental, earned
and interest income. Because all of APF's properties are leased on a triple-net
basis, if a tenant has defaulted on its lease obligations or has declared
bankruptcy, it would reduce APF's rental, earned and interest income until APF
could lease those affected properties to a new tenant or tenants. As of June
30, 1999, your Income Fund had no tenants under bankruptcy protection.
Therefore, assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999, would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for the same period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
S-7
<PAGE>
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive the notes. You should note
that the APF Shares may trade at prices significantly below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Original Limited
Limited Partner Investments Estimated Value
Partner less Estimated of APF Shares
Investments Distributions of Estimated Value of per
less Net Sales Proceeds Number of Value of APF Shares Average $10,000
Distributions per $10,000 APF Shares APF Shares Estimated after Original
of Net Sales Original Offered to Payable to Acquisition Acquisition Limited Partner
Proceeds (1) Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 2,197,098 $43,941,960 $464,000 $43,477,960 $10,869
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
S-8
<PAGE>
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1).................................................... $ 33,769
Appraisals and Valuation(2)...................................... 6,435
Fairness Opinions(3)............................................. 30,000
Solicitation Fees(4)............................................. 17,440
Printing and Mailing(5).......................................... 97,808
Accounting and Other Fees(6)..................................... 64,612
--------
Subtotal....................................................... 250,064
--------
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)........................ 105,551
Legal Closing Fees(8)............................................ 52,136
Partnership Liquidation Costs(9)................................. 56,249
--------
Subtotal....................................................... 213,936
--------
Total............................................................ $464,000
========
</TABLE>
- --------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
S-9
<PAGE>
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For the purposes of the Acquisition, the term "Solicitation Fees" includes
costs such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of the Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (March 12, 1992). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership agreement
currently provides that your Income Fund may not participate in any
transaction involving (1) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(2) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding greater than 50% of the outstanding units
approve this amendment to your Income Fund's partnership agreement, Article 21
will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would change your Income Fund to a general partnership, change our liability or
your liability, or allow you to take part in the control or management of your
Income Fund. The form of opinion of Baker & Hostetler, LLP is attached to this
supplement as Appendix D.
S-10
<PAGE>
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired. If you prefer, you may instead vote by telephone according to
the instructions on your consent form.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
S-11
<PAGE>
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
-------------------------- Ended June
1996 1997 1998 30, 1999
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions......... -- -- -- --
Accounting and Administrative
Services............................. $ 95,845 $ 88,667 $101,423 $45,370
Property Management Fees.............. $ 37,293 $ 37,974 $ 39,393 $19,200
Broker/Dealer Commissions............. -- -- -- --
Due Diligence and Marketing Support
Fees................................. -- -- -- --
Acquisition Fees...................... -- -- -- --
Asset Management Fees................. -- -- -- --
Real Estate Disposition Fees(1)....... -- -- -- --
-------- -------- -------- -------
Total historical.................... $133,138 $126,641 $140,816 $64,570
Pro Forma Distributions to be Paid to
the General Partners Following the
Acquisition:
Cash Distributions on APF Shares(2)... $ 30,117 $ 31,769 $ 32,524 $16,262
Salary Compensation................... -- -- -- --
-------- -------- -------- -------
Total pro forma..................... $ 30,117 $ 31,769 $ 32,524 $16,262
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
S-12
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $810 $793 $858 $816 $905 $365 $279
Distributions from Return of
Capital(1)..................... 46 92 27 69 -- 73 131
---- ---- ---- ---- ---- ---- ----
Total......................... $856 $885 $885 $885 $905 $438 $410
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
Cash distributions for the year ended December 31, 1997 include $40,000
earned in 1997 but declared payable in the first quarter of 1998.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
.the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
S-13
<PAGE>
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired, all Limited Partners of
your Income Fund who vote "Against" the acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. We believe the Acquisition is the best way to
maximize the return on your investment because of your ability to participate
in the potential appreciation of APF Shares. Since your Income Fund is
restricted to owning and leasing a static number of restaurant properties due
to the limitations contained in your Income Fund's partnership agreement and
limited capital resources, your investments have less of an opportunity to
appreciate. Because APF is a growth-oriented operating company, you will have
the opportunity as an APF stockholder to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds.
S-14
<PAGE>
However, based on the reasons stated in this section of the supplement and the
opinion of Legg Mason that the APF Share consideration payable to each Income
Fund is fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund XI,
Ltd. .................. 40,000,000 10,000 10,763 10,729 10,000 9,110
</TABLE>
S-15
<PAGE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund of units as part of its
distribution reinvestment program and do not necessarily reflect the prices
in a secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have contractual
obligations pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up
to 21,328 APF Shares in the aggregate in accordance with the terms of
your Income Fund's partnership agreement. The 21,328 APF Shares issued
to us will have an estimated value, based on the exchange value, of
approximately $426,560.
. James M. Seneff, Jr. and Robert A. Bourne as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive stock options,
under APF's 1999 Performance Incentive Plan or any other such plan
approved by the stockholders. The benefits that may be realized by
Messrs. Seneff and Bourne are likely to exceed the benefits that they
would expect to derive from the Income Funds if the Acquisition does not
occur.
. As general partners of your Income Fund, we are legally liable for all
of your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement
for your Income Fund prohibits the Income Fund from incurring
indebtedness, the only liabilities the Income Fund has are liabilities
with respect to its ongoing business operations. In the event that your
Income Fund is acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund.
S-16
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner Investment
------------------
<S> <C>
CNL Income Fund XI, Ltd. .................................... $1,940
</TABLE>
S-17
<PAGE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares, and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
S-18
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares and/or notes, as the case may be, to you.
The taxable year of your Income Fund will end at this time, and you must
report, in your taxable year that includes the date of the Acquisition, your
share of all income, gain, loss, deduction and credit for your Income Fund
through the date of the Acquisition, including gain or loss resulting from the
Acquisition. If your taxable year is not the calendar year, you could be
required to recognize as income in a single taxable year your share of your
Income Fund's income attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units and your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-19
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,069,718 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,362,041)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,306,461)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes............ 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,306,461)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,780,721)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
Combined CNL Income Pro Forma Adjusted
APF Fund XI, Ltd. Adjustments Pro Forma
------------ ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $1,819,762 $ 30,840 (j) $32,808,116
Fees............. 2,616,185 0 (36,759)(k) 2,579,426
Interest and
Other Income..... 16,269,383 42,055 0 16,311,438
------------ ------------- ------------------ ------------
Total Revenue... $49,843,082 $1,861,817 $ (5,919) $51,698,980
Expenses:
General and
Administrative... 9,579,902 94,421 (40,842)(l),(m) 9,633,481
Management and
Advisory Fees.... 0 19,200 (19,200)(n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 28,346 8,439 (o) 501,751
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 213,292 108,894 (p) 4,991,339
Amortization..... 1,079,454 0 0 1,079,454
Transaction
Costs............ 483,005 120,097 0 603,102
------------ ------------- ------------------ ------------
Total Expenses.. 26,814,549 475,356 57,291 27,347,196
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,028,533 $1,386,461 $ (63,210) $24,351,784
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 89,929 (27,649)(q) 93,521
Gain (Loss) on
Sale of
Properties....... (201,843) 0 0 (201,843)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ------------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit
(Provision) for
Federal Income
Taxes............ 22,317,409 1,476,390 (90,859) 23,702,940
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ------------- ------------------ ------------
Net
Earnings(Losses).. $22,317,409 $1,476,390 $ (90,859) $23,702,940
============ ============= ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150(s) $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,836,474 (u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,793,960 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund XI, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 40 n/a 621
============== =========== ==================== =================
Earnings per
share/unit...... $ n/a $ 0.37 $ n/a $ 0.52
============== =========== ==================== =================
Book value per
share/unit...... $ n/a $ 8.55 $ n/a $ 16.32
============== =========== ==================== =================
Dividends per
share/unit...... $ n/a $ 0.44 $ n/a $ 0.76
============== =========== ==================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.93x
============== =========== ==================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,750,012 $ (92,458)(s) $ 34,822,956
============== =========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 2,173,898 45,671,781(r)
============== =========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 2,173,898 45,672,362
============== =========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $29,236,754 $9,369,565 (u2) $ 733,689,302
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 82,368 $ (24,887)(x) $ 9,304,579
Investment in
joint ventures.. $ 1,081,046 $ 2,772,561 $1,358,053 (u2) $ 5,211,660
Total assets.... $1,170,947,086 $ 5,744,319 $5,530,908 (u2),(x) $1,212,222,313
Total
liabilities/minority
interest........ $ 465,485,738 $ 1,560,329 $ (24,887)(x) $ 467,021,180
Total equity.... $ 705,461,348 $34,183,990 $5,555,795 (u2) $ 745,201,133
</TABLE>
S-21
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation expense
of $967,179 as if restaurant properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any restaurant properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial Corp. On a
historical basis, CNL Financial Services, Inc. records all of the loan
origination fees received as revenue. For purposes of presenting pro forma
financial statements of these entities on a combined basis, these loan
origination fees are required to be deferred and amortized into revenues
over the term of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$616,904 are being deferred for pro forma purposes and are being amortized
over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services Inc. from borrowers during the six months ended June 30,
1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and the
CNL Restaurant Financial Services Group resulting from agreements between
these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in footnote (u)
below:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,069,718
</TABLE>
S-22
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
(j) Represents $30,840 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees.............................................. $ (19,200)
Reimbursement of administrative costs........................ (17,559)
---------
$ (36,759)
=========
</TABLE>
(l)Represents the elimination of $14,755 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $23,203 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $19,200 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $8,439 resulting from assuming
that acquisitions of restaurant properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group and
the Income Fund had been issued as of January 1, 1998 and that these
entities had operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $108,894 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $27,649 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustments to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma restaurant properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June 30,
1999. Based on historical results through July 31, 1999, all interest costs
related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
S-23
<PAGE>
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,413,810 $50,348,014 $43,333,961 $175,095,785
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $39,739,785 $162,739,785
Cash Consideration...... -- -- 464,000 464,000
APF Transaction Costs... 5,413,810 3,348,014 3,130,176 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,413,810 $50,348,014 $43,333,961 $175,095,785
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--
Historical............ $ 8,330,475 $10,135,087 $34,183,990 $ 52,649,552
Purchase Price
Adjustments:
Land and buildings on
operating leases...... 7,680,023 7,680,023
Net investment in
direct financing
leases................ 1,959,541 1,959,541
Investment in joint
ventures.............. 1,358,053 1,358,053
Accrued rental income.. (1,711,758) (1,711,758)
Intangibles and other
assets................ (2,575,792) (135,888) (2,711,680)
Goodwill*.............. 42,788,719 -- 42,788,719
Excess purchase price.. 73,083,335 -- -- 73,083,335
----------- ----------- ----------- ------------
Total Allocation...... $81,413,810 $50,348,014 $43,333,961 $175,095,785
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed
to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,083,335 was
expensed at June 30, 1999 because the Advisor has not been deemed to qualify
as a "business" for purposes of applying APB Opinion No. 16, "Business
Combinations." Goodwill of $42,788,719 relating to the acquisition of the
CNL Financial Services Group is being amortized over 20 years. APF did not
acquire any intangibles as part of any of the acquisitions. The entries were
as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A.......... 8,600
Common Stock (CFA, CFS, CFC)--Class B.......... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)..... 12,568,974
Retained Earnings.............................. 5,883,163
Accumulated distributions in excess of
earnings...................................... 73,083,335
Goodwill for CFC/CFS (Intangibles and other
assets)....................................... 42,788,719
CFC/CFS Organizational Costs/Other Assets...... 2,575,792
Cash to pay APF transaction costs.............. 8,761,824
APF Common Stock............................... 61,500
APF Capital in Excess of Par Value............. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital.............................. 34,183,990
Land and buildings on operating leases......... 7,680,023
Net investment in direct financing leases...... 1,959,541
Investment in joint ventures................... 1,358,053
Accrued rental income.......................... 1,711,758
Intangibles and other assets................... 135,888
Cash to pay APF Transaction costs.............. 3,130,176
Cash consideration to Income Fund.............. 464,000
APF Common Stock............................... 21,739
APF Capital in Excess of Par Value............. 39,718,046
(To record acquisition of Income Fund)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party payables
recorded as receivables by the Advisor, and the elimination of intercompany
balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857 from
liabilities assumed in the acquisition since the Merger Agreement requires
that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes
at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $24,887 in related party
payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XI, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XI, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (1)............. $ 1,951,746 $ 1,988,880 $ 4,067,454 $ 3,998,538 $ 3,976,787 $ 3,920,528 $ 3,933,435
Net income (2).......... 1,476,390 1,627,478 3,809,404 3,295,079 3,464,705 3,202,176 3,272,492
Cash distributions
declared (3)........... 1,750,012 1,790,012 3,660,024 3,500,024 3,540,024 3,540,023 3,425,007
Net income per unit (2)
....................... 0.37 0.40 0.94 0.82 0.86 0.79 0.81
Cash distributions
declared per unit (3)
....................... 0.44 0.45 0.92 0.88 0.89 0.89 0.86
GAAP book value per
unit................... 8.55 8.54 8.61 8.58 8.63 8.65 8.73
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets ........... $35,744,319 $35,665,956 $36,103,592 $35,785,538 $36,003,045 $36,086,683 $36,335,476
Total partners'
capital................ 34,183,990 34,145,698 34,457,612 34,308,232 34,513,177 34,588,496 34,926,343
</TABLE>
- --------
(1) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of consolidated joint ventures.
(2) Net income for the years ended December 31, 1998 and 1996, include $461,861
and $213,685, respectively, from a gain on sale of land and buildings.
(3) Distributions for the year ended December 31, 1998, include special
distributions to the Limited Partners of $40,000 and $120,000 declared
during the six months ended June 30, and December 31, respectively, which
represented cumulative excess operating reserves. Distributions for the
year ended December 31, 1996, includes a special distribution to the
Limited Partners of $40,000, which represented cumulative excess operating
reserves.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XI, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 20, 1991, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as
properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 40 restaurant properties,
which included interests in five restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and one restaurant property owned
with one of our affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998 was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,797,730 and
$2,038,262 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999 is
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the quarter
ended June 30, 1999.
In January 1999, the Income Fund reinvested a portion of the net sales
proceeds it received from the 1998 sale of the restaurant property in Nashua,
New Hampshire in a Burger King restaurant property located in Yelm, Washington,
at an approximate cost of $1,032,400. In addition, in February 1999, the Income
Fund reinvested a portion of the remaining net sales proceeds in a joint
venture arrangement, Portsmouth Joint Venture, with CNL Income Fund XVIII,
Ltd., one of our affiliates, to purchase and hold one restaurant property. The
Income Fund contributed approximately $247,300 and had a 42.8% interest in the
profits and losses of the joint venture as of June 30, 1999. The Income Fund
intends to invest the remaining net sales proceeds in an additional restaurant
property.
Currently, rental income from the Income Fund's restaurant properties and
net sales proceeds from the sale of a restaurant property, pending reinvestment
in an additional restaurant property, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts,
certificates of deposit, and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At June 30, 1999, the Income
Fund had $1,804,990 invested in such short-term investments, as compared to
$1,559,240 at December 31, 1998. The increase in cash and cash equivalents
during the six months ended June 30, 1999, is primarily attributable to the
release of a portion of the funds held in escrow at December 31, 1998 relating
to the sale of the restaurant property in Nashua, New Hampshire during 1998,
net of reinvestment in restaurant properties, as described above. The funds
remaining at June 30, 1999, after payment of distributions and other
liabilities, will be used to invest in an additional restaurant property and to
meet the Income Fund's working capital and other needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
S-26
<PAGE>
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital for the years ended December 31,
1998, 1997, and 1996, was cash from operations, which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses, Cash from operations was $3,894,062, $3,642,796, and
$3,601,714 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase during 1998, as compared to 1997, is primarily a result of changes
in the Income Fund's working capital and changes in income and expenses as
described in "Results of Operations" below, and the increase in cash from
operations during 1997, as compared to 1996, is primarily a result of changes
in income and expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In November 1996, the Income Fund sold its restaurant property in
Philadelphia, Pennsylvania, for $1,050,000 and received net sales proceeds of
$1,044,750, resulting in a gain of $213,685 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in
September 1992, and had a cost of approximately $877,900, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $166,900 in excess of its original
purchase price. As of December 31, 1996, the net sales proceeds of $1,044,750,
plus accrued interest of $3,072, were being held in an interest-bearing escrow
account pending the release of funds by the escrow agent to acquire an
additional restaurant property. The sale of this restaurant property was
structured to qualify as a like-kind exchange transaction in accordance with
Section 1031 of the Internal Revenue Code. As a result, no gain was recognized
for federal income tax purposes. Therefore, the Income Fund was not required to
distribute any of the net sales proceeds from the sale of this restaurant
property to Limited Partners for the purpose of paying federal and state income
taxes.
In January 1997, the Income Fund reinvested the net sales proceeds from the
1996 sale of the restaurant property in Philadelphia, Pennsylvania, in a Black-
eyed Pea restaurant property located in Corpus Christi, Texas, with one of our
affiliates as tenants-in-common. In connection therewith, the Income Fund and
the affiliate entered into an agreement whereby each co-venturer will share in
the profits and losses of the restaurant property in proportion to its
applicable percentage interest. As of December 31, 1998, the Income Fund owned
a 72.58% interest in this restaurant property.
In October 1998, the Income Fund sold its restaurant property in Nashua, New
Hampshire, for $1,748,000 and received net sales proceeds of $1,630,296,
resulting in a gain of $461,861 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in 1992, and had
a cost of approximately $1,302,414, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $327,900 in excess of its original
purchase price. As of December 31, 1998, the net sales proceeds of $1,630,296,
plus accrued interest of $10,640, were being held in an interest-bearing escrow
account pending the release of funds by the escrow agent to acquire an
additional restaurant property.
In January 1999, the Income Fund reinvested a portion of the net sales
proceeds it received from the sale of the property in Nashua, New Hampshire, in
a Burger King property located in Yelm, Washington, at an approximate cost of
$1,054,000. In addition, in February 1999, the Income Fund reinvested the
remaining net sales proceeds it received from the sale of the property in
Nashua, New Hampshire, in a joint venture arrangement, Portsmouth Joint
Venture, with an affiliate of the General Partners, to purchase and hold one
restaurant property, at a total cost of approximately $584,100. The Income Fund
contributed approximately $250,000 and has an approximate 43 percent interest
in the profits and losses of the joint venture.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the
S-27
<PAGE>
Income Fund may borrow funds but will not encumber any of the restaurant
properties in connection with any such borrowing. The Income Fund will not
borrow for the purpose of returning capital to the Limited Partners. The Income
Fund will not borrow under arrangements that would make the Limited Partners
liable to creditors of the Income Fund. We further have represented that we
will use our reasonable efforts to structure any borrowing so that it will not
constitute "acquisition indebtedness" for federal income tax purposes and also
will limit the Income Fund's outstanding indebtedness to three percent of the
aggregate adjusted tax basis of its restaurant properties. Certain of our
affiliates from time to time incur certain operating expenses on behalf of the
Income Fund for which the Income Fund reimburses the affiliates without
interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts wih less than a 30-day maturity
date, pending the Income Fund's use of such funds to pay Income Fund expenses
or to make distributions to partners. At December 31, 1998, the Income Fund had
$1,559,240 invested in such short-term investments as compared to $1,272,386 at
December 31, 1997. As of December 31, 1998, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately three percent annually. The funds remaining at December 31, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on cash from
operations, and for the six months ended June 30, 1998, accumulated excess
operating reserves, the Income Fund declared distributions to Limited Partners
of $1,750,012 and $1,790,012 for the six months ended June 30, 1999 and 1998,
respectively, or $875,006 for each of the quarters ended June 30, 1999 and
1998. This represents distributions of $0.44 and $0.45 per unit for the six
months ended June 30, 1999 and 1998, respectively, or $0.22 per unit for each
of the quarters ended June 30, 1999 and 1998. No distributions were made to us
for the quarters and six months ended June 30, 1999 and 1998. No amounts
distributed to the Limited Partners for the six months ended June 30, 1999 and
1998 are required to be or have been treated by the Income Fund as a return of
capital for purposes of calculating the Limited Partners' return on their
adjusted capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
decreased to $1,055,825 at June 30, 1999 from $1,142,120 at December 31, 1998,
primarily as a result of the payment in January 1999 of a special distribution
accrued at December 31, 1998, of $120,000, representing cumulative excess
operating reserves. We believe that the Income Fund has sufficient cash on hand
to meet its current working capital needs.
S-28
<PAGE>
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Based on cash from operations, and during the years ended December 31, 1998
and 1996, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,660,024, $3,500,024, and $3,540,024
for the years ended December 31, 1998, 1997, and 1996, respectively. This
represents a distribution of $0.92, $0.88, and $0.89 per Unit for the years
ended December 31, 1998, 1997, and 1996, respectively. No amounts distributed
to the Limited Partners for the years ended December 31, 1998, 1997, and 1996,
are required to be or have been treated by the Income Fund as a return of
capital for purposes of calculating the Limited Partners' return on their
adjusted capital contributions.
During 1998, 1997, and 1996, certain of our affiliates incurred $109,290,
$83,747, and $105,643, respectively, for certain operating expenses. As of
December 31, 1998 and 1997, the Income Fund owed $25,446 and $6,648,
respectively, our affiliates for such amounts, accounting and administrative
services and management fees. As of March 11, 1999, the Income Fund had
reimbursed the affiliates all such amounts. Other liabilities, including
distributions payable, increased to $1,116,674 at December 31, 1998, from
$969,257 at December 31, 1997, partially as the result of the Income Fund's
accruing a special distribution payable to the Limited Partners of $120,000 at
December 31, 1998, which was paid in January 1999 and an increase in rents paid
in advance at December 31, 1998.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1999 and 1998, the Income Fund and its
consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, owned and leased 36 wholly owned restaurant properties, including one
restaurant property in Nashua, New Hampshire, which was sold in October 1998,
to operators of fast-food and family-style restaurant chains. During the six
months ended June 30, 1999 and 1998, the Income Fund, Denver Joint Venture and
CNL/Airport Joint Venture earned $1,764,869 and $1,764,387, respectively, in
rental income from operating leases and earned income from direct financing
leases, $885,840 and $881,836 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively. In addition, during the six months ended
June 30, 1999 and 1998, the Income Fund earned $54,893 and $62,764,
respectively, in contingent rental income, $34,651 and $42,996 of which was
earned during the quarters ended June 30, 1999 and 1998, respectively.
In addition, during the six months ended June 30, 1998, the Income Fund
owned and leased two restaurant properties indirectly through other joint
venture arrangements and owned and leased one restaurant property with an
affiliate as tenants-in-common. During the six months ended June 30, 1999 the
Income Fund owned and leased three restaurant properties indirectly through
other joint venture arrangements and owned and leased one restaurant property
with an affiliate as tenants-in-common. In connection therewith, during the six
months ended June 30, 1999 and 1998, the Income Fund earned $123,135 and
$97,605, respectively, $65,134 and $57,604 of which was earned during the
quarters ended June 30, 1999 and 1998, respectively. Net income earned by
unconsolidated joint ventures increased during the six months ended June 30,
1999, as compared to
S-29
<PAGE>
the six months ended June 30, 1998, as a result of the fact that in February
1999, the Income Fund reinvested a portion of the net sales proceeds from the
1998 sale of the restaurant property in Nashua, New Hampshire, in Portsmouth
Joint Venture, with CNL Income Fund XVIII, Ltd., one of our affiliates. In
addition, net income earned by joint ventures during the six months ended June
30, 1998 was less than that earned during the six months ended June 30, 1999,
partially due to the fact that Ashland Joint Venture adjusted estimated
contingent rental amounts accrued at December 31, 1997 to actual amounts
during the six months ended June 30, 1998.
During the six months ended June 30, 1999 and 1998, the Income Fund earned
$42,055 and $98,048, respectively, in interest and other income, $21,121 and
$85,643 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. Interest and other income earned during the quarter and six
months ended June 30, 1998, was more than that earned during the quarter and
six months ended June 30, 1999, primarily because the Income Fund collected
and recognized $60,000 in other income in May 1998, as a result of the
execution of an amendment to a purchase and sale agreement with a third party
to extend the closing date for the sale of the Burger King restaurant property
located in Nashua, New Hampshire. In accordance with the terms of the
amendment, the Income Fund was deemed to have earned the $60,000 upon
execution of the amendment to extend the closing date for the sale of this
restaurant property. This restaurant property was sold in October 1998.
Operating expenses, including depreciation and amortization expense, were
$475,356 and $361,402 for the six months ended June 30, 1999 and 1998,
respectively, $242,880 and $179,651 of which were incurred during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to 1998, is
primarily a result of the Income Fund incurring $85,130 and $120,097,
respectively, in transaction costs relating to our retaining financial and
legal advisors to assist us in evaluating and negotiating the Acquisition with
APF. If the Limited Partners reject the Acquisition, the Income Fund will bear
the portion of the transaction costs based upon the percentage of "For" votes
and we will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
The Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1996, the Income Fund and its
consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, owned and leased 37 wholly-owned restaurant properties, including one
restaurant property in Philadelphia, Pennsylvania, which was sold in November
1996. During the year ended December 31, 1997, the Income Fund and its
consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, owned and leased 36 wholly-owned restaurant properties, and during
the year ended December 31, 1998, the Income Fund and its consolidated joint
ventures, Denver Joint Venture and CNL/Airport Joint Venture, owned and leased
37 wholly-owned restaurant properties, including one restaurant property in
Columbus, Ohio exchanged for one restaurant property in Danbury, Connecticut
and one restaurant property in Nashua, New Hampshire, which was sold in
October 1998. In addition, during 1998, 1997, and 1996, the Income Fund and
its consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, was a co-venturer in two separate joint ventures that each owned and
leased one restaurant property, and during 1998 and 1997, the Income Fund
owned and leased one restaurant property with an affiliate as tenants-in-
common. As of December 31, 1998, the Income Fund owned, either directly or
through joint venture arrangements, 38 restaurant properties that are subject
to long-term, triple-net leases. The leases of the restaurant properties
provide for minimum base annual rental amounts, payable in monthly
installments, ranging from approximately $45,600 to $191,900. The majority of
the leases provide for percentage rent based on sales in excess of a specified
amount. In addition, some of the leases provide that, commencing in specified
lease years, generally the sixth lease year, the annual base rent required
under the terms of the lease will increase.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
and its consolidated joint ventures, Denver Joint Venture and CNL/Airport
Joint Venture, earned $3,537,605, $3,543,984, and $3,615,977, respectively, in
rental income from operating leases and earned income from direct financing
leases. The decrease in rental and earned income during 1997 as compared to
1996 is primarily attributable to
S-30
<PAGE>
the sale of the restaurant property in Philadelphia, Pennsylvania in November
1996, as described above in "Capital Resources." In January 1997, the Income
Fund reinvested the net sales proceeds in a restaurant property in Corpus
Christi, Texas, with one of our affiliates, as described above in "Capital
Resources."
For the years ended December 31, 1998, 1997, and 1996, the Income Fund also
earned $243,115, $225,888, and $251,312, respectively, in contingent rental
income. The increase in contingent rental income during 1998, as compared to
1997, is primarily due to an increase in gross sales of certain restaurant
properties whose leases require the payment of contingent rental income. The
decrease during 1997, as compared to 1996, is primarily due to the sale of the
restaurant property in Philadelphia, Pennsylvania.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $215,501, $236,103, and $118,211, respectively, attributable
to net income earned by unconsolidated joint ventures in which the Income Fund
is a co-venturer. The decrease in net income earned by joint ventures during
1998, as compared to 1997, is primarily due to Ashland Joint Venture adjusting
estimated contingent rental amounts accrued at December 31, 1997 to actual
amounts billed during 1998. The increase in net income earned by unconsolidated
joint ventures during 1997, as compared to 1996, is primarily attributable to
the Income Fund investing in a restaurant property in Corpus Christi, Texas, in
January 1997, with one of our affiliates as tenants-in-common, as described
above in "Capital Resources."
During the year ended December 31, 1998, five lessees, or group of
affiliated lessees, of the Income Fund and its consolidated joint ventures,
Golden Corral Corporation, Foodmaker, Inc., Burger King Corporation,
DenAmerica, and Advantica Restaurant Group, Inc., each contributed more than
10% of the Income Fund's total rental income, including rental income from the
Income Fund's consolidated joint ventures, the Income Fund's share of rental
income from two restaurant properties owned by unconsolidated joint ventures
and one restaurant property owned with an affiliate as tenants-in-common. As of
December 31, 1998, Golden Corral Corporation was the lessee under leases
relating to three restaurants, Foodmaker, Inc. was the lessee under leases
relating to eight restaurants, Burger King Corporation was the lessee under
leases relating to seven restaurants, Advantica Restaurant Group, Inc. was the
lessee under leases relating to five restaurants, and DenAmerica Corporation
was the lessee under leases relating to five restaurants. It is anticipated
that, based on the minimum rental payments required by the leases, these five
tenants each will continue to contribute more than 10% of the Income Fund's
total rental income during 1999. In addition, during the year ended December
31, 1998, four restaurant chains, Golden Corral, Jack in the Box, Burger King,
and Denny's, each accounted for more than 10% of the Income Fund's total rental
income, including rental income from the Income Fund's consolidated joint
ventures and the Income Fund's share of rental income from two restaurant
properties owned by unconsolidated joint ventures and one restaurant property
owned with an affiliate as tenants-in-common. In 1999, it is anticipated that
these restaurant chains each will continue to account for more than 10% of the
total rental income to which the Income Fund is entitled under the terms of its
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income if the Income Fund is not able to re-lease the
restaurant properties in a timely manner.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $139,707, $62,440, and $61,403, respectively, in interest
and other income. The increase in interest and other income during 1998, as
compared to 1997, was primarily attributable to the Income Fund collecting and
recognizing $60,000 in other income in May 1998, as a result of executing an
amendment to a purchase and sale agreement with a third party to extend the
closing date for the Burger King restaurant property located in Nashua, New
Hampshire. In accordance with the terms of the amendment, the Income Fund was
deemed to have earned the $60,000 upon execution of the amendment to extend the
closing date of this restaurant property. This restaurant property was sold in
October 1998, as described above in "Capital Resources."
Operating expenses, including depreciation and amortization expense, were
$719,911, $703,459, and $725,767 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily a result of the Income Fund incurring $20,888 in
S-31
<PAGE>
transaction costs relating to our retaining financial and legal advisors to
assist us in evaluating and negotiating the proposed Acquisition with APF, as
described above in "Capital Resources."
The decrease in operating expenses during 1997, as compared to 1996, is
primarily attributable to a decrease in depreciation expense as a result of the
sale of the restaurant property in Philadelphia, Pennsylvania.
As a result of the sale of the restaurant property in Nashua, New Hampshire,
as described above in "Capital Resources," the Income Fund recognized a gain of
$461,861 for financial reporting purposes for the year ended December 31, 1998.
In addition, as a result of the sale of the restaurant property in
Philadelphia, Pennsylvania, as described above in "Capital Resources," the
Income Fund recognized a gain of $213,685 for financial reporting purposes for
the year ended December 31, 1996. No restaurant properties were sold during the
year ended December 31, 1997.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we Partners believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
S-32
<PAGE>
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
S-33
<PAGE>
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998 ...................... F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998 ........................................... F-5
Report of Independent Certified Public Accountants....................... F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-20
Unaudited Pro Forma Balance Sheet as of June 30, 1999.................... F-21
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................ F-23
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-25
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................ F-27
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-29
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-31
</TABLE>
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,803,077 and
$2,589,785, respectively............................. $21,808,299 $21,683,785
Net investment in direct financing leases............. 7,428,455 6,786,286
Investment in joint ventures.......................... 2,772,561 2,521,613
Cash and cash equivalents............................. 1,804,990 1,559,240
Restricted cash....................................... -- 1,640,936
Receivables, less allowance for doubtful accounts of
$562 and $5,820, respectively........................ 82,368 132,311
Prepaid expenses...................................... 13,864 12,335
Accrued rental income................................. 1,711,758 1,645,062
Other assets.......................................... 122,024 122,024
----------- -----------
$35,744,319 $36,103,592
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 89,097 $ 14,461
Accrued and escrowed real estate taxes payable........ 15,677 15,138
Distributions payable................................. 875,006 995,006
Due to related party.................................. 24,887 25,446
Rents paid in advance and deposits.................... 51,158 92,069
----------- -----------
Total liabilities................................... 1,055,825 1,142,120
Commitments and Contingencies (Note 4)
Minority interest..................................... 504,504 503,860
Partners' capital..................................... 34,183,990 34,457,612
----------- -----------
$35,744,319 $36,103,592
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases....................... $ 646,271 $ 675,491 $1,289,771 $1,350,982
Earned income from direct
financing leases............. 239,569 206,345 475,098 413,405
Contingent rental income...... 34,651 42,996 54,893 62,764
Interest and other income..... 21,121 85,643 42,055 98,048
--------- ---------- ---------- ----------
941,612 1,010,475 1,861,817 1,925,199
--------- ---------- ---------- ----------
Expenses:
General operating and
administrative............... 29,589 44,999 71,949 74,457
Professional services......... 11,634 9,241 22,472 14,193
Management fees to related
party........................ 9,724 9,710 19,200 19,052
State and other taxes......... 157 1,036 28,346 24,370
Depreciation and
amortization................. 106,646 114,665 213,292 229,330
Transaction costs............. 85,130 -- 120,097 --
--------- ---------- ---------- ----------
242,880 179,651 475,356 361,402
--------- ---------- ---------- ----------
Income Before Minority Interests
in Income of Consolidated Joint
Ventures and Equity in Earnings
of Unconsolidated Joint
Ventures....................... 698,732 830,824 1,386,461 1,563,797
Minority Interests in Income of
Consolidated Joint Ventures.... (16,797) (16,906) (33,206) (33,924)
Equity in Earnings of
Unconsolidated Joint Ventures.. 65,134 57,604 123,135 97,605
--------- ---------- ---------- ----------
Net Income...................... $ 747,069 $ 871,522 $1,476,390 $1,627,478
========= ========== ========== ==========
Allocation of Net Income:
General partners.............. $ 7,471 $ 8,715 $ 14,764 $ 16,275
Limited partners.............. 739,598 862,807 1,461,626 1,611,203
--------- ---------- ---------- ----------
$ 747,069 $ 871,522 $1,476,390 $1,627,478
========= ========== ========== ==========
Net Income Per Limited Partner
Unit........................... $ 0.18 $ 0.22 $ 0.37 $ 0.40
========= ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 211,047 $ 176,232
Net income..................................... 14,764 34,815
----------- -----------
225,811 211,047
----------- -----------
Limited partners:
Beginning balance.............................. 34,246,565 34,132,000
Net income..................................... 1,461,626 3,774,589
Distributions ($0.44 and $0.92 per limited
partner unit, respectively)................... (1,750,012) (3,660,024)
----------- -----------
33,958,179 34,246,565
----------- -----------
Total partners' capital.......................... $34,183,990 $34,457,612
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,797,730 $ 2,038,262
----------- -----------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases.......................................... (337,806) --
Investment in direct financing leases............ (694,610) --
Investment in joint venture...................... (247,286) --
Decrease in restricted cash...................... 1,630,296 --
----------- -----------
Net cash provided by investing activities...... 350,594 --
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,870,012) (1,790,012)
Distributions to holders of minority interests... (32,562) (34,830)
----------- -----------
Net cash used in financing activities.......... (1,902,574) (1,824,842)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 245,750 213,420
Cash and Cash Equivalents at Beginning of Period..... 1,559,240 1,272,386
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,804,990 $ 1,485,806
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period.......................................... $ 875,006 $ 875,006
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XI, Ltd. (the "Partnership") for the year ended December 31, 1998.
The Partnership accounts for its 85 percent interest in Denver Joint Venture
and its 77.33% interest in CNL/Airport Joint Venture using the consolidation
method. Minority interests represent the minority joint venture partners'
proportionate share of the equity in the Partnership's consolidated joint
ventures. All significant intercompany accounts and transactions have been
eliminated.
2. Land and Buildings on Operating Leases:
In January 1999, the Partnership reinvested a portion of the net sales
proceeds it received from the 1998 sale of the property in Nashua, New
Hampshire in a Burger King property located in Yelm, Washington, at an
approximate cost of $1,032,400. In accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases," the land portion of this
property was classified as an operating lease while the building portion was
classified as a capital lease.
3. Investment in Joint Ventures:
In February 1999, the Partnership reinvested a portion of the remaining net
sales proceeds it received from the 1998 sale of the property in Nashua, New
Hampshire in a joint venture arrangement, Portsmouth Joint Venture, with CNL
Income Fund XVIII, Ltd., an affiliate of the general partners, to purchase and
hold one restaurant property. As of June 30, 1999, the Partnership had
contributed approximately $247,000 to the joint venture and owned a 42.8%
interest in the profits and losses of this joint venture. The Partnership
accounts for its investment in this joint venture under the equity method since
the Partnership shares control with this affiliate.
The following presents the combined, condensed financial information for the
joint ventures and the property held as tenants-in-common with an affiliate at:
F-5
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $3,639,814 $3,427,681
Net investment in direct financing lease.......... 322,625 --
Cash.............................................. 2,009 1,109
Receivables....................................... 32,541 --
Prepaid expenses.................................. 3,246 8,290
Accrued rental income............................. 149,398 130,585
Partners' capital................................. 4,149,633 3,567,665
Revenues.......................................... 232,703 399,305
Net income........................................ 181,750 300,036
</TABLE>
The Partnership recognized income totalling $123,135 and $97,605 for the six
months ended June 30, 1999 and 1998, respectively, from these joint ventures,
$65,134 and $57,604 of which was earned during the quarters ended June 30, 1999
and 1998, respectively.
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,197,098 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $43,333,961 of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XI, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XI, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except
for the second paragraph of Note 11
for which the date is March 11, 1999 and Note 12 for which the date is June
3, 1999
F-7
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $21,683,785 $23,561,017
Net investment in direct financing leases............. 6,786,286 6,611,661
Investment in joint ventures.......................... 2,521,613 2,567,786
Cash and cash equivalents............................. 1,559,240 1,272,386
Restricted cash....................................... 1,640,936 --
Receivables, less allowance for doubtful accounts
$5,820 in 1998....................................... 132,311 119,575
Prepaid expenses...................................... 12,335 13,363
Accrued rental income................................. 1,645,062 1,517,726
Other assets.......................................... 122,024 122,024
----------- -----------
$36,103,592 $35,785,538
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 14,461 $ 6,508
Accrued and escrowed real estate taxes payable........ 15,138 19,410
Distributions payable................................. 995,006 875,006
Due to related parties................................ 25,446 6,648
Rents paid in advance and deposits.................... 92,069 68,333
----------- -----------
Total liabilities................................... 1,142,120 975,905
Minority interests.................................... 503,860 501,401
Partners' capital..................................... 34,457,612 34,308,232
----------- -----------
$36,103,592 $35,785,538
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,644,418 $2,702,558 $2,765,327
Earned income from direct financing
leases.................................. 893,187 841,426 850,650
Contingent rental income................. 243,115 225,888 251,312
Interest and other income................ 139,707 62,440 61,403
---------- ---------- ----------
3,920,427 3,832,312 3,928,692
---------- ---------- ----------
Expenses:
General operating and administrative..... 154,434 148,380 164,642
Professional services.................... 34,140 32,077 30,984
Management fees to related parties....... 39,393 37,974 37,293
Real estate taxes........................ 2,858 -- --
State and other taxes.................... 24,262 25,779 14,650
Depreciation and amortization............ 443,936 459,249 478,198
Transaction costs........................ 20,888 -- --
---------- ---------- ----------
719,911 703,459 725,767
---------- ---------- ----------
Income Before Minority Interests in Income
of Consolidated Joint Ventures, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Buildings.... 3,200,516 3,128,853 3,202,925
Minority Interests in Income of
Consolidated Joint Ventures............... (68,474) (69,877) (70,116)
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 215,501 236,103 118,211
Gain on Sale of Land and Buildings......... 461,861 -- 213,685
---------- ---------- ----------
Net Income................................. $3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 34,815 $ 32,951 $ 33,356
Limited partners......................... 3,774,589 3,262,128 3,431,349
---------- ---------- ----------
$3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.94 $ 0.82 $ 0.86
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $108,925 $40,000,000 $(11,515,062) $10,783,633 $(4,790,000) $34,588,496
Distributions to
limited partners
($0.89 per limited
partners unit)........ -- -- -- (3,540,024) -- -- (3,540,024)
Net income............. -- 33,356 -- -- 3,431,349 -- 3,464,705
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 142,281 40,000,000 (15,055,086) 14,214,982 (4,790,000) 34,513,177
Distributions to
limited partners
($0.88 per limited
partners unit)........ -- -- -- (3,500,024) -- -- (3,500,024)
Net income............. -- 32,951 -- -- 3,262,128 -- 3,295,079
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 175,232 40,000,000 (18,555,110) 17,477,110 (4,790,000) 34,308,232
Distributions to
limited partners
($0.92 per limited
partners unit)........ -- -- -- (3,660,024) -- -- (3,660,024)
Net income............. -- 34,815 -- -- 3,774,589 -- 3,809,404
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $210,047 $40,000,000 $(22,215,134) $21,251,699 $(4,790,000) $34,457,612
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $3,826,352 $3,585,979 $3,657,138
Distributions from unconsolidated joint
ventures................................. 262,843 250,497 148,375
Cash paid for expenses.................... (247,138) (237,312) (251,408)
Interest received......................... 52,005 43,632 47,609
---------- ---------- ----------
Net cash provided by operating
activities.............................. 3,894,062 3,642,796 3,601,714
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings.. 1,630,296 -- 1,044,750
Investment in joint ventures.............. (1,169) (1,044,750) --
Decrease (increase) in restricted cash.... (1,630,296) 1,044,750 (1,044,750)
---------- ---------- ----------
Net cash used in investing activities.... (1,169) -- --
---------- ---------- ----------
Cash Flows From Financing Activities:
Distributions to limited partners......... (3,540,024) (3,540,024) (3,540,024)
Distributions to holders of minority
interests................................ (66,015) (56,246) (58,718)
---------- ---------- ----------
Net cash used in financing activities.... (3,606,039) (3,596,270) (3,598,742)
---------- ---------- ----------
Net Increase in Cash and Cash Equivalents.. 286,854 46,526 2,972
Cash and Cash Equivalents at Beginning of
Year...................................... 1,272,386 1,225,860 1,222,888
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,559,240 $1,272,386 $1,225,860
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $3,809,404 $3,295,079 $3,464,705
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 443,936 458,660 476,198
Amortization.............................. -- 589 2,000
Gain on sale of land and buildings........ (461,861) -- (213,685)
Minority interests in income of
consolidated joint ventures.............. 68,474 69,877 70,116
Equity in earnings of unconsolidated joint
ventures, net of distributions........... 47,342 14,394 30,164
Decrease (increase) in receivables........ (23,376) (23,957) 25,855
Decrease (increase) in prepaid expenses... 1,028 (136) 151
Decrease in net investment in direct
financing leases......................... 90,236 74,706 62,366
Increase in accrued rental income......... (127,336) (260,223) (296,439)
Increase in accounts payable and accrued
expenses................................. 3,681 2,143 4,280
Increase (decrease) in due to related
parties.................................. 18,798 4,527 (4,386)
Increase (decrease) in rents paid in
advance and deposits..................... 23,736 7,137 (19,611)
---------- ---------- ----------
Total adjustments........................ 84,658 347,717 137,009
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,894,062 $3,642,796 $3,601,714
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Land and building under operating lease
exchanged for land and building
under operating lease.................... $ 718,930 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 995,006 $ 875,006 $ 915,006
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to the fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and
F-12
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
accrued rental income, and to decrease rental or other income or increase bad
debt expense for the current period, although the Partnership continues to
pursue collection of such amounts. If amounts are subsequently determined to be
uncollectible, the corresponding receivable and allowance for doubtful accounts
are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 85 percent
interest in Denver Joint Venture and its 77.33% interest in CNL/Airport Joint
Venture using the consolidation method. Minority interests represent the
minority joint venture partners' proportionate share of equity in the
Partnership's consolidated joint ventures. All significant intercompany
accounts and transactions have been eliminated.
The Partnership's investments in Ashland Joint Venture and Des Moines Real
Estate Joint Venture, and a property in Corpus Christi, Texas, for which the
property is held as tenants-in-common, are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
General Partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant use of management estimates relate to the
allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases are classified as operating leases
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of
F-13
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
the majority of these leases are operating leases. Substantially all leases are
for 14 to 20 years and provide for minimum and contingent rentals. In addition,
the tenant pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage for public
liability, property damage, fire and extended coverage. The lease options
generally allow tenants to renew the leases for two to five successive five-
year periods subject to the same terms and conditions as the initial lease.
Most leases also allow the tenant to purchase the property at fair market value
after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $11,607,426 $12,269,964
Buildings....................................... 12,666,144 13,746,182
----------- -----------
24,273,570 26,016,146
Less accumulated depreciation................... (2,589,785) (2,455,129)
----------- -----------
$21,683,785 $23,561,017
=========== ===========
</TABLE>
In September 1998, the tenant of the property in Columbus, Ohio, exercised
its option under the terms of its lease agreement, to exchange one existing
property with a replacement property. In conjunction therewith, the Partnership
exchanged the Burger King property in Columbus, Ohio, for a Burger King
property in Danbury, Connecticut. The lease for the property in Columbus, Ohio,
was amended to allow the property in Danbury, Connecticut to continue under the
terms of the original lease. All closing costs were paid by the tenant. The
Partnership accounted for this as a nonmonetary exchange of similar assets and
recorded the acquisition of the property in Danbury, Connecticut at the net
book value of the property in Columbus, Ohio. No gain or loss was recognized
due to this being accounted for as a nonmonetary exchange of similar assets.
In October 1998, the Partnership sold its property in Nashua, New Hampshire,
to a third party for $1,748,000, and received net sales proceeds of $1,630,296,
resulting in a gain of $461,861 for financial reporting purposes. This property
was originally acquired by the Partnership in 1992 at a cost of approximately
$1,302,400, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold this property for a total of approximately
$327,900 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997, and 1996, the Partnership recognized $127,336, $260,233 and
$296,439, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,426,198
2000.......................................................... 2,426,198
2001.......................................................... 2,435,203
2002.......................................................... 2,486,388
2003.......................................................... 2,644,398
Thereafter.................................................... 16,656,009
-----------
$29,074,394
===========
</TABLE>
F-14
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $13,985,977 $13,834,907
Estimated residual values....................... 2,210,329 2,144,114
Less unearned income............................ (9,410,020) (9,367,360)
----------- -----------
Net investment in direct financing leases....... $ 6,786,286 $ 6,611,661
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 988,575
2000.......................................................... 988,575
2001.......................................................... 988,575
2002.......................................................... 999,775
2003.......................................................... 1,019,879
Thereafter.................................................... 9,000,598
-----------
$13,985,977
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 62.16% and a 76.6% interest in the profits and losses
of Ashland Joint Venture and Des Moines Real Estate Joint Venture,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
In January 1997, the Partnership acquired a 72.58% interest in a Black-eyed
Pea property in Corpus Christi, Texas, as tenants-in-common with an affiliate
of the general partners. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate, and amounts relating to its investment are included in investment in
joint ventures.
F-15
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Ashland Joint Venture, Des Moines Real Estate Joint Venture and the
Partnership and affiliate, as tenants-in-common, each own and lease one
property to an operator of national fast-food restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $3,427,681 $3,511,507
Cash................................................ 1,109 621
Receivables......................................... -- 21,638
Prepaid expenses.................................... 8,290 6,939
Accrued rental income............................... 130,585 99,429
Liabilities......................................... -- 466
Partners' capital................................... 3,567,665 3,639,668
Revenues............................................ 399,305 430,923
Net income.......................................... 300,036 334,962
</TABLE>
The Partnership recognized income totalling $215,501, $236,103, and $118,211
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
As of December 31, 1998, the net sales proceeds of $1,630,296 from the sale
of the property in Nashua, New Hampshire, plus accrued interest of $10,640,
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional property (See Note 11).
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their Limited
Partners' 10% Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership,
F-16
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
iii) third, to pay all of the Partnership's liabilities, if any, to the general
and limited partners, iv) fourth, after allocations of net income, gains and/or
losses, to distribute to the partners with positive capital accounts balances,
in proportion to such balances, up to amounts sufficient to reduce such
positive balances to zero, and v) thereafter, any funds remaining shall then be
distributed 95 percent to the limited partners and five percent to the general
partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,660,024, $3,500,024 and
$3,540,024, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................. $3,809,404 $3,295,079 $3,464,705
Depreciation for tax reporting purposes
less than (in excess of) depreciation for
financial reporting purposes............. 2,899 (43,077) (39,035)
Gain on sale of land and building for
financial reporting purposes in excess of
gain for tax reporting purposes.......... (461,861) -- (213,685)
Direct financing leases recorded as
operating leases for tax reporting
purposes................................. 90,236 74,706 62,366
Equity in earnings of unconsolidated joint
ventures for financial reporting purposes
in excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes....................... (5,906) (13,296) (606)
Capitalization of transaction costs for
tax reporting purposes................... 20,888 -- --
Accrued rental income..................... (127,336) (260,223) (296,439)
Rents paid in advance..................... 23,236 22,436 (19,611)
Allowance for doubtful accounts........... 5,820 (14,746) (8,114)
Minority interests in timing differences
of consolidated joint ventures........... (44,316) 14,430 15,933
---------- ---------- ----------
Net income for federal income tax
purposes................................. $3,313,064 $3,075,309 $2,965,514
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint
F-17
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
ventures. The management fee, which will not exceed fees which are competitive
for similar services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliate. The
Partnership incurred management fees of $39,393, $37,974, and $37,293 for the
years ended December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $101,423, $88,667, and $95,845 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1997, the Partnership and an affiliate of the general partners
acquired a property as tenants-in-common for a purchase price of $1,441,057 (of
which the Partnership contributed $1,044,750 or 72.50%) from CNL BB Corp., an
affiliate of the general partners. CNL BB Corp. had purchased and temporarily
held title to this property in order to facilitate the acquisition of the
property by the Partnership and the affiliate. The purchase price paid by the
Partnership and the affiliate represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,446
and $6,648, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of rental and earned income from the unconsolidated joint ventures and the
property held as tenants-in-common with an affiliate of the general partners),
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Foodmaker, Inc...................................... $768,032 $768,032 $768,032
Burger King Corporation and BK Acquisition, Inc..... 695,427 733,620 712,334
Golden Corral Corporation........................... 564,104 538,871 538,355
DenAmerica Corporation.............................. 536,779 489,623 N/A
Advantica Restaurant Group, Inc. (Denny's, Inc. and
Quincy's Restaurants, Inc., during the year ended
December 31, 1998)................................. 473,726 N/A N/A
Flagstar Enterprises, Inc. (and Denny's, Inc. and
Quincy's Restaurants, Inc. during the years ended
December 31, 1997 and 1996)........................ N/A 780,502 774,347
</TABLE>
F-18
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from the unconsolidated joint ventures
and the property held as tenants-in-common with an affiliate of the general
partners), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Burger King................................... $1,144,250 $1,198,027 $1,271,606
Denny's....................................... 898,908 854,141 747,341
Jack in the Box............................... 768,032 768,032 768,032
Golden Corral Family Steakhouse Restaurants... 564,103 538,871 538,355
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the Properties in a timely manner.
11. Subsequent Events:
In January 1999, the Partnership reinvested a portion of the net sales
proceeds it received from the sale of the property in Nashua, New Hampshire, in
a Burger King property located in Yelm, Washington, at an approximate cost of
$1,034,000. In connection therewith, the Partnership entered into a long term,
triple-net lease with terms substantially the same as its other leases.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,394,196 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $43,333,961 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,197,098 shares valued at $20.00 per
APF share.
F-19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net depreciation).. $569,567,003 $3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing
Leases.................... 132,179,949 0 132,179,949 0 0
Mortgages and Notes
Receivable................ 63,351,507 0 63,351,507 0 0
Other Investments.......... 16,197,812 0 16,197,812 0 0
Investment In Joint
Ventures.................. 1,081,046 0 1,081,046 0 0
Cash and Cash Equivalents.. 18,764,033 0(A) 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................... 2,006,690 0 2,006,690 0 0
Receivables (net
allowances)
/Due from Related Party... 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income...... 5,875,698 0 5,875,698 0 0
Other Assets............... 12,551,632 0 12,551,632 405,214 313,486
Goodwill................... 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Assets.............. $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued
Liabilities............... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction Costs
Payable................... 9,745,014 0 9,745,014 0 0
Distributions Payable...... 0 0 0 0 0
Due to Related Parties..... 1,444,444 0 1,444,444 0 500,981
Income Tax Payable......... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................... 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income............ 2,466,355 0 2,466,355 0 0
Rents Paid in Advance...... 1,617,367 0 1,617,367 0 0
Minority Interest.......... 644,611 0 644,611 0 0
Common Stock............... 373,484 0 373,484 0 0
Common Stock--Class A...... 0 0 0 6,400 2,000
Common Stock--Class B...... 0 0 0 3,600 724
Additional Paid-in-
capital................... 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated distributions
in
excess of net earnings.... (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital.......... 0 0 0 0 0
------------ ---------- ------------ ---------- ----------
Total Liabilities and
Equity................... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ ========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding 37,347,883
============
Shares Outstanding 37,348,464
============
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund XI, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $21,808,299 $ 7,680,023 (B2) $ 602,425,181
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 7,428,455 1,959,541 (B2) 141,567,945
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 0 0 353,874,178
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 2,772,561 1,358,053 (B2) 5,211,660
Cash and Cash
Equivalents............ 1,767,517 (8,761,824)(B1) 12,742,057 1,804,990 (3,130,176)(B2) 10,952,871
(464,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)
/Due from Related
Party.................. 1,125,933 (6,614,629)(C) 9,247,098 82,368 (24,887)(E) 9,304,579
Accrued Rental Income... 0 0 5,875,698 1,711,758 (1,711,758)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 135,888 (135,888)(B2) 13,173,857
Goodwill................ 0 42,788,719 (B1) 42,788,719 0 0 42,788,719
------------ ------------ -------------- ----------- ----------- --------------
Total Assets........... $304,738,561 $ 24,836,474 $1,170,947,086 $35,744,319 $ 5,530,908 $1,212,222,313
============ ============ ============== =========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 104,774 $ 0 $ 5,209,077
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 875,006 0 875,006
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 24,887 (24,887)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 51,158 0 1,668,525
Minority Interest....... 0 0 644,611 504,504 0 1,149,115
Common Stock............ 0 61,500 (B1) 434,984 0 21,739 (B2) 456,723
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 39,718,046 (B2) 832,654,261
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,163)(B1) (87,909,851) 0 0 (87,909,851)
(73,083,335)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 34,183,990 (34,183,990)(B2) 0
------------ ------------ -------------- ----------- ----------- --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,836,474 $1,170,947,086 $35,744,319 $ 5,530,908 $1,212,222,313
============ ============ ============== =========== =========== ==============
Wtd. Avg. Shares
Outstanding............ 45,671,781
==============
Shares Outstanding...... 45,672,362
==============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ----------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense ...... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $23,564,432 $2,089,441 $25,653,873 $ 3,877,654 $ 42,804 $ (239,337)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision For Loss on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Cash Distributions
Declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XI, Ltd. Adjustments Pro Forma
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $ 1,819,762 $ 30,840 (j) $32,808,116
Fees................... (9,812,516)(b),(c) 2,616,185 0 (36,759)(k) 2,579,426
Interest and Other
Income................ 144,014 (d) 16,269,383 42,055 0 16,311,438
----------- ----------- ----------- --------- -----------
Total Revenue.......... (9,668,502) 49,843,082 1,861,817 (5,919) 51,698,980
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 94,421 (40,842)(l),(m) 9,633,481
Management and Advisory
Fees.................. (2,913,775)(f) 0 19,200 (19,200)(n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 28,346 8,439 (o) 501,751
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 213,292 108,894 (p) 4,991,339
Amortization........... 1,069,718 (h) 1,079,454 0 0 1,079,454
Transaction Costs...... 0 483,005 120,097 0 603,102
----------- ----------- ----------- --------- -----------
Total Expenses......... (3,362,041) 26,814,549 475,356 57,291 27,347,196
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,306,461) $23,028,533 $ 1,386,461 $ (63,210) $24,351,784
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 89,929 (27,649)(q) 93,521
Gain (Loss) on Sale of
Properties............ 0 (201,843) 0 0 (201,843)
Provision For Loss on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ----------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,306,461) 22,317,409 1,476,390 (90,859) 23,702,940
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ----------- --------- -----------
Net Earnings (Losses)... $(4,780,721) $22,317,409 $ 1,476,390 $ (90,859) $23,702,940
=========== =========== =========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.37 $ n/a $ 0.52
=========== =========== =========== ========= ===========
Dividend Per
Share/Unit............. $ n/a $ n/a $ 0.44 $ n/a $ 0.76
=========== =========== =========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.55 $ n/a $ 16.32
=========== =========== =========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.93x
=========== =========== =========== ========= ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $ 1,750,012 $ (92,458)(s) $34,822,956
=========== =========== =========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 2,173,898 45,671,781 (r)
=========== =========== =========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,173,898 45,672,362
=========== =========== =========== ========= ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense ...... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and Other
Expenses............... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,559,002(t) $51,008,151 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,579,872 34,228,091 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XI, Ltd. Adjustments Pro Forma
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $3,780,720 $ 61,679 (j) $59,923,859
Fees................... (32,715,768)(b),(c) 3,226,263 0 (72,158)(k) 3,154,105
Interest and Other
Income................ 207,144 (d) 32,221,925 139,707 0 32,361,632
------------ ----------- ---------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $3,920,427 $ (10,479) $95,439,596
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 191,432 (86,848)(l),(m) 16,044,140
Management and Advisory
Fees.................. (4,658,434)(f) 0 39,393 (39,393)(n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 24,262 13,509 (o) 605,217
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 443,936 217,789 (p) 10,610,064
Amortization........... 2,139,436 (h) 2,303,437 0 0 2,303,437
Transaction Costs...... 0 157,054 20,888 0 177,942
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,263,512) 51,472,365 719,911 105,057 52,297,333
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization,
Provision for Losses on
Properties and
Other Expenses......... $(23,245,112) $40,057,283 $3,200,516 $(115,536) $43,142,263
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 147,027 (55,298)(q) 77,591
Gain (Loss) on Sale of
Properties............ 0 0 461,861 0 461,861
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Losses on
Properties............ 0 (611,534) 0 0 (611,534)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,245,112) 43,125,962 3,809,404 (170,834) 46,764,532
Benefit/(Provision) for
Federal Income
Taxes................. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,346,678) $43,125,962 $3,809,404 $(170,834) $46,764,532
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.95 $ n/a $ 1.10
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.91 $ n/a $ 1.50
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.61 $ n/a $ 16.47
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.12x
============ =========== ========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,386,655 $3,620,024 $(304,917)(t) $63,701,762
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,378,091 n/a 2,173,898 42,551,989 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 2,173,898 45,661,825
============ =========== ========== ========= ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)...... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments..... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities........... 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,322,765) 12,877,072 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,449,417 $ 33,213,450 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma CNL Income Pro Forma Adjusted
Adjustments Combined APF Fund XI, Ltd. Adjustments Pro Forma
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ (4,780,721)(a) $ 22,317,409 $ 1,476,390 $ (90,859)(a) $ 23,702,940
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,774,655 213,292 108,894 (b) 5,096,841
Amortization expense... 1,069,718 (c) 1,979,471 0 0 1,979,471
Minority interest in
income of consolidated
joint venture......... 0 17,610 33,206 0 50,816
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 (3,662) 27,649 (d) 49,107
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 0 0 201,843
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease(increase) in
other receivables..... 0 (2,201,960) 60,583 0 (2,141,377)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease(increase) in
accrued interest on
mortgage
note receivable....... 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease(increase) in
prepaid expenses...... 0 (320,425) (1,529) 0 (321,954)
Decrease in net
investment in direct
financing leases...... 0 721,624 52,441 0 774,065
Increase in accrued
rental income......... 0 (1,915,785) (66,696) 0 (1,982,481)
Decrease(increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase(decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 75,175 0 (588,303)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 (559) 0 585,168
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (40,911) 0 625,808
Increase(decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,069,718 (75,920,094) 321,340 136,543 (75,462,211)
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) operating
activities............ (3,711,003) (53,602,685) 1,797,730 45,684 (51,759,271)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 0 0 3,696,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) (337,806) (44,344,589)
Investment in direct
financing leases...... 0 (44,186,644) (694,610) 0 (44,881,254)
Investment in joint
venture............... 0 (117,663) (247,286) 0 (364,949)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 1,630,296 0 1,630,296
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) investing
activities............ 4,452,252 (111,734,526) 350,594 0 (111,383,932)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) (32,562) 0 (53,667)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,870,012) 92,458 (g) (35,062,764)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) financing
activities............ (4,689,252) 180,263,475 (1,902,574) 92,458 178,453,359
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 245,750 138,142 15,310,156
Cash at beginning of
year................... (10,894,082) 6,184,949 1,559,240 (3,187,006) 4,557,183
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(14,842,085) $ 21,111,213 $ 1,804,990 $(3,048,864) $ 19,867,339
============ ============= =========== =========== =============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------ ------------- ------------ ----------- ---------- ------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------ ------------- ------------ ----------- ---------- ------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------ ------------- ------------ ----------- ---------- ------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,559,002) (51,008,151) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------ ------------- ------------ ----------- ---------- ------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,189,146) 305,646,395 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,322,765) (34,709,705) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------ ------------- ------------ ----------- ---------- ------------
Cash at end of year..... $123,199,837 $(110,322,765) $ 12,877,072 $ 713,308 $ 962,573 $ 2,526,078
============ ============= ============ =========== ========== ============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma CNL Income Pro Forma Adjusted Pro
Adjustments Combined APF Fund XI, Ltd. Adjustments Forma
------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,346,678)(a) $ 43,125,962 $ 3,809,404 $ (170,834)(a) $ 46,764,532
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 443,936 217,789 (b) 10,809,221
Amortization expense... 2,139,436 (c) 4,453,520 0 0 4,453,520
Minority interest in
income of consolidated
joint venture......... 0 30,156 68,474 0 98,630
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 47,342 55,298 (d) 87,200
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 (461,861) 0 (461,861)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 0 0 1,009,576
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease (increase) in
other receivables..... 0 (2,543,413) (23,376) 0 (2,566,789)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 1,028 0 8,274
Decrease in net
investment in direct
financing leases...... 0 1,971,634 90,236 0 2,061,870
Increase in accrued
rental income......... 0 (2,187,652) (127,336) 0 (2,314,988)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 846,680 3,681 0 850,361
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 18,798 0 (114,566)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 23,736 0 460,579
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------ ----------- ----------- ------------
Total adjustments...... 1,798,538 13,328,343 84,658 273,087 13,686,088
------------ ------------ ----------- ----------- ------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 3,894,062 102,253 60,450,620
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 1,630,296 0 4,016,237
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) (1,169) 0 (975,865)
Acquisition of
businesses............ (8,761,824)(f) (8,761,824) 0 (3,130,176)(g) (12,356,000)
(464,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 (1,630,296) 0 (1,630,296)
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 0 0 200,000
------------ ------------ ----------- ----------- ------------
Net cash provided by
(used in) investing
activities............ 13,032,562 (387,518,080) (1,169) (3,594,176) (391,113,425)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) (66,015) 0 (100,088)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,751,143) (3,540,024) 304,917 (j) (72,986,250)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------ ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............ (9,378,504) 287,419,594 (3,606,039) 304,917 284,118,472
Net increase (decrease)
in cash................ (10,894,082) (43,644,181) 286,854 (3,187,006) (46,544,333)
Cash at beginning of
year................... 0 49,829,130 1,272,386 0 51,101,516
------------ ------------ ----------- ----------- ------------
Cash at end of year..... $(10,894,082) $ 6,184,949 $ 1,559,240 $(3,187,006) $ 4,557,183
============ ============ =========== =========== ============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,413,810 $50,348,014 $43,333,961 $175,095,785
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $39,739,785 $162,739,785
Cash Consideration...... -- -- 464,000 464,000
APF Transaction Costs... 5,413,810 3,348,014 3,130,176 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $81,413,810 $50,348,014 $43,333,961 $175,095,785
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $34,183,990 $ 52,649,552
Purchase Price
Adjustments:
Land and buildings on
operating leases..... -- -- 7,680,023 7,680,023
Net investment in
direct financing
leases............... -- -- 1,959,541 1,959,541
Investment in joint
ventures............. -- -- 1,358,053 1,358,053
Accrued rental
income............... -- -- (1,711,758) (1,711,758)
Intangibles and other
assets............... -- (2,575,792) (135,888) (2,711,680)
Goodwill*............. -- 42,788,719 -- 42,788,719
Excess purchase
price................ 73,083,335 -- -- 73,083,335
----------- ----------- ----------- ------------
Total Allocation.... $81,413,810 $50,348,014 $43,333,961 $175,095,785
=========== =========== =========== ============
</TABLE>
--------
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,083,335 was expensed at March 31, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $42,788,719
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<C> <S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A........ 8,600
Common Stock (CFA, CFS, CFC)--Class B........ 4,825
Additional Paid-in Capital (CFA, CFS, CFC)... 12,568,974
Retained Earnings............................ 5,883,163
Accumulated distributions in excess of
earnings.................................... 73,083,335
Goodwill for CFC/CFS (Intangibles and other
assets)..................................... 42,788,719
CFC/CFS Organizational Costs/Other Assets... 2,575,792
Cash to pay APF transaction costs............ 8,761,824
APF Common Stock............................. 61,500
APF Capital in Excess of Par Value........... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners Capital............................. 34,183,990
Land and buildings on operating leases....... 7,680,023
Net investment in direct financing leases.... 1,959,541
Investment in joint ventures................. 1,358,053
Accrued rental income........................ 1,711,758
Intangibles and other assets................. 135,888
Cash to pay APF Transaction costs............ 3,130,176
Cash consideration to Income Fund............ 464,000
APF Common Stock............................ 21,739
APF Capital in Excess of Par Value.......... 39,718,046
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $24,887 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31, 1999
had been acquired and leased on January 1, 1998. No pro forma
adjustments were
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
made for any properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,069,718
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $30,840 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $(19,200)
Reimbursement of administrative costs......................... (17,559)
--------
$(36,759)
========
</TABLE>
(l) Represents the elimination of $17,559 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $23,283 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $19,200 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $8,439 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1998 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group
and the Income Fund had been issued as of January 1, 1998 and that
these entities had operated under a REIT structure as of January 1,
1999.
(p) Represents an increase in depreciation expense of $108,894 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $27,649
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
purposes of the pro forma financial statements, it is assumed that the
stockholders approved a proposal for a one-for-two reverse stock split
and a proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational when
they were acquired by APF from January 1, 1998 through July 31, 1999
had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to their
construction completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the year ended December 31, 1998 of $3,107,164 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are being
amortized and recorded as interest income over the terms of the
underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,139,436
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $61,679 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $(39,393)
Reimbursement of administrative costs......................... (32,765)
--------
$(72,158)
========
</TABLE>
(l) Represents the elimination of $32,765 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $54,083 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $39,393 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $13,509 resulting from
assuming that acquisitions of properties that had been operational when
APF acquired them from January 1, 1998 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group
and the Income Fund had been issued as of January 1, 1998 and that
these entities had operated under a REIT structure as of January 1,
1998.
(p) Represents an increase in depreciation expense of $217,789 as a result
of adjusting the historical basis of the real estate owned indirectly
by the Fund through joint venture or tenancy in common arrangements
with affiliates or unrelated third parties, to fair value as a result
by the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
properties.
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $55,298
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a result
of eliminating acquisition fees (see 4(II)(b)) between APF and the
Advisor which on a historical basis were capitalized as part of the
basis of the building.
(s) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a reverse stock split proposal and a proposal to increase the
number of authorized common shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses to
net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor and
capitalized on a historical basis as part of the cost of land and
building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for properties
that had been operational upon acquisition by APF since it is assumed
that these properties had been acquired on January 1, 1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(c) Represents add back of pro forma amortization of goodwill expenses to
net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July 1,
1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant Financial
Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor and
capitalized on a historical basis as part of the cost of land and
building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-39
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XI, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XI, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund XI, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Bourne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against
the Merger and affirmatively elect the note option, such limited partners
shall be entitled to receive, in lieu of the Share Consideration, notes
(the "Notes") in the aggregate amount equal to 97% of the value (based on
the Exchange Value as defined in the Registration Statement) of the Share
Consideration such Dissenting Partners would have otherwise received had
such partners not elected to receive the Notes (the "Note Option"). The
Notes will mature on the fifth anniversary of the Closing Date and will
bear interest at a fixed rate equal to seven percent. The aggregate Share
Consideration shall be reduced on a one-for-basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners
not elected the Note Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together will constitute
one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any choice or
conflict of law provision or rules (whether of the State of Florida or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XI, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XI, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
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"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,394,196 fully paid and nonassessable APF Common
Shares (2,197,098 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $40,255,527, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OP
General Partner and The Operating Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,605,804 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to execute and
deliver this Agreement and to perform their obligations hereunder. The
execution, delivery and
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performance by APF, the OP General Partner and the Operating Partnership of
this Agreement have been duly and validly authorized by the boards of directors
of APF and the OP General Partner. This Agreement constitutes the valid and
legally binding obligation of APF, the OP General Partner and the Operating
Partnership, enforceable in accordance with its terms and conditions. None of
APF, the OP General Partner or the Operating Partnership needs to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement, except in connection with federal
securities laws and any applicable "Blue Sky" or state securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions the validity of this
Agreement or any action to be taken by APF in connection with the consummation
of the
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transactions contemplated hereby or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement. Except as
publicly disclosed by APF in any APF SEC Document, none of APF or its
Subsidiaries is subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could reasonably be
expected to have a Material Adverse Effect on APF or would prevent or delay the
consummation of the transactions contemplated hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material
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terms of its permits, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF, the businesses of APF and its Subsidiaries are not,
to APF's Knowledge, being conducted in violation of any law, ordinance or
regulation of any governmental entity except that no representation or warranty
is made in this Section 6.14 with respect to environmental laws and except for
violations or possible violations which do not, and, insofar as reasonably can
be foreseen, in the future will not, have a Material Adverse Effect on APF.
Except as publicly disclosed by APF in its APF SEC Documents, no investigation
or review by any governmental entity with respect to APF or its Subsidiaries is
pending or, to the Knowledge of APF, threatened, nor, to the Knowledge of APF,
has any government entity indicated an intention to conduct the same, other
than, in each case, those which APF reasonably believes will not have a
Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such leases and subleases (as amended to date). With respect to
each lease and sublease listed in Section 7.12(b) of the Disclosure Schedule:
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(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General Partners have
made available to APF and the Operating Partnership correct and complete copies
of all such licenses, sublicenses, agreements, and permissions (as amended to
date).
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(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,394,196 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
B-29
<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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<PAGE>
ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
B-31
<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
B-32
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $439,420 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
B-33
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-34
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-35
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XI, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-36
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL INCOME FUND XI, LTD.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statutes, this Florida
limited partnership, whose certificate was filed with the Florida Department of
State on August 20, 1991, adopts the following certificate of amendment to its
certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross references
to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
-------------------------------------
James M. Seneff, Jr.
-------------------------------------
Robert A. Bourne
CNL REALTY CORPORATION
By: _________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XI, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XI, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
D-1
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
D-2
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XII, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant
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property services to operators of national and regional restaurant chains, from
triple-net leasing and mortgage financing to site selection, construction
management and build-to-suit development. If APF acquires all of the Income
Funds in the Acquisition, APF expects to have total assets of approximately
$1.5 billion at the time of the consummation of the Acquisition and will be one
of the largest triple-net lease REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,384,248 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due
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, 2005 in an amount equal to 97% of your portion of the APF Share
consideration, based on the exchange value, that would otherwise have been paid
to your Income Fund. Please note that you may only receive the notes if you
vote "Against" the Acquisition, and you elect to receive the notes on your
consent form. You will receive APF Shares if your Income Fund elects to be
acquired in the Acquisition and you vote "For" the Acquisition, or you vote
"Against" the Acquisition and do not affirmatively select the notes on your
consent form. In addition, if Limited Partners in your Income Fund elect to
receive notes in the amount greater than 15% of the estimated value of APF
Shares, based on the exchange value, to be paid to your Income Fund, then APF
has the right to decline to acquire your Income Fund. The notes will not be
listed on any exchange or automated quotation system, and a market for the
notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRA, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $1,710.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 2,384,248 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices substantially below
the exchange value or the historical per share book value of the assets of APF.
The APF Shares have been approved for listing on the NYSE, subject to official
notice of issuance. Prior to listing, the existing APF stockholders have not
had an active trading market in which they could sell their APF Shares.
Additionally, any Limited Partners of the Income Funds who become APF
stockholders as a result of the
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Acquisition, will have transformed their investment in non-tradable units into
an investment in freely tradable APF Shares. Consequently, some of these
stockholders may choose to sell their APF Shares upon listing at a time when
demand for APF Shares may be relatively low. The market price of the APF Shares
may be volatile after the Acquisition, and the APF Shares could trade at prices
substantially less than the exchange value as a result of increased selling
activity following the issuance of the APF Shares, the interest level of
investors in purchasing the APF Shares after the Acquisition and the amount of
distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $850, $850 and $880, respectively, to you per $10,000
investment. While historically, APF has made distributions equal to 7.625% per
APF Share, based on the exchange value, we cannot be sure that APF will be able
to maintain this level of distributions in the future. In the event that APF is
unable to maintain this level of distributions in the future, your
distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have four material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third,
assuming only your Income Fund is acquired in the Acquisition, we will receive
17,992 APF Shares. Finally, in the event that your Income Fund is not acquired,
however, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of
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<PAGE>
restaurant properties in which you participate in the profits from the
operation of its restaurant properties, to holding common stock of APF, an
operating company, that will own an interest in 1,240 restaurant properties,
assuming only your Income Fund and the CNL Restaurant Businesses were acquired
as of June 30, 1999. The risks inherent in investing in an operating company
such as APF include that APF may invest in new restaurant properties that are
not as profitable as APF anticipated, it may incur substantial indebtedness to
make future acquisitions of restaurant properties that it may be unable to
repay and it may make mortgage loans to prospective operators of national and
regional restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
If APF's borrower's default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
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mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.90%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.49x and its ratio of debt-to-total assets would
have been 34.59%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the
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obligations of the tenant or the borrower. The ability of the tenants or
borrowers to pay their obligations to APF in a timely manner will depend on a
number of factors, including the successful operation of their businesses.
Various factors, many of which are beyond the control of a restaurant chain,
may adversely affect the economic viability of the restaurant chain, including
but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
.changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience, services
and attractiveness of the restaurant chain;
.changes in demographics, consumer tastes and traffic patterns;
.the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or that
of its franchisor or vendors, to adequately address year 2000 issues;
.increases in operating expenses; and
.increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had no Boston
Market restaurant properties and tenants of six Long John Silver's restaurant
properties of which one Long John Silver's restaurant property has ceased to
pay lease payments to your Income Fund. The aggregate lost rental, interest and
earned income of the leases of the property for the six months ended June 30,
1999 was $39,223, which constitutes 1.89% of total rental, interest and earned
income, including lost rental, interest and earned income, for such period.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
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If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited Estimated
Partner Value of
Original Investments APF Shares
Limited less per
Partner Distributions Estimated Average
Investments of Net Sales Estimated Value of $10,000
less Proceeds per Number of Value of APF Shares Original
Distributions $10,000 APF Shares APF Shares Estimated after Limited
of Net Sales Original Offered to Payable to Acquisition Acquisition Partner
Proceeds Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------- ------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 2,384,248 $47,684,960 $504,000 $47,180,960 $10,485
</TABLE>
- --------
(1) The Income Fund has made no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on , 2005. APF may redeem the notes at any time prior to their
maturity at a price equal to the sum of the outstanding principal balance plus
accrued interest.
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EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1) ..................................................... $ 37,036
Appraisals and Valuation(2)........................................ 7,920
Fairness Opinions(3)............................................... 30,000
Solicitation Fees(4)............................................... 18,900
Printing and Mailing(5)............................................ 106,000
Accounting and Other Fees(6)....................................... 72,387
--------
Subtotal...................................................... $272,243
--------
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax, and Recording Fees(7).......................... $114,542
Legal Closing Fees(8)............................................... 56,577
Partnership Liquidation Costs(9).................................... 60,638
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Subtotal....................................................... 231,757
--------
Total............................................................... $504,000
========
</TABLE>
--------
(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your
Income Fund's pro-rata portion of these fees was determined based on
the ratio of the value of the APF Share consideration payable to your
Income Fund, based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based on the
exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the
Income Funds in connection with the Acquisition were $105,420. Your
Income Fund's pro-rata portion of these fees was determined based on
the number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your
Income Fund's pro-rata portion of these fees was determined based on
the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds
in connection with the Acquisition is estimated to be $1,399,998. Your
Income Fund's pro-rata portion of these fees was determined based on
the number of Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds
in connection with the Acquisition is estimated to be $841,245. Your
Income Fund's pro-rata portion of these fees was determined based on
the ratio of your Income Fund's total assets as of June 30, 1999 to the
total assets of all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all
of the Income Funds in connection with the Acquisition is estimated to
be $1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value,
to the total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
S-9
<PAGE>
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your
Income Fund's pro-rata portion of these fees was determined based on
the ratio of your Income Fund's total assets as of June 30, 1999 to the
total assets of all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the
Income Funds in connection with the Acquisition is estimated to be
$698,901. Your Income Fund's pro-rata portion of these costs was
determined based on the ratio of the value of the APF Share
consideration payable to your Income Fund, based on the exchange value,
to the total value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer fact sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are
acquired by APF, all of the solicitation fees will be payable by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (October 1992). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership
agreement currently provides that your Income Fund may not participate
in any transaction involving (1) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(2) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding greater than 50% of the outstanding units
approve this amendment to your Income Fund's partnership agreement, Article 21
will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would change your Income Fund to a general partnership, change our liability or
your liability, or allow you to take part in the control or
S-10
<PAGE>
management of your Income Fund. The form of opinion of Baker & Hostetler LLP is
attached to this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Fund, have scheduled a special meeting
of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date as we may select and as to which
we give you notice. At our discretion, we may elect to extend the solicitation
period. Under no circumstances will the solicitation period be extended beyond
March 31, 2000. Any consent form received by Corporate Election Services prior
to 5:00 p.m., Eastern time, on the last day of the solicitation period will be
effective provided that such consent form has been properly completed and
signed. If you fail to return a signed consent form by the end of the
solicitation period, your units will be counted as voting "Against" the
Acquisition of your Income Fund and you will receive APF Shares if your Income
Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
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<PAGE>
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND
THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
-------------------------- June 30,
1996 1997 1998 1999
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to
the General Partners and
Affiliates:
General Partner Distributions... -- -- -- --
Accounting and Administrative
Services....................... $ 97,722 $ 92,866 $107,911 $49,317
Property Management Fees........ 40,244 40,218 41,537 21,455
Broker/Dealer Commissions....... -- -- -- --
Due Diligence and Marketing
Support Fees................... -- -- -- --
Acquisition Fees................ -- -- -- --
Asset Management Fees........... -- -- -- --
Real Estate Disposition
Fees(1)........................ -- -- -- --
-------- -------- -------- -------
Total historical.............. $137,966 $133,084 $149,448 $70,772
Pro Forma Distributions to Be Paid
to the General Partners Following
the Acquisition:
Cash Distributions on APF
Shares(2)...................... $ 25,407 $ 26,801 $ 27,438 $13,719
Salary Compensation............. -- -- -- --
-------- -------- -------- -------
Total pro forma............... $ 25,407 $ 26,801 $ 27,438 $13,719
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
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<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
Year Ended December 31, 1999
------------------------ ----------------
Pro
1994 1995 1996 1997 1998 Historical Forma
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........... $850 $860 $850 $850 $645 $408 $274
Distributions from Return of
Capital(1)......................... -- -- -- -- 235 17 123
---- ---- ---- ---- ---- ---- ----
Total............................. $850 $860 $850 $850 $880 $425 $397
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
.the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired, all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
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<PAGE>
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to the Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity as an APF stockholder to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc, and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
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<PAGE>
.the value or fairness of the notes;
. the prices at which the APF Shares any trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
.the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
.any other matters with respect to any specific individual partner or class
of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern . On the basis of these calculations, we believe that
the ultimate value of the APF Shares, based on the exchange value, will exceed
the going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund XII,
Ltd.................... 45,000,000 10,000 10,405 10,356 9,504 9,270
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
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<PAGE>
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund of units as part of its
distribution reinvestment program, and do not necessarily reflect the
prices in a secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
Substantial Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive three material benefits. These benefits include:
. With respect to our ownership in your Income Fund, we may be issued up to
17,992 APF Shares in the aggregate in accordance with the terms of your
Income Fund's partnership agreement. The 17,992 APF Shares issued to us
will have an estimated value, based on the exchange value, of
approximately $359,840.
. James M. Seneff, Jr. and Robert A. Bourne as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all of
your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement for
your Income Fund prohibits the Income Fund from incurring indebtedness,
the only liabilities the Income Fund has are liabilities with respect to
its ongoing business operations. In the event that your Income Fund is
acquired by APF, we would be relieved of our legal obligation to satisfy
the liabilities of the acquired Income Fund.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
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<PAGE>
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated
Gain/(Loss) per
Average $10,000
Original Limited
Partner
Investment
----------------
<S> <C>
CNL Income Fund XII, Ltd....................................... $1,710
</TABLE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80
S-17
<PAGE>
percent of the total combined voting power of all classes of stock entitled to
vote and at least 80 percent of the total number of shares of all other classes
of stock of the corporation. APF has represented to Shaw Pittman, APF's tax
counsel, that, following the Acquisition, the Limited Partners of the Income
Funds will not own stock possessing at least 80 percent of the total combined
voting power of all classes of APF stock entitled to vote and at least
80 percent of the total number of shares of all other classes of APF stock.
Based upon this representation, Shaw Pittman has opined that the Acquisition
will not result in the acquisition of control of APF by the Limited Partners
for purposes of section 351(a). Accordingly, the transfer of assets will result
in recognition of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the
S-18
<PAGE>
amount of gain your Income Fund recognizes, the electing Limited Partner still
will be required to take into account his, her or its share of your Income
Fund's gain as determined under the partnership agreement of your Income Fund.
Therefore, Limited Partners who elect the notes may recognize gain in the year
of the Acquisition despite the fact that they will not receive cash with which
to pay the tax on the gain. Such Limited Partners will adjust the basis of the
notes as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-19
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,067,882 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,363,877)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,304,625)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,304,625)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses)......... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,778,885)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund XII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $1,987,888 $ 56,314 (j) $33,001,716
Fees............. 2,616,185 0 (50,040)(k) 2,566,145
Interest and
Other Income..... 16,269,383 44,935 0 16,314,318
------------ ---------- ------------------ ------------
Total Revenue... $49,843,082 $2,032,823 $ 6,274 $51,882,179
Expenses:
General and
Administrative... 9,579,902 104,953 (52,434)(l),(m) 9,632,421
Management and
Advisory Fees.... 0 21,455 (21,455)(n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 20,764 9,158 (o) 494,888
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 167,782 74,264 (p) 4,911,199
Amortization..... 1,077,618 995 0 1,078,613
Transaction
Costs............ 483,005 127,682 0 610,687
------------ ---------- ------------------ ------------
Total Expenses.. 26,812,713 443,631 9,533 27,265,877
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,030,369 $1,589,192 $ (3,259) $24,616,302
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 190,206 (14,299)(q) 207,148
Gain (Loss) on
Sale of
Properties....... (201,843) 74,714 0 (127,129)
Provision For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ---------- ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,319,245 1,854,112 (17,558) 24,155,799
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ---------- ------------------ ------------
Net Earnings
(Losses)......... $22,319,245 $1,854,112 $(17,558) $24,155,799
============ ========== ================== ============
</TABLE>
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
Distributions
declared........ $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,955,195(u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,912,681(u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund XII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 47 n/a 628
============== =========== ==================== ==================
Earnings per
share/unit...... $ n/a $ 0.41 $ n/a $ 0.53
============== =========== ==================== ==================
Book value per
share/unit...... $ n/a $ 8.74 $ n/a $ 16.33
============== =========== ==================== ==================
Dividends per
share/unit...... $ n/a $ 0.43 $ n/a $ 0.76
============== =========== ==================== ==================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.97x
============== =========== ==================== ==================
Cash
Distributions
declared........ $ 33,165,402 $ 1,912,504 $ (113,777)(s) $ 34,964,129
============== =========== ==================== ==================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 2,359,048 45,856,931 (r)
============== =========== ==================== ==================
Shares
outstanding..... 43,498,464 n/a 2,359,048 45,857,512
============== =========== ==================== ==================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $32,466,496 $9,015,954 (u2) $ 736,295,433
Mortgages/notes
receivable...... $ 353,874,178 $ 54,294 $ 0 $ 353,928,472
Receivables/due
from related
parties......... $ 9,247,098 $ 79,416 $ (28,712)(x) $ 9,297,802
Investment in
joint ventures.. $ 1,081,046 $ 2,722,141 $1,270,196 (u2) $ 5,073,383
Total assets.... $1,171,065,807 $40,474,487 $3,763,649 (u2),(x) $1,215,303,943
Total
liabilities/minority
interest........ $ 465,485,738 $ 1,142,038 $ (28,712)(x) $ 466,599,064
Total equity.... $ 705,580,069 $39,332,449 $3,792,361 (u2) $ 748,704,879
</TABLE>
S-21
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation expense
of $967,179 as if restaurant properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any restaurant properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................. $ (689,425)
Secured equipment lease fees................................. (67,967)
Advisory fees................................................ (126,788)
Reimbursement of administrative costs........................ (382,728)
Acquisition fees............................................. (4,452,252)
Underwriting fees............................................ (54,248)
Administrative, executive and guarantee fees................. (532,389)
Servicing fees............................................... (572,728)
Development fees............................................. (38,853)
Management fees.............................................. (1,681,870)
-----------
Total...................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial Corp. On a
historical basis, CNL Financial Services, Inc. records all of the loan
origination fees received as revenue. For purposes of presenting pro forma
financial statements of these entities on a combined basis, these loan
origination fees are required to be deferred and amortized into revenues
over the term of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services Inc. from borrowers during the six months ended June 30,
1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs............................... $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.............................................. $(1,681,870)
Administrative executive and guarantee fees.................. (532,389)
Servicing fees............................................... (572,728)
Advisory fees................................................ (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and the
CNL Restaurant Financial Services Group resulting from agreements between
these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in footnote (u)
below:
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,067,883
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
(j) Represents $56,314 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees................................................. $(21,455)
Reimbursement of administrative costs........................... (28,585)
--------
$(50,040)
========
</TABLE>
S-22
<PAGE>
(l) Represents the elimination of $28,585 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $23,849 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $21,455 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $9,158 resulting from assuming
that acquisitions of restaurant properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group and
the Income Fund had been issued as of January 1, 1998 and that these
entities had operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $74,264 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $14,299 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma restaurant properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June 30,
1999. Based on historical results through July 31, 1999, all interest costs
related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,295,089 $50,274,594 $46,951,127 $178,520,810
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $43,124,810 $166,124,810
Cash Consideration...... -- -- 504,000 504,000
APF Transaction Costs... 5,295,089 3,274,594 3,322,317 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,295,089 $50,274,594 $46,951,127 $178,520,810
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $39,332,449 $ 57,798,011
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 7,183,181 7,183,181
Net investment in
direct financing
leases................ -- -- 1,832,773 1,832,773
Investment in joint
ventures.............. -- -- 1,270,196 1,270,196
Accrued rental income.. -- -- (2,624,549) (2,624,549)
Intangibles and other
assets................ -- (2,575,792) (42,923) (2,618,715)
Goodwill*.............. -- 42,715,299 -- 42,715,299
Excess purchase price.. 72,964,614 -- -- 72,964,614
----------- ----------- ----------- ------------
Total Allocation...... $81,295,089 $50,274,594 $46,951,127 $178,520,810
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
S-23
<PAGE>
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $72,964,614 was
expensed at June 30, 1999 because the Advisor has not been deemed to qualify
as a "business" for purposes of applying APB Opinion No. 16, "Business
Combinations." Goodwill of $42,715,299 relating to the acquisition of the
CNL Financial Services Group is being amortized over 20 years. APF did not
acquire any intangibles as part of any of the acquisitions. The entries were
as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A............ 8,600
Common Stock (CFA, CFS, CFC)--Class B............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)........ 12,568,974
Retained Earnings................................. 5,883,163
Accumulated distributions in excess of earnings... 72,964,614
Goodwill for CFC/ICFS (Intangibles and other
assets).......................................... 42,715,299
CFC/CFS Organizational Costs/Other Assets........ 2,575,792
Cash to pay APF transaction costs................ 8,569,683
APF Common Stock................................. 61,500
APF Capital in Excess of Par Value............... 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital................................ 39,332,449
Land and buildings on operating leases............ 7,183,181
Net investment in direct financing leases......... 1,832,773
Investment in joint ventures...................... 1,270,196
Accrued rental income............................ 2,624,549
Intangibles and other assets..................... 42,923
Cash to pay APF Transaction costs................ 3,322,317
Cash consideration to Income Fund................ 504,000
APF Common Stock................................. 23,590
APF Capital in Excess of Par Value............... 43,101,220
(To record acquisition of Income Fund)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party payables
recorded as receivables by the Advisor, and the elimination of intercompany
balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857 from
liabilities assumed in the acquisition since the Merger Agreement requires
that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes
at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $28,712 in related party
payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XII, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,223,029 $ 1,939,113 $ 4,051,192 $ 4,522,216 $ 4,553,058 $ 4,570,571 $ 4,548,580
Net income (2).......... 1,854,112 1,575,026 2,933,537 3,952,214 3,943,043 4,014,372 4,027,834
Cash distributions
declared (3)........... 1,912,504 1,912,504 3,960,008 3,825,008 3,825,008 3,870,007 3,825,006
Net income per unit
(2).................... 0.41 0.35 0.65 0.87 0.87 0.88 0.89
Cash distributions
declared per unit (3).. 0.43 0.43 0.88 0.85 0.85 0.86 0.85
GAAP book value per
unit................... 8.74 8.91 8.75 8.98 8.95 8.93 8.90
Weighted average number
of Limited Partner
units outstanding...... 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $40,474,487 $41,206,624 $40,634,898 $41,430,990 $41,343,138 $41,229,132 $41,127,173
Total partners'
capital................ 39,332,449 40,079,834 39,390,841 40,417,312 40,290,106 40,172,071 40,027,706
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures and adjustments to
accrued rental income due to the tenant of certain restaurant properties
filing for bankruptcy.
(2) Net income for the six months ended June 30, 1999 includes $74,714 from a
gain on sale of land and building. Net income for the years ended December
31, 1998 and 1996, includes $104,374 and $15,355, respectively, from a loss
on sale of land and building. Net income for the year ended December 31,
1998, includes $206,535 for a provision for loss on building.
(3) Distributions for the years ended December 31, 1998 and 1995, include a
special distribution to the Limited Partners of $135,000 and $45,000,
respectively, which represented cumulative excess operating reserves.
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 20, 1991, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as
properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 47 restaurant properties,
which included interests in five restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998, was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,837,011 and
$2,183,206, for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, is primarily a result of
changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In August 1998, the Income Fund entered into a joint venture arrangement,
Columbus Joint Venture, with our affiliates, to construct, own and lease one
restaurant property. As of June 30, 1999, the Income Fund had contributed
approximately $251,100, of which approximately $135,800 was contributed during
the six months ended June 30, 1999, to the joint venture to purchase land and
pay for construction costs relating to the joint venture. As of June 30, 1999,
the Income Fund owned an approximate 28 percent interest in the profits and
losses of the joint venture.
In May 1999, the Income Fund sold its restaurant property in Morganton,
North Carolina, to an unrelated third party for $550,000 and received $467,300
in cash and accepted the remaining sales proceeds in the form of a promissory
note in the principal sum of $55,000. The Income Fund had recorded an allowance
for loss on building relating to this restaurant property of $206,535 at
December 31, 1998 due to the tenant filing for bankruptcy. The allowance
represented the difference between the carrying value of the restaurant
property at December 31, 1998 and the estimated net realizable value for this
restaurant property. At June 30, 1999 the Income Fund recorded a gain relating
to the sale of this restaurant property of $74,714, for financial reporting
purposes, resulting in an overall net loss relating to the sale of this
restaurant property of approximately $131,800. The promissory note is
collateralized by a mortgage on the restaurant property. The promissory note
bears interest at a rate of 10.25% per annum and is being collected in 60
monthly installments of principal and interest. Net sales proceeds of $467,300
received in cash and proceeds received from the collection of this promissory
note will be used to reinvest in an additional restaurant property.
Currently, rental income from the Income Fund's restaurant properties and
net sales proceeds from the sale of restaurant properties, pending reinvestment
in additional restaurant properties are invested in money market accounts or
other short-term, highly liquid investments such as demand deposits at
commercial banks, certificates of deposit, and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At June 30,
1999, the Income Fund had $2,484,668 invested in such short-term investments,
as compared to $2,362,980 at December 31, 1998. The funds remaining at June 30,
1999, after payment of distributions and other liabilities,
S-26
<PAGE>
will be used to acquire additional restaurant properties and to meet the Income
Fund's working capital and other needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additiuonally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital for the years ended December 31,
1998, 1997, and 1996, was cash from operations, which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses. Cash from operations was $4,116,780, $3,806,988, and
$3,951,689 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase in cash from operations during 1998, as compared to 1997, is
primarily a result of changes in the Income Fund's working capital, and the
decrease in cash from operations during 1997, as compared to 1996, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below and changes in the Income Fund's working capital during each
of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997 and 1996.
In April 1996, the Income Fund sold its restaurant property in Houston,
Texas to an unrelated third party for $1,640,000. As a result of this
transaction, the Income Fund recognized a loss of $15,355 for financial
reporting purposes primarily due to acquisition fees and miscellaneous
acquisition expenses that the Income Fund had allocated to this restaurant
property. In May 1996, the Income Fund reinvested the sales proceeds from this
sale, along with additional funds, in Middleburg Joint Venture. The Income Fund
has an 87.54% interest in the profits and losses of Middleburg Joint Venture
and the remaining interest in this joint venture is held by an affiliate of the
Income Fund, which has the same general partners.
In March 1997, the Income Fund entered into a new lease for the restaurant
property in Tempe, Arizona. In connection therewith, the Income Fund incurred
$55,000 in renovation costs, which were completed in May 1997.
In August 1998, the Income Fund entered into a joint venture arrangement,
Columbus Joint Venture, with our affiliates, to construct and hold one
restaurant property. As of December 31, 1998, the Income Fund had contributed
approximately $115,000 to purchase land and pay for construction costs relating
to the joint venture and owned a 27.72% interest in profits and losses of this
joint venture. When funding is completed, the Income Fund expects to have an
approximate 28 percent interest in profits and losses of the joint venture.
In December 1998, the Income Fund sold its restaurant property in Monroe,
North Carolina, to an unrelated third party, and received net sales proceeds of
$483,549. As a result of this transaction, the Income Fund recognized a loss of
$104,374 for financial reporting purposes. The Income Fund intends to reinvest
these net sales proceeds in an additional restaurant property.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any
S-27
<PAGE>
borrowing so that it will not constitute "acquisition indebtedness" for federal
income tax purposes and also will limit the Income Fund's outstanding
indebtedness to three percent of the aggregate adjusted tax basis of its
restaurant properties. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sales of restaurant properties, pending investment in
additional restaurant properties, are invested in money market accounts or
other short-term highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
Fund had $2,362,980 invested in such short-term investments as compared to
$1,706,415 at December 31, 1997. The increase in cash and cash equivalents
during 1998, is primarily due to the receipt of $483,549 in net sales proceeds
from the 1998 sale of the restaurant property in Monroe, North Carolina. As of
December 31, 1998, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
three percent annually. The Funds remaining at December 31, 1998 after payment
of distributions and other liabilities, will be used to meet the Income Fund's
working capital and other needs.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who meet specified
financial standards minimizes the Income Fund's operating expenses. We believe
that the leases will continue to generate cash flow in excess of operating
expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current cash
from operations, the Income Fund declared distributions to the Limited Partners
of $1,912,504 for each of the six months ended June 30, 1999 and 1998, or
$956,252 for each of the quarters ended June 30, 1999 and 1998. This represents
distributions for each applicable six months of $0.43 per unit, or $0.21 per
unit for each applicable quarter. No distributions were made to us for the
quarters and six months ended June 30, 1999 and 1998. No amounts distributed to
the Limited Partners for the six months ended June 30, 1999 and 1998 are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
Total liabilities of the Income Fund decreased to $1,142,038 at June 30,
1999, from $1,244,057 at December 31, 1998, primarily as a result of the Income
Fund paying in January 1999, a special distribution to the Limited Partners of
$135,000 accrued at December 31, 1998. We believe that the Income Fund has
sufficient cash on hand to meet its current working capital needs.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
income Fund has insufficient funds for such purposes,
S-28
<PAGE>
we will contribute to the Income Fund an aggregate amount of up to one percent
of the offering proceeds for maintenance and repairs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,960,008 for the year ended December 31, 1998, and
$3,825,008 for each of the years ended December 31, 1997 and 1996. This
represents a distribution of $0.88 per Unit for the year ended December 31,
1998, and $0.85 per Unit for each of the years ended December 31, 1997 and
1996. No amounts distributed or to be distributed to the Limited Partners for
the years ended December 31, 1998, 1997, and 1996, are required to be or have
been treated by the Income Fund as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions. The Income Fund intends to continue to make distributions of
cash available for distribution to Limited Partners on a quarterly basis.
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $130,847, $97,078, and $118,929, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$24,025 and $6,887, respectively, to affiliates for such amounts and accounting
and administrative services. As of March 11, 1999, the Income Fund had
reimbursed the affiliates all such amounts. Other liabilities including
distributions payable increased to $1,220,032 at December 31, 1998, from
$1,006,791 at December 31, 1997, primarily as the result of the Income Fund's
accruing a special distribution of accumulated, excess operating reserves
payable to the Limited Partners of $135,000 at December 31, 1998. The increase
was also partially a result of an increase in rents paid in advance at December
31, 1998.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund owned and leased
44 wholly owned restaurant properties, including one restaurant property sold
in December 1998, and during the six months ended June 30, 1999, the Income
Fund owned and leased 43 wholly owned restaurant properties, including one
restaurant property sold in May 1999, to operators of fast-food and family-
style restaurant chains. During the six months ended June 30, 1999 and 1998,
the Income Fund earned $1,983,206 and $1,858,822, respectively, in rental
income from operating leases, net of adjustments to accrued rental income, and
earned income from direct financing leases from these restaurant properties,
$1,001,988 and $824,602 of which was earned during the quarters ended June 30,
1999 and 1998, respectively. Rental and earned income was lower during the
quarter and six months ended June 30, 1998, as compared to the quarter and six
months ended June 30, 1999, due to the fact that in June 1998, Long John
Silver's, Inc. filed for bankruptcy and rejected the leases relating to three
of the eight restaurant properties that it leased. As a result, the tenant
ceased making rental payments on the three rejected leases, and during the
quarter and six months ended June 30, 1998, the Income Fund wrote off accrued
rental income, or non-cash accounting adjustments relating to the straight-
lining of future scheduled rent increases over the lease term in accordance
with generally accepted accounting principles, relating to these restaurant
properties. No amounts were written-off during the quarter and six months ended
June 30, 1999. The effect from the write-off of accrued rental income was
partially offset by the fact that the Income Fund recorded rental and earned
income during the quarter and six months ended June 30, 1998, prior to the
tenant vacating the restaurant properties in June 1998. No rental and earned
income was recognized during the quarter and six months ended June 30, 1999
from the former tenant. The Income Fund has continued receiving rental payments
relating to the five leases not rejected by the tenant. In December 1998 and
May 1999, the Income Fund sold two of the vacant restaurant properties and
intends to reinvest the net sales proceeds from the sales of these restaurant
properties in additional restaurant properties, as discussed in "Capital
Resources". In July 1999, the Income Fund entered into a new lease with a new
tenant for the
S-29
<PAGE>
remaining vacant restaurant property. In connection with the new lease, the
tenant has agreed to pay for all construction costs necessary to convert this
restaurant property into a new concept. Conversion of this restaurant property
is expected to be completed during the third quarter of 1999, at which time
rental payments are expected to commence. While Long John Silver's, Inc. has
not rejected or affirmed the remaining five leases, there can be no assurance
that some or all of the leases will not be rejected in the future. The lost
revenues that would result in the event the remaining five leases are rejected
could have an adverse effect on the results of operations of the Income Fund,
if the Income Fund is not able to re-lease these restaurant properties in a
timely manner.
In addition, during the six months ended June 30, 1998, the Income Fund
owned and leased four restaurant properties indirectly through joint venture
arrangements and during the six months ended June 30, 1999, the Income Fund
owned and leased five restaurant properties indirectly through joint venture
arrangements. In connection with the joint venture arrangements, during the six
months ended June 30, 1999 and 1998, the Income Fund earned $190,206 and
$21,892, respectively, of which income of $119,068 and a loss of $43,758 were
recognized during the quarters ended June 30, 1999 and 1998, respectively. Net
income earned by joint ventures was lower during the quarter and six months
ended June 30, 1998, as compared to the quarter and six months ended June 30,
1999, primarily due to the fact that Kingsville Real Estate Joint Venture, in
which the Income Fund owns a 31.13% interest in the profits and losses of the
joint venture, established an allowance for doubtful accounts of approximately
$50,800 and $65,900 during the quarter and six months ended June 30, 1998,
respectively, in accordance with its collection policy. No such allowance was
established during the quarter and six months ended June 30, 1999. In addition,
during the quarter and six months ended June 30, 1998, Kingsville Real Estate
Joint Venture established a provision for loss on land and net investment in
direct financing lease for its restaurant property in Kingsville, Texas for
approximately $316,000. The allowance represented the difference between the
restaurant property's carrying value at June 30, 1998 and the estimated net
realizable value of the restaurant property. In January 1999, Kingsville Real
Estate Joint Venture entered into a new lease for this restaurant property with
a new tenant and we ceased collection efforts on the past due amounts.
During the six months ended June 30, 1999, five restaurant chains, Long John
Silver's, Hardee's, Jack in the Box, Golden Corral, and Denny's, each accounted
for more than ten percent of the Income Fund's total rental income, including
the Income Fund's share of rental income from five restaurant properties owned
by joint ventures. During 1998, Long John Silver's Inc. filed for bankruptcy,
as described above. It is anticipated that during the remainder of 1999, Jack
in the Box, Denny's, Golden Corral, and Hardee's each will continue to account
for more than ten percent of the Income Fund's total rental income to which the
Income Fund is entitled under the terms of the leases. Any failure of these
restaurant chains could materially affect the Income Fund's income if the
Income Fund is not able to re-lease the restaurant properties in a timely
manner.
Operating expenses, including depreciation and amortization expense, were
$443,631 and $364,087 for the six months ended June 30, 1999 and 1998,
respectively, of which $231,662 and $199,846 were incurred during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was partially a result of the
Income Fund incurring $92,263 and $127,682 in transaction costs during the
quarter and six months ended June 30, 1999, respectively, relating to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition with APF. If the Limited Partners reject the
Acquisition, the Income Fund will bear the portion of the transaction costs
based upon the percentage of "For" votes and we will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.
In addition, the increase in operating expenses during the quarter and six
months ended June 30, 1999, was partially attributable to the fact that the
Income Fund incurred legal, insurance and real estate tax expenses on the two
restaurant properties for which the leases were rejected and which were vacant
during the quarter and six months ended June 30, 1999, as a result of Long John
Silver's, Inc. filing for bankruptcy, as described above. In addition, the
increase in operating expenses during the quarter and six months ended June 30,
1999, was partially attributable to an increase in depreciation expense due to
the fact that during 1998, the Income
S-30
<PAGE>
Fund reclassified these assets from net investment in direct financing leases
to land and buildings on operating leases. In May 1999, the Income Fund sold
one of the vacant restaurant properties and in July 1999 the Income Fund
entered into a long-term triple net lease with a new tenant for the remaining
vacant restaurant property. The new tenant is responsible for real estate
taxes, insurance and maintenance; therefore, we do not anticipate that the
Income Fund will continue to incur these expenses. The Income Fund will incur
certain expenses such as real estate taxes, insurance, and maintenance relating
to one or more of the five restaurant properties still leased by Long John
Silver's, Inc. if one or more of the leases are rejected.
The increase in operating expenses during the quarter and six months ended
June 30, 1999 was partially offset by the fact that during the quarter and six
months ended June 30, 1998, the Income Fund recorded bad debt expense for past
due principal and interest amounts relating to the loan with the tenant of the
restaurant property in Kingsville Real Estate Joint Venture due to financial
difficulties the tenant experienced. In January 1999, Kingsville Real Estate
Joint Venture entered into a new lease with a new tenant, and we ceased
collection efforts on the past due amounts.
As a result of the sale of the restaurant property in Morganton, North
Carolina, as described above in "Capital Resources," the Income Fund recorded a
gain of $74,714 for financial reporting purposes during the quarter and six
months ended June 30, 1999. No restaurant properties were sold during the
quarter and six months ended June 30, 1998.
The Years Ended December 31, 1998, 1997 and 1996
During the years ended December 31, 1996, the Income Fund owned and leased
45 wholly-owned restaurant properties, including the restaurant property in
Houston, Texas, which was sold in April 1996. During 1998 and 1997, the Income
Fund owned and leased 44 wholly-owned restaurant properties, including the
restaurant property in Monroe, North Carolina, which was sold in December 1998.
During 1996 and 1997, the Income Fund was a co-venturer in four separate joint
ventures that each owned and leased one restaurant property, and during 1998,
the Income Fund was a co-venturer in five separate joint ventures that each
owned and leased one restaurant property. As of December 31, 1998, the Income
Fund owned, either directly or through joint venture arrangements, 48
restaurant properties that are, in general, subject to long-term, triple-net
leases. The leases of the restaurant properties provide for minimum base annual
rental payments, payable in monthly installments, ranging from approximately
$48,000 to $213,800. The majority of the leases provide for percentage rent
based on sales in excess of a specified amount. In addition, some of the leases
provide that, commencing in specified lease years, generally the sixth lease
year, the annual base rent required under the terms of the lease will increase.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $3,862,390, $4,102,842, and $4,165,640, respectively, in rental income
from operating leases, net of adjustments to accrued rental income and earned
income from direct financing leases from restaurant properties wholly-owned by
the Income Fund. Rental and earned income decreased approximately $136,300
during 1998, as compared to 1997, primarily due to the fact that in June 1998,
Long John Silver's, Inc., filed for bankruptcy and rejected the leases relating
to three of its eight leases, as described above. In conjunction with the three
rejected leases, during 1998, the Income Fund wrote off approximately $224,900
of accrued rental income, or non-cash accounting adjustments relating to the
straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles. In December 1998, the
Income Fund sold one of the vacant restaurant properties, as described above in
"Capital Resources," and intends to reinvest the net sales proceeds from the
sale of this restaurant property in an additional restaurant property. The
Income Fund will not recognize any rental and earned income from these two
vacant restaurant properties until new tenants for these restaurant properties
are located, or until the restaurant properties are sold and the proceeds from
such sales are reinvested in additional restaurant properties.
The decrease in rental and earned income during 1997, as compared to 1996,
is primarily attributable to a decrease of approximately $51,800 during the
year ended December 31, 1997 as a result of the sale of the restaurant property
in Houston, Texas, in April 1996, as discussed above in "Capital Resources."
S-31
<PAGE>
In addition, rental and earned income also decreased approximately $23,500
during 1997 as a result of the fact that the tenant of the restaurant property
in Tempe, Arizona, declared bankruptcy and ceased operations of the restaurant
business located on the restaurant property in June 1996. As a result of the
termination of this lease, during the year ended December 31, 1996, the Income
Fund reclassified this lease from a direct financing lease to an operating
lease. In March 1997, the Income Fund entered into a new lease for the
restaurant property in Tempe, Arizona with a new tenant to operate the
restaurant property for which rental payments commenced in July 1997. The
decrease in rental and earned income during 1997, as compared to 1996, was
partially offset by an increase in rental income earned from the new tenant
during 1997.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $23,433, $54,330, and $67,652, respectively, in contingent rental
income. The decrease in contingent rental income during 1998 and 1997, each as
compared to the previous year, is primarily attributable to decreased gross
sales of certain restaurant properties requiring the payments of contingent
rental income.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $95,142, $277,325, and $200,499, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The decrease in net income earned by joint ventures during 1998, as
compared to 1997,
is primarily due to the fact that Kingsville Real Estate Joint Venture, in
which the Income Fund owns a 31.13% interest in the profits and losses of the
joint venture, established an allowance for doubtful accounts of approximately
$116,700 during 1998. The tenant of this restaurant property experienced
financial difficulties and ceased payment of rents under the terms of their
lease agreement. No such allowance was established during the year ended
December 31, 1997. In addition, during 1998, the joint venture established an
allowance for loss on land and net investment in the direct financing lease for
its restaurant property in Kingsville, Texas of approximately $316,000. The
allowance represents the difference between the restaurant property's carrying
value at December 31, 1998 and the estimated net realizable value of the
restaurant property. In January 1999, Kingsville Real Estate Joint Venture
entered into a new lease for this restaurant property with a new tenant. The
increase in net income earned by joint ventures during 1997, as compared to
1996, is primarily due to the fact that the Income Fund invested in Middelburg
Joint Venture in May 1996, as described above in "Capital Resources."
During the year ended December 31, 1998, four of the Income Fund's lessees,
or group of affiliated lessees, (i) Long John Silver's, Inc., (ii) Foodmaker,
Inc., (iii) Denny's Inc. and Quincy's, Inc., which are affiliated under common
control of Advantica Restaurant Group, Inc., and (iv) Flagstar Enterprises,
Inc., each contributed more than 10% of the Income Fund's total rental income,
including the Income Fund's share of rental income from five restaurant
properties owned by joint ventures. As of December 31, 1998, Long John
Silver's, Inc. was the lessee under leases relating to five restaurants,
excluding the three leases rejected by the tenant, as described above,
Foodmaker, Inc. was the lessee under leases relating to 10 restaurants,
Advantica restaurant Group, Inc. was the lessee under leases relating to four
restaurants, and Flagstar Enterprises, Inc. was the lessee under leases
relating to 11 restaurants. It is anticipated that based on the minimum rental
payments required by the leases, Foodmaker, Inc., Advantica restaurant Group,
Inc., and Flagstar Enterprises, Inc. each will continue to contribute more than
10% of the Income Fund's total rental income during 1999. In addition, during
the year ended December 31, 1998, four restaurant chains, Long John Silver's,
Hardee's, Jack in the Box, and Denny's, each accounted for more than 10% of the
Income Fund's total rental income, including the Income Fund's share of rental
income from five restaurant properties owned by joint ventures. During 1998,
Long John Silver's Inc. filed for bankruptcy, as described above. In 1999, it
is anticipated that Jack in the Box, Denny's, and Hardee's each will continue
to account for more that 10% of the Income Fund's total rental income to which
the Income Fund is entitled under the terms of the leases. Any failure of these
lessees or restaurant chains could materially affect the Income Fund's income
if the Income Fund is not able to re-lease the restaurant properties in a
timely manner.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $70,227, $87,719, and $119,267, respectively, in interest and other
income. The decrease in interest and other income during 1998, as compared to
1997, is primarily a result of the Income Fund establishing an allowance for
S-32
<PAGE>
doubtful accounts during 1998, of approximately $17,300 for past due accrued
interest income amounts that relate to the loan with the tenant of the
restaurant property in Kingsville Real Estate Joint Venture due to financial
difficulties the tenant is experiencing. In January 1999, Kingsville Real
Estate Joint Venture entered into a new lease with a new tenant, and in
conjunction therewith, we agreed to cease collection efforts on the past due
amounts. The decrease in interest and other income during 1997, as compared to
1996, is primarily attributable to the Income Fund granting certain easement
rights during 1996, to the owner of the restaurant property adjacent to the
Income Fund's restaurant property in Black Mountain, North Carolina, in
exchange for $25,000. In addition, the decrease in interest and other income
during 1997, as compared to 1996, is offset by an increase attributable to the
Income Fund recognizing approximately $7,900 in other income due to the fact
that the former tenant of the restaurant property in Tempe, Arizona, paid past
due real estate taxes relating to the restaurant property and the Income Fund
reversed such amounts during 1997 that it had previously accrued as payable
during 1996.
Operating expenses, including depreciation and amortization expense, were
$806,746, $570,002, and $594,660, for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily attributable to the fact that the Income Fund
recorded bad debt expense for past due principal and interest amounts relating
to the loan with the tenant of the restaurant property in Kingsville Real
Estate Joint Venture due to financial difficulties the tenant is experiencing.
In January 1999, Kingsville Real Estate Joint Venture entered into a new lease
with a new tenant, and we ceased collection efforts on the past due amounts.
In addition, the increase in operating expenses during 1998, is partially
attributable to the fact that the Income Fund accrued insurance and real estate
tax expenses as a result of Long John Silver's, Inc. filing for bankruptcy and
rejecting the leases relating to three of its eight leased restaurant
properties in June 1998, as described above. In addition, the increase in
operating expenses during 1998 is partially attributable to an increase in
depreciation expense due to the fact that during 1998, the Income Fund
reclassified these assets from net investment in direct financing leases to
land and buildings on operating leases. In December 1998, the Income Fund sold
one of the vacant restaurant properties and intends to reinvest the net sales
proceeds it received from the sale of this restaurant property in an additional
restaurant property. The Income Fund will continue to incur certain expenses,
such as real estate taxes, insurance, and maintenance relating to the two
remaining, vacant restaurant properties until new tenants or buyers are
located.
In addition, the increase in operating expenses during 1998, is partially a
result of the Income Fund incurring $24,282 in transaction costs relating to
our retaining financial and legal advisors to assist us in evaluating and
negotiating the proposed Acquisition with APF, as described above in "Capital
Resources."
The decrease in operating expenses during 1997, as compared to 1996, is
partially attributable to the fact that during 1996, the Income Fund recorded
current and past due real estate taxes relating to the restaurant property in
Tempe, Arizona, due to financial difficulties the tenant was experiencing. As
described above, the amounts accrued during 1996 were reversed and recorded as
other income during 1997. No real estate taxes were recorded during 1997
relating to the restaurant property in Tempe, Arizona, due to the fact that the
new tenant is responsible for the real estate taxes under the terms of the new
lease.
In addition, the decrease in operating expenses during 1997, as compared to
1996, is partially attributable to a decrease in accounting and administrative
expenses associated with operating the Income Fund and its restaurant
properties. In addition, the decrease in operating expenses during 1997 is
partially attributable to the Income Fund incurring certain expenses, such as
insurance and legal fees during 1996, due to the former tenant of the
restaurant property in Tempe, Arizona declaring bankruptcy during 1996.
As a result of the sales of the restaurant properties in Monroe, North
Carolina and Houston, Texas, as described above in "Capital Resources," the
Income Fund recognized losses of $104,374 and $15,355 for financial reporting
purposes for the years ended December 31, 1998 and 1996, respectively. No
restaurant properties were sold during 1997.
S-33
<PAGE>
During the year ended December 31, 1998, the Income Fund recorded a
provision for loss on building in the amount of $206,535 for financial
reporting purposes relating to the Long John Silver's restaurant property in
Morganton, North Carolina. The tenant of this restaurant property filed for
bankruptcy and ceased payment of rents under the terms of its lease agreement,
as described above. The allowance represents the difference between the
carrying value of the restaurant property at December 31, 1998 and the
estimated net realizable value for this restaurant property.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we Partners believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the
S-34
<PAGE>
respective vendors and manufacturers to verify the year 2000 compliance of
their products. The Y2K Team has also requested and is evaluating documentation
from the non-information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
S-35
<PAGE>
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-36
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998....................................................... F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and
for the Year Ended December 31, 1998.................................... F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-5
Report of Independent Certified Public Accountants....................... F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-21
Unaudited Pro Forma Balance Sheet as of June 30, 1999.................... F-22
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................ F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................ F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-32
</TABLE>
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,952,802 and
$1,795,099, respectively, and allowance for loss on
building of $206,535 in 1998......................... $20,087,965 $20,703,333
Net investment in direct financing leases............. 12,378,531 12,471,978
Investment in joint ventures.......................... 2,722,141 2,522,004
Mortgage note receivable.............................. 54,294 --
Cash and cash equivalents............................. 2,484,668 2,362,980
Receivables, less allowance for doubtful accounts of
$3,620 and $214,633, respectively.................... 79,416 16,862
Prepaid expenses...................................... 17,622 7,038
Lease costs, less accumulated amortization of $4,252
and $3,256, respectively............................. 25,301 26,297
Accrued rental income, less allowance for doubtful
accounts
of $6,323 in 1999 and 1998........................... 2,624,549 2,524,406
----------- -----------
$40,474,487 $40,634,898
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 99,964 $ 21,195
Accrued and escrowed real estate taxes payable........ 20,302 10,137
Distributions payable................................. 956,252 1,091,252
Due to related party.................................. 28,712 24,025
Rents paid in advance and deposits.................... 36,808 97,448
----------- -----------
Total liabilities................................... 1,142,038 1,244,057
Commitments and Contingencies (Note 5)
Partners' capital..................................... 39,332,449 39,390,841
----------- -----------
$40,474,487 $40,634,898
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 629,748 $ 658,592 $1,234,632 $1,285,138
Adjustments to accrued rental
income........................ -- (224,867) -- (224,867)
Earned income from direct fi-
nancing leases................ 376,240 390,877 748,574 798,551
Contingent rental income....... 2,311 6,295 4,682 13,717
Interest and other income...... 25,180 29,430 44,935 44,682
---------- ---------- ---------- ----------
1,029,479 860,327 2,032,823 1,917,221
---------- ---------- ---------- ----------
Expenses:
General operating and adminis-
trative....................... 31,597 31,541 78,881 66,006
Professional services.......... 11,435 -- 22,576 12,986
Bad debt expense............... -- 75,699 -- 84,667
Management fees to related par-
ty............................ 10,925 10,971 21,455 21,551
Real estate taxes.............. 1,371 1,152 3,496 1,152
State and other taxes.......... -- 405 20,764 17,653
Depreciation and amortization.. 84,071 80,078 168,777 160,072
Transaction costs.............. 92,263 -- 127,682 --
---------- ---------- ---------- ----------
231,662 199,846 443,631 364,087
---------- ---------- ---------- ----------
Income Before Equity in Earnings
(Loss) of Joint Ventures and
Gain on Sale of Land and
Building........................ 797,817 660,481 1,589,192 1,553,134
Equity in Earnings (Loss) of
Joint Ventures.................. 119,068 (43,758) 190,206 21,892
Gain on Sale of Land and Build-
ing............................. 74,714 -- 74,714 --
---------- ---------- ---------- ----------
Net Income....................... $ 991,599 $ 616,723 $1,854,112 $1,575,026
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 9,270 $ 6,167 $ 17,895 $ 15,750
Limited partners............... 982,329 610,556 1,836,217 1,559,276
---------- ---------- ---------- ----------
$ 991,599 $ 616,723 $1,854,112 $1,575,026
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.22 $ 0.14 $ 0.41 $ 0.35
========== ========== ========== ==========
Weighted Average Number of Lim-
ited Partner Units Outstanding.. 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 223,305 $ 192,411
Net income..................................... 17,895 30,894
----------- -----------
241,200 223,305
----------- -----------
Limited partners:
Beginning balance.............................. 39,167,536 40,224,901
Net income..................................... 1,836,217 2,902,643
Distributions ($0.43 and $0.88 per limited
partner unit, respectively)................... (1,912,504) (3,960,008)
----------- -----------
39,091,249 39,167,536
----------- -----------
Total partners' capital...................... $39,332,449 $39,390,841
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,837,011 $ 2,183,206
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... 467,300 --
Investment in joint venture...................... (135,825) --
Collections on mortgage note receivable.......... 706 --
Payment of lease costs........................... -- (3,500)
----------- -----------
Net cash provided by (used in) investing activ-
ities......................................... 332,181 (3,500)
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (2,047,504) (1,912,504)
----------- -----------
Net cash used in financing activities.......... (2,047,504) (1,912,504)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 121,688 267,202
Cash and Cash Equivalents at Beginning of Period..... 2,362,980 1,706,415
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 2,484,668 $ 1,973,617
----------- -----------
Supplemental Schedule of Non-Cash Financing Activi-
ties:
Mortgage note accepted in exchange for sale of land
and building...................................... $ 55,000 $ --
=========== ===========
Distributions declared and unpaid at end of peri-
od................................................ $ 956,252 $ 956,252
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XII, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Buildings on Operating Leases:
At December 31, 1998, the Partnership had recorded an allowance for loss on
building of $206,535 relating to the property in Morganton, North Carolina, due
to the tenant filing for bankruptcy. The allowance represented the difference
between the carrying value of the property at December 31, 1998 and the
estimated net realizable value for this property. In May 1999, the Partnership
sold this property to an unrelated third party for $550,000, received $467,300
in cash and accepted the remaining net sales proceeds in the form of a
promissory note (See Note 3), resulting in a gain of $74,714 for financial
reporting purposes. This gain, when netted against the allowance recorded at
December 31, 1998, resulted in a total net loss of approximately $131,800.
3. Mortgage Note Receivable:
In connection with the sale of the property in Morganton, North Carolina, in
May 1999, the Partnership accepted a promissory note in the principal sum of
$55,000 collateralized by a mortgage on the property. The promissory note bears
interest at a rate of 10.25% per annum and is being collected in 60 monthly
installments of principal and interest.
4. Concentration of Credit Risk:
The following schedule presents total rental and earned income (including
mortgage interest income) from individual restaurant chains, each representing
more than ten percent of the Partnership's total rental and earned income
(including the Partnership's share of rental and earned income from joint
ventures) for each of the six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Jack in the Box............................................ $512,334 $511,296
Denny's.................................................... 403,411 377,287
Hardee's................................................... 388,484 392,060
Golden Corral.............................................. 243,680 N/A
Long John Silver's......................................... 236,194 335,117
</TABLE>
The information denoted by N/A indicates that for the applicable period
presented, the chain did not represent more than ten percent of the
Partnership's total rental and earned income.
F-5
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and
rejected the leases relating to three of its eight Properties and ceased making
rental payments to the Partnership. In December 1998 and May 1999, the
Partnership sold two of the vacant properties. In July 1999, the Partnership
entered into a new lease with a new tenant for the remaining vacant property
for which rental payments are expected to commence in the third quarter of
1999. While Long John Silver's, Inc. has not rejected or affirmed the remaining
five leases, there can be no assurance that some or all of the leases will not
be rejected in the future. The lost revenues that would result in the event the
remaining five leases are rejected could have an adverse effect on the results
of operations of the Partnership, if the Partnership is not able to re-lease
these properties in a timely manner.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these restaurant chains could significantly impact
the results of operations of the Partnership, if the Partnership is not able to
re-lease the properties in a timely manner.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,384,248 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $46,951,127 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and, therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transactions costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XII, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 27, 1999, except for Note 11
for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on building.............................. $20,703,333 $20,820,279
Net investment in direct financing leases...... 12,471,978 13,656,265
Investment in joint ventures................... 2,522,004 2,517,421
Cash and cash equivalents...................... 2,362,980 1,706,415
Receivables, less allowance for doubtful
accounts of $214,633 and $7,482............... 16,862 202,472
Prepaid expenses............................... 7,038 7,216
Lease costs, less accumulated amortization of
$3,256 and $1,307............................. 26,297 24,746
Accrued rental income, less allowance for
doubtful accounts of $6,323 in 1998........... 2,524,406 2,496,176
----------- -----------
$40,634,898 $41,430,990
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable............................... $ 21,195 $ 10,558
Accrued and escrowed real estate taxes
payable....................................... 10,137 3,244
Distributions payable.......................... 1,091,252 956,252
Due to related parties......................... 24,025 6,887
Rents paid in advance and deposits............. 97,448 36,737
Total liabilities............................ 1,244,057 1,013,678
Partners' capital.............................. 39,390,841 40,417,312
----------- -----------
$40,634,898 $41,430,990
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,515,351 $2,455,312 $2,473,574
Adjustments to accrued rental income..... (224,867) -- --
Earned income from direct financing
leases.................................. 1,571,906 1,647,530 1,692,066
Contingent rental income................. 23,433 54,330 67,652
Interest and other income................ 70,227 87,719 119,267
---------- ---------- ----------
3,956,050 4,244,891 4,352,559
---------- ---------- ----------
Expenses:
General operating and administrative..... 148,427 162,593 173,614
Professional services.................... 32,758 28,665 39,121
Bad debt expense......................... 188,990 -- --
Management fees to related parties....... 41,537 40,218 40,244
Real estate taxes........................ 8,989 -- 7,891
State and other taxes.................... 17,653 18,496 18,471
Depreciation and amortization............ 344,110 320,030 315,319
Transaction costs........................ 24,282 -- --
---------- ---------- ----------
806,746 570,002 594,660
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Loss on Sale of Land and
Buildings, and Provision for Loss on
Building.................................. 3,149,304 3,674,889 3,757,899
Equity in Earnings of Joint Ventures....... 95,142 277,325 200,499
Loss on Sale of Land and Buildings......... (104,374) -- (15,355)
Provision for Loss on Building............. (206,535) -- --
---------- ---------- ----------
Net Income................................. $2,933,537 $3,952,214 $3,943,043
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 30,894 $ 39,522 $ 39,533
Limited partners......................... 2,902,643 3,912,692 3,903,510
---------- ---------- ----------
$2,933,537 $3,952,214 $3,943,043
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.65 $ 0.87 $ 0.87
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $112,356 $45,000,000 $(10,690,019) $11,123,278 $(5,374,544) $40,172,071
Distributions to
limited partners
($0.85 per limited
partner unit)......... -- -- -- (3,825,008) -- -- (3,825,008)
Net income............. -- 39,533 -- -- 3,903,510 -- 3,943,043
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 151,889 45,000,000 (14,515,027) 15,026,788 (5,374,544) 40,290,106
Distributions to
limited partners
($0.85 per limited
partner unit)......... -- -- -- (3,825,008) -- -- (3,825,008)
Net income............. -- 39,522 -- -- 3,912,692 -- 3,952,214
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 191,411 45,000,000 (18,340,035) 18,939,480 (5,374,544) 40,417,312
Distributions to
limited partners
($0.88 per limited
partner unit)......... -- -- -- (3,960,008) -- -- (3,960,008)
Net income............. -- 30,894 -- -- 2,902,643 -- 2,933,537
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $222,305 $45,000,000 $(22,300,043) $21,842,123 $(5,374,544) $39,390,841
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 4,094,016 $ 3,736,731 $ 3,951,047
Distributions from joint ventures..... 205,815 256,653 190,596
Cash paid for expenses................ (243,316) (252,145) (278,240)
Interest received..................... 60,265 65,749 88,286
----------- ----------- -----------
Net cash provided by operating ac-
tivities........................... 4,116,780 3,806,988 3,951,689
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and build-
ing.................................. 483,549 -- 1,640,000
Additions to land and buildings on op-
erating leases....................... -- (55,000) --
Investment in joint ventures.......... (115,256) -- (1,645,024)
Collections on loan to tenant of joint
venture.............................. -- 4,886 7,741
Payment of lease costs................ (3,500) (26,052) --
----------- ----------- -----------
Net cash provided by (used in) in-
vesting activities................. 364,793 (76,166) 2,717
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net cash used in financing activi-
ties............................... (3,825,008) (3,825,008) (3,870,008)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 656,565 (94,186) 84,398
Cash and Cash Equivalents at Beginning
of Year................................ 1,706,415 1,800,601 1,716,203
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 2,362,980 $ 1,706,415 $ 1,800,601
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,933,537 $ 3,952,214 $ 3,943,043
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense...................... 188,990 -- --
Depreciation.......................... 342,161 317,189 313,319
Amortization.......................... 1,949 2,841 2,000
Equity in earnings of joint venture,
net of distributions................. 110,673 (20,672) (9,903)
Loss on sale of land and buildings.... 104,374 -- 15,355
Provision for loss on building........ 206,535 -- --
Decrease in net investment in direct
financing leases..................... 164,614 132,771 121,597
Decrease (increase) in receivables.... (3,380) (4,450) 48,671
Decrease (increase) in prepaid ex-
penses............................... 178 (430) (4,862)
Increase in accrued rental income..... (28,230) (533,121) (518,502)
Increase (decrease) in accounts pay-
able and accrued expenses............ 17,530 (10,207) 8,745
Increase (decrease) in due to related
parties.............................. 17,138 3,906 (4,269)
Increase (decrease) in rents paid in
advance and deposits................. 60,711 (33,053) 36,495
----------- ----------- -----------
Total adjustments................... 1,183,243 (145,226) 8,646
----------- ----------- -----------
Net Cash Provided by Operating Activi-
ties................................... $ 4,116,780 $ 3,806,988 $ 3,951,689
=========== =========== ===========
Supplemental Schedule of Non-Cash Fi-
nancing Activities:
Distributions declared and unpaid at De-
cember 31.............................. $ 1,091,252 $ 956,252 $ 956,252
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators or franchisees of national and regional fast-food
and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
values. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-12
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership's investments in Des Moines
Real Estate Joint Venture, Williston Real Estate Joint Venture, Kingsville Real
Estate Joint Venture, Middleburg Joint Venture and Columbus Joint Venture are
accounted for using the equity method since the Partnership shares control with
affiliates which have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease using the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. Substantially all
leases are for 14 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments,
F-13
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fully maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to four
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................... $12,584,387 $12,837,754
Buildings.......................................... 10,120,580 9,443,412
----------- -----------
22,704,967 22,281,166
Less accumulated depreciation...................... (1,795,099) (1,460,887)
----------- -----------
20,909,868 20,820,279
Less allowance for loss on building................ (206,535) --
----------- -----------
$20,703,333 $20,820,279
=========== ===========
</TABLE>
In March 1997, the Partnership entered into a new lease for the property in
Tempe, Arizona. In connection therewith, the Partnership incurred $55,000 in
renovation costs which were completed in May 1997.
In December 1998, the Partnership sold its property in Monroe, North
Carolina, and received net sales proceeds of $483,549, resulting in a loss of
$104,374 for financial reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1998, 1997 and 1996, the Partnership recognized $28,230 (net of $6,323 in
reserves and $224,867 in write-offs), $533,121, and $518,502, respectively, of
such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 2,212,548
2000............................................................. 2,214,984
2001............................................................. 2,224,926
2002............................................................. 2,244,948
2003............................................................. 2,521,540
Thereafter....................................................... 21,695,400
-----------
$33,114,346
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-14
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
During the year ended December 31, 1998, the Partnership established an
allowance for loss on building of $206,535, relating to the Long John Silver's
property in Morganton, North Carolina. The tenant of this property filed for
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
property at December 31, 1998, and the current estimated net realizable value
for this property.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $24,790,776 $28,413,665
Estimated residual values.......................... 3,924,188 4,190,941
Less unearned income............................... (16,242,986) (18,948,341)
----------- -----------
Net investment in direct financing leases.......... $12,471,978 $13,656,265
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 1,678,170
2000............................................................. 1,678,170
2001............................................................. 1,678,170
2002............................................................. 1,678,170
2003............................................................. 1,731,030
Thereafter....................................................... 16,347,066
-----------
$24,790,776
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
During the year ended December 31, 1998, three of the Partnership's leases
with Long John Silver's, Inc. were rejected in connection with the tenant
filing for bankruptcy. As a result, the Partnership reclassified these assets
from net investment in direct financing leases to land and buildings on
operating leases. In accordance with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying value. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
5. Investment in Joint Ventures:
As of December 31, 1998, the Partnership had a 59.05%, an 18.61%, a 31.13%,
and an 87.54% interest in the profits and losses of Williston Real Estate Joint
Venture, Des Moines Real Estate Joint Venture, Kingsville Real Estate Joint
Venture, and Middleburg Joint Venture, respectively. The remaining interests in
these joint ventures are held by affiliates of the Partnership which have the
same general partners.
In August 1998, the Partnership entered into a joint venture agreement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant property. As of December 31, 1998, the
F-15
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Partnership contributed amounts to purchase land and pay construction costs
relating to the joint venture. The Partnership has agreed to contribute
additional amounts to the joint venture for construction costs. As of December
31, 1998 the Partnership owned a 27.72% interest in the profits and losses of
this joint venture. When funding is complete, the Partnership expects to have
an approximate 28 percent interest in the profits and losses of the joint
venture. The Partnership accounts for its investment in this joint venture
under the equity method since the Partnership shares control with affiliates.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture, Middleburg Joint Venture, and Columbus
Joint Venture each own and lease one property to an operator of national fast-
food or family-style restaurants. The following presents the joint ventures'
combined, condensed financial information at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land................................................ $2,498,504 $1,768,636
Net investment in direct financing leases, less
allowance for impairment in carrying value.......... 2,219,798 2,446,688
Cash................................................. 5,671 6,893
Receivables.......................................... -- 13,843
Accrued rental income................................ 166,447 157,252
Other assets......................................... 283 443
Liabilities.......................................... 483,138 7,673
Partners' capital.................................... 4,407,565 4,386,082
Revenues............................................. 337,881 481,085
Provision for loss on land and direct financing
lease............................................... (316,113) --
Net income (loss).................................... (38,867) 446,047
</TABLE>
The Partnership recognized income totalling $95,142, $277,325, and $200,499
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Receivables:
During 1993, the Partnership loaned $208,855 to the tenant of the property
owned by Kingsville Real Estate Joint Venture in connection with the purchase
of equipment for the restaurant property. The loan, which bore interest at a
rate of ten percent, was payable over 84 months and was collateralized by the
restaurant equipment. Receivables at December 31, 1997, included $188,642
relating to this loan, including accrued interest of $7,488. During the year
ended December 31, 1998, the Partnership established an allowance for
doubtful accounts of $205,965, which represented the entire amount outstanding
under the loan plus accrued interest, due to the uncertainty of collectibility
of this note. No amounts relating to this loan are included in receivables at
December 31, 1998.
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to
F-16
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
receipt by the limited partners of an aggregate, ten percent, cumulative,
noncompounded annual return on their invested capital contributions (the
"Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in liquidation
of the Partnership, to the extent distributed, will be distributed first to the
limited partners in an amount sufficient to provide them with their Limited
Partners' 10% Return, plus the return of their adjusted capital contributions.
The general partners will then receive, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net cash flow
and a return of their capital contributions. Any remaining sales proceeds will
be distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation of
the Partnership is, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property is, in
general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,960,008, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared distributions
to the limited partners of $3,825,008. No distributions have been made to the
general partners to date.
F-17
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,933,537 $3,952,214 $3,943,043
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (224,652) (249,366) (259,752)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 164,614 132,771 121,597
Provision for loss on building.......... 206,535 -- --
Loss on sale of land and buildings for
tax reporting purposes less than (in
excess of) loss for financial reporting
purposes............................... 25,699 -- (26,151)
Capitalization of transaction costs for
tax reporting purposes................. 24,282 -- --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
(less than) equity in earnings of joint
ventures for financial reporting
purposes............................... 138,311 (51,481) (46,345)
Allowance for doubtful accounts......... 207,151 (15,913) (16,396)
Accrued rental income................... (28,230) (533,121) (518,502)
Rents paid in advance................... 60,711 (39,303) 36,495
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,507,958 $3,195,801 $3,233,989
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Affiliate. The Partnership incurred
management fees of $41,537, $40,218, and $40,244 for the years ended December
31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition
F-18
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
fees will be incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition fee is
subordinated to receipt by the limited partners of their aggregate 10%
Preferred Return, plus their adjusted capital contributions. No deferred,
subordinated real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $107,911, $92,866, and $97,722 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
The due to related parties at December 31, 1998 and 1997, totalled $24,025
and $6,887, respectively.
10. Concentration of Credit Risk:
The following schedule presents rental and earned income from individual
lessees, or affiliated groups of lessees, each representing more than ten
percent of the Partnership's total rental and earned income (including the
Partnership's share of rental and earned income from joint ventures) for each
of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Foodmaker, Inc............................ $1,023,630 $1,024,667 $1,024,667
Flagstar Enterprises, Inc. (and Denny's
Inc. and Quincy's Restaurants, Inc. for
the years ended December 31, 1997 and
1996).................................... 784,922 1,216,908 1,224,953
Long John Silver's, Inc................... 508,351 647,829 649,992
Advantica Restaurant Group, Inc. (and
Denny's, Inc. and Quincy's Restaurants,
Inc. for the year ended December 31,
1998).................................... 424,742 N/A N/A
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Jack in the Box............................. $1,023,630 $1,024,667 $1,024,667
Hardee's.................................... 784,922 787,260 791,998
Denny's..................................... 782,486 807,547 818,672
Long John Silver's.......................... 574,044 713,522 715,685
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or group of affiliated tenants and the chain did not represent more than
ten percent of the Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
F-19
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In June 1998, a tenant, Long John Silver's, Inc., filed for bankruptcy and
rejected the leases relating to three of its eight leases and ceased making
rental payments to the Partnership. In December 1998, the Partnership sold one
of the vacant properties and intends to reinvest the net sales proceeds from
the sale of this
property in an additional property. The Partnership will not recognize rental
and earned income from these two remaining properties until new tenants for
these properties are located or until the properties are sold and the proceeds
from such sales are reinvested in additional properties. While Long John
Silver's, Inc. has not rejected or affirmed the remaining five leases, there
can be no assurance that some or all of the leases will not be rejected in the
future. The lost revenues resulting from the two remaining vacant properties,
as described above, and the possible rejection of the remaining five leases
could have an adverse effect on the results of operations of the Partnership,
if the Partnership is not able to re-lease these properties in a timely manner.
The general partners are currently seeking either new tenants or purchasers for
the two remaining vacant properties.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,768,496 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $46,951,127 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,384,248 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates
and assumptions set forth below in the notes to such information which
included pro forma adjustments. This unaudited pro forma financial information
has been prepared utilizing the historical financial statements of APF, the
historical combined financial information of the Income Fund, the Advisor and
CNL Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of
properties by APF from January 1, 1998 through July 31, 1999, the acquisition
of the Advisor, the CNL Restaurant Financial Services Group and the
Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net
depreciation).......... $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0
Mortgages and
NotesReceivable........ 63,351,507 0 63,351,507 0 0
Other Investments....... 16,197,812 0 16,197,812 0 0
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0
Receivables (net
allowances) /Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income... 5,875,698 0 5,875,698 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0
Distributions Payable... 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981
Income Tax Payable...... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income......... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0
Minority Interest....... 644,611 0 644,611 0 0
Common Stock............ 373,484 0 373,484 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital....... 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical
Historical Combining CNL
CNL Financial Pro Forma Combined Income Pro Forma Adjusted
Corp. Adjustments APF Fund XII Ltd. Adjustments Pro Forma
------------- ------------ -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $20,087,965 $ 7,183,181 (B2) $ 600,208,005
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 12,378,531 1,832,773 (B2) 146,391,253
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 54,294 0 353,928,472
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 2,722,141 1,270,196 (B2) 5,073,383
Cash and Cash
Equivalents............ 1,767,517 (8,569,683)(B1) 12,934,198 2,484,668 (3,322,317)(B2) 11,592,549
(504,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)/Due from
Related Party.......... 1,125,933 (6,614,629)(C) 9,247,098 79,416 (28,712)(E) 9,297,802
Accrued Rental Income... 0 0 5,875,698 2,624,549 (2,624,549)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 42,923 (42,923)(B2) 13,173,857
Goodwill................ 0 42,715,299 (B1) 42,715,299 0 0 42,715,299
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $304,738,561 $ 24,955,195 $1,171,065,807 $40,474,487 $ 3,763,649 $1,215,303,943
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 120,266 $ 0 $ 5,224,569
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 956,252 0 956,252
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 28,712 (28,712)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 36,808 0 1,654,175
Minority Interest....... 0 0 644,611 0 0 644,611
Common Stock............ 0 61,500 (B1) 434,984 0 23,590 (B2) 458,574
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 43,101,220 (B2) 836,037,435
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,163)(B1) (87,791,130) 0 0 (87,791,130)
(72,964,614)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 39,332,449 (39,332,449)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,955,195 $1,171,065,807 $40,474,487 $ 3,763,649 $1,215,303,943
============ ============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 45,856,931 (r)
==============
Shares Outstanding...... 45,857,512
==============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 27,900,894 $ 3,056,620(a) $ 30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
------------ ----------- ------------ ----------- --------- ----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
------------ ----------- ------------ ----------- --------- ----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties .. $ 23,564,432 $ 2,089,441 $ 25,653,873 $ 3,877,654 $ 42,804 $ (239,337)
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision For Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
------------ ----------- ------------ ----------- --------- ----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes... 0 0 0 (1,595,036) (16,906) 86,202
------------ ----------- ------------ ----------- --------- ----------
Net Earnings (Losses)... $ 22,853,308 $ 2,089,441 $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
============ =========== ============ =========== ========= ==========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========= ==========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========= ==========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========= ==========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
============ =========== ============ =========== ========= ==========
Cash Distributions
declared............... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a
============ =========== ============ =========== ========= ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
============ =========== ============ =========== ========= ==========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
============ =========== ============ =========== ========= ==========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XII, Ltd. Adjustments Pro Forma
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $1,987,888 $ 56,314 (j) $33,001,716
Fees................... (9,812,516)(b),(c) 2,616,185 0 (50,040)(k) 2,566,145
Interest and Other
Income................ 144,014 (d) 16,269,383 44,935 0 16,314,318
----------- ----------- ---------- ---------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $2,032,823 $ 6,274 $51,882,179
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 104,953 (52,434)(l),(m) 9,632.421
Management and Advisory
Fees.................. (2,913,775)(f) 0 21,455 (21,455)(n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 20,764 9,158 (o) 494,888
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 167,782 74,264 (p) 4,911,199
Amortization........... 1,067,882 (h) 1,077,618 995 0 1,078,613
Transaction Costs...... 0 483,005 127,682 0 610,687
----------- ----------- ---------- ---------- -----------
Total Expenses......... (3,363,877) 26,812,713 443,631 9,533 27,265,877
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,304,625) $23,030,369 $1,589,192 $ (3,259) $24,616,302
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 190,206 (14,299)(q) 207,148
Gain (Loss) on Sale of
Properties............ 0 (201,843) 74,714 0 (127,129)
Provision For Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,304,625) 22,319,245 1,854,112 (17,558) 24,155,799
Benefit/(Provision) for
Federal Income
Taxes.................. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- ---------- -----------
Net Earnings (Losses)... $(4,778,885) $22,319,245 $1,854,112 $ (17,558) $24,155,799
=========== =========== ========== ========== ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.41 $ n/a $ 0.53
=========== =========== ========== ========== ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.74 $ n/a $ 16.33
=========== =========== ========== ========== ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.43 $ n/a $ 0.76
=========== =========== ========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.97x
=========== =========== ========== ========== ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,912,504 $(113,777) (s) $34,964,129
=========== =========== ========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 2,359,048 45,856,931 (r)
=========== =========== ========== ========== ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,359,048 45,857,512
=========== =========== ========== ========== ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties
and Other Expenses..... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Other Expenses......... 0 0 0 0 0 0
Provision For Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,561,839(t) $51,010,988 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,581,732 34,229,951 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XII, Ltd. Adjustments Pro Forma
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned $ 112,628
Income................ $ 0 $56,081,460 $3,885,823 (j) $60,079,911
Fees................... (32,715,768)(b),(c) 3,226,263 0 (79,305)(k) 3,146,958
Interest and Other
Income................ 207,144 (d) 32,221,925 70,227 0 32,292,152
------------ ----------- ---------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $3,956,050 $ 33,323 $95,519,021
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 379,164 (86,651)(l),(m) 16,232,069
Management and Advisory
Fees.................. (4,658,434)(f) 0 41,537 (41,537)(n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 17,653 14,660(o) 599,759
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 342,161 148,529(p) 10,439,029
Amortization........... 2,135,765 (h) 2,299,766 1,949 0 2,301,715
Transaction Costs...... 0 157,054 24,282 0 181,336
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,267,183) 51,468,694 806,746 35,001 52,310,441
Operating
Earnings(Losses) Before
Equity in Earnings of
Joint Ventures/Minority
Interests, (Gain) Loss
on Sale of Properties,
Gain on Securitization,
and Provision for
Losses on Properties
and Other Expenses..... $(23,241,441) $40,060,954 $3,149,304 $ (1,678) $43,208,580
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 95,142 (28,598)(q) 52,406
Loss on Sale of
Properties............ 0 0 (104,374) 0 (104,374)
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Other Expenses......... 0 0 0 0 0
Provision For Loss on
Properties............ 0 (611,534) (206,535) 0 (818,069)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income
Taxes.................. (23,241,441) 43,129,633 2,933,537 (30,276) 46,032,894
Benefit/(Provision) for
Federal Income
Taxes................. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,343,007) $43,129,633 $2,933,537 $ (30,276) $46,032,894
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ .65 n/a $ 1.08
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.75 n/a $ 16.48
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.88 n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.09x
============ =========== ========== ========= ===========
Cash Distributions
declared............... $ 9,378,504 (t) $60,389,492 $3,960,008 $(362,554)(t) $63,986,945
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,379,951 n/a 2,359,048 42,738,999 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 2,359,048 45,846,975
============ =========== ========== ========= ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments..... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities........... 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities........... (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities........... 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,325,602) 12,874,235 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year .... $ 18,764,033 $ 14,446,580 $ 33,210,613 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XII, Ltd. Adjustments Pro Forma
------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,778,885)(a) $ 22,319,245 $ 1,854,112 $ (17,558)(a) $ 24,155,799
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,774,655 167,782 74,264 (b) 5,016,701
Amortization expense... 1,067,882 (c) 1,977,635 995 0 1,978,630
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 (64,312) 14,299 (d) (24,893)
Loss (gain) on sale of
land, buildings, and
net investment in
direct
financing leases...... 0 201,843 (74,714) 0 127,129
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) (62,553) 0 (2,264,513)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (10,584) 0 (331,009)
Decrease in net
investment in direct
financing leases...... 0 721,624 93,447 0 815,071
Increase in accrued
rental income......... 0 (1,915,785) (100,143) 0 (2,015,928)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 88,934 0 (574,544)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 4,687 0 590,414
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (60,640) 0 606,079
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------- ------------- ----------- ------------ -------------
Total adjustments..... 1,067,882 (75,921,930) (17,101) 88,563 (75,850,468)
------------- ------------- ----------- ------------ -------------
Net cash provided by
(used in) operating
activities........... (3,711,003) (53,602,685) 1,837,011 71,005 (51,694,669)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 467,300 0 4,163,364
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) (135,825) 0 (253,488)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 706 0 706
------------- ------------- ----------- ------------ -------------
Net cash provided by
(used in) investing
activities........... 4,452,252 (111,734,526) 332,181 0 (111,402,345)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related
parties on behalf of
the entity............ 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (2,047,504) 113,777 (g) (35,218,937)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------- ------------- ----------- ------------ -------------
Net cash provided by
(used in) financing
activities........... (4,689,252) 180,263,475 (2,047,504) 113,777 178,329,748
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 121,688 184,782 15,232,734
Cash at beginning of
year................... (10,701,941) 6,374,253 2,362,980 (3,316,912) 5,420,321
------------- ------------- ----------- ------------ -------------
Cash at end of year..... $ (14,649,944) $ 21,300,517 $ 2,484,668 $ (3,132,130) $ 20,653,055
============= ============= =========== ============ =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $(468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,561,839)(j) (51,010,988) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,191,983) 305,643,558 (8,200,077) 51,854 (700,074)
Net increase(decrease)
in cash................ 75,613,060 (110,325,602) (34,712,542) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,325,602) $ 12,874,235 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund Pro Forma Adjusted
Adjustments APF XII, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net Income (loss).............. $(16,343,007)(a) $ 43,129,633 $ 2,933,537 $ (30,276)(a) $ 46,032,894
Adjustments to reconcile net
income(loss) to net cash
provided by
(used in) operating activities:
Depreciation.................. (340,898)(b) 10,147,496 342,161 148,529 (b) 10,638,186
Amortization expense.......... 2,135,765 (c) 4,449,849 1,949 0 4,451,798
Minority interest in income of
consolidated joint venture... 0 30,156 0 0 30,156
Equity in earnings of joint
ventures, net of
distributions................ 0 (15,440) 110,673 28,598 (d) 123,831
Loss (gain) on sale of land,
building, net investment in
direct
financing leases............. 0 0 104,374 0 104,374
Provision for loss on land,
buildings, and direct
financing leases/provision
for deferred taxes........... 0 1,009,576 206,535 0 1,216,111
Gain on securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of notes
receivable................... 0 265,871,668 0 0 265,871,668
Decrease (increase) in other
receivables.................. 0 (2,543,413) 185,610 0 (2,357,803)
Increase in accrued interest
income included in notes
receivable................... 0 (170,492) 0 0 (170,492)
Increase in accrued interest
on mortgage note receivable.. 0 0 0 0 0
Investment in notes
receivable................... 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable................... 0 23,539,641 0 0 23,539,641
Decrease in restricted cash... 0 2,504,091 0 0 2,504,091
Decrease (increase) in due
from related party........... 0 (953,688) 0 0 (953,688)
Increase in prepaid expenses.. 0 7,246 178 0 7,424
Decrease in net investment in
direct financing leases...... 0 1,971,634 164,614 0 2,136,248
Increase in accrued rental
income....................... 0 (2,187,652) (28,230) 0 (2,215,882)
Increase in intangibles and
other assets................. 0 (154,351) 0 0 (154,351)
Increase (decrease) in
accounts payable, accrued
expenses and other
liabilities.................. 0 846,680 17,530 0 864,210
Increase in due to related
parties, excluding
reimbursement of acquisition,
and stock issuance costs paid
on behalf of the entity...... 0 (133,364) 17,138 0 (116,226)
Increase in accrued interest.. 0 (77,968) 0 0 (77,968)
Increase in rents paid in
advance and deposits......... 0 436,843 60,711 0 497,554
Decrease in deferred rental
income....................... 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments............. 1,794,867 13,324,672 1,183,243 177,127 14,685,042
------------ ------------- ----------- ----------- -------------
Net cash provided by(used in)
operating activities......... (14,548,140) 56,454,305 4,116,780 146,851 60,717,936
Cash Flows from Investing
Activities:
Proceeds from sale of land,
buildings, direct financing
leases, and
equipment.................... 0 2,385,941 483,549 0 2,869,490
Additions to land and
buildings on operating
leases....................... 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct financing
leases....................... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint venture... 0 (974,696) (115,256) 0 (1,089,952)
Acquisition of businesses..... (8,569,683)(f) (8,569,683) 0 (3,322,317)(g) (12,396,000)
(504,000)(g)
Purchase of other
investments.................. 0 (16,083,055) 0 0 (16,083,055)
Net loss in market value from
investments in trading
securities................... 0 295,514 0 0 295,514
Proceeds from retained
interest and securities,
excluding investment income.. 0 212,821 0 0 212,821
Investment in mortgage notes
receivable................... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage note
receivable................... 0 291,990 0 0 291,990
Investment in equipment notes
receivable................... 0 (7,837,750) 0 0 (7,837,750)
Collections on equipment notes
receivable................... 0 3,046,873 0 0 3,046,873
Decrease in restricted cash... 0 0 0 0 0
Increase in intangibles and
other assets................. 0 (6,281,069) 0 0 (6,281,069)
Other......................... 0 200,000 (3,500) 0 196,500
------------ ------------- ----------- ----------- -------------
Net cash provided by(used in)
investing activities......... 13,224,703 (387,325,939) 364,793 (3,826,317) (390,787,463)
Cash Flows from Financing
Activities:
Subscriptions received from
stockholders................. 0 386,592,011 0 0 386,592,011
Contributions from limited
partners..................... 0 0 0 0 0
Reimbursement of acquisition
and stock issuance costs paid
by related parties on behalf
of the entity................ 0 (4,574,925) 0 0 (4,574,925)
Payment of stock issuance
costs........................ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing on
line of credit/notes
payable...................... 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable......... 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of common
stock........................ 0 (639,528) 0 0 (639,528)
Distributions to holders of
minority interest............ 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners..................... (9,378,504)(j) (69,753,980) (3,825,008) 362,554 (j) (73,216,434)
Other......................... 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by(used in)
financing activities......... (9,378,504) 287,416,757 (3,825,008) 362,554 283,954,303
Net increase(decrease) in
cash.......................... (10,701,941) (43,454,877) 656,565 (3,316,912) (46,115,224)
Cash at beginning of year...... 0 49,829,130 1,706,415 0 51,535,545
------------ ------------- ----------- ----------- -------------
Cash at end of year............ $(10,701,941) $ 6,374,253 $ 2,362,980 $(3,316,912) $ 5,420,321
============ ============= =========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor, the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of Consideration
Received.................. $81,295,089 $50,274,594 $46,951,127 $178,520,810
=========== =========== =========== ============
Share Consideration........ $76,000,000 $47,000,000 $43,124,810 $166,124,810
Cash Consideration......... -- -- 504,000 504,000
APF Transaction Costs...... 5,295,089 3,274,594 3,322,317 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,295,089 $50,274,594 $46,951,127 $178,520,810
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical..... $ 8,330,475 $10,135,087 $39,332,449 $ 57,798,011
Purchase Price Adjustments:
Land and buildings on op-
erating leases.......... -- -- 7,183,181 7,183,187
Net investment in direct
financing leases........ -- -- 1,832,773 1,832,773
Investment in joint ven-
tures................... -- -- 1,270,196 1,270,196
Accrued rental income.... -- -- (2,624,549) (2,624,549)
Intangibles and other as-
sets.................... -- (2,575,792) (42,923) (2,618,715)
Goodwill*................ -- 42,715,299 -- 42,715,299
Excess purchase price.... 72,964,614 -- -- 72,964,614
----------- ----------- ----------- ------------
Total Allocation....... $81,295,089 $50,274,594 $46,951,127 $178,520,810
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $72,964,614 was expensed at
June 30, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of $42,715,299 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC) - Class A.......... 8,600
Common Stock (CFA, CFS, CFC) - Class B.......... 4,825
Additional Paid In Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of earn-
ings........................................... 72,964,614
Goodwill for CFC/CFS (Intangibles and other as-
sets).......................................... 42,715,299
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 8,569,683
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 39,332,449
Land and buildings on operating leases.......... 7,183,181
Net investment in direct financing leases....... 1,832,773
Investment in joint ventures.................... 1,270,196
Accrued rental income......................... 2,624,549
Intangibles and other assets.................. 42,923
Cash to pay APF Transaction costs............. 3,322,317
Cash consideration to Income Fund............. 504,000
APF Common Stock.............................. 23,590
APF Capital in Excess of Par Value............ 43,101,220
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $28,712 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (689,425)
Secured equipment lease fees............................. (67,967)
Advisory fees............................................ (126,788)
Reimbursement of administrative costs.................... (382,728)
Acquisition fees......................................... (4,452,252)
Underwriting fees........................................ (54,248)
Administrative, executive and guarantee fees............. (532,389)
Servicing fees........................................... (572,728)
Development fees......................................... (38,853)
Management fees.......................................... (1,681,870)
-----------
Total.................................................. $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which
were deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,681,870)
Administrative executive and guarantee fees.............. (532,389)
Servicing fees........................................... (572,728)
Advisory fees............................................ (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,067,883
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $56,314 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(21,455)
Reimbursement of administrative costs....................... (28,585)
--------
$(50,040)
========
</TABLE>
(l) Represents the elimination of $28,585 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $23,849 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $21,455 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $9,158 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $74,264 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $14,299 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.............................................. $ 207,144
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C> <C>
General and administrative costs....................... $ (4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,851,004)
Administrative executive and guarantee fees.............. 1,233,043)
Servicing fees........................................... (1,269,357)
Advisory fees............................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,135,765
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $112,628 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(41,537)
Reimbursement of administrative costs....................... (37,768)
--------
$(79,305)
========
</TABLE>
(l) Represents the elimination of $37,768 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $48,883 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $41,537 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $14,660 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
had been issued as of January 1, 1998 and that these entities had
operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $148,529 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $28,598 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-40
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among CNL American Properties Fund, Inc., a
Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware limited
partnership (the "Operating Partnership"), CNL APF GP Corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund XII, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to
collectively herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
B-1
<PAGE>
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the
Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP CORP.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XII, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XII, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,768,496 fully paid and nonassessable APF Common
Shares (2,384,248 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $42,752,014, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,231,504 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,768,496 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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<PAGE>
ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
B-31
<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
B-32
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $476,850 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
B-33
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-34
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-35
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XII, Ltd.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-36
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL INCOME FUND XII, LTD.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statutes, this
Florida limited partnership, whose certificate was filed with the Florida
Department of State on August 20, 1991, adopts the following certificate of
amendment to its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
_____________________________________
James M. Seneff, Jr.
_____________________________________
Robert A. Bourne
CNL Realty Corporation
By:__________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XII, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XII, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
D-1
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
D-2
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XIII, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XIII, Ltd., which we refer to as the Income Fund, for the purpose
of enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantges associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis. APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and
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mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,943,093 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties, to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $710.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,943,093 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition, will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $850 to you per $10,000 investment. While historically, APF
has made distributions equal to 7.625% per APF Share, based on the exchange
value, we cannot be sure that APF will be able to maintain this level of
distributions in the future. In the event that APF is unable to maintain this
level of distributions in the future, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We are
and have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
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The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,270 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the combination of cash paid to and
payments on any notes if you elect to receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a
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residual-interest security and retain an interest-only strip security. The fair
value of the residual-interest and interest-only strip security would be the
present value of the estimated net cash flows to be received after considering
the effects of prepayments and credit losses. The capitalized mortgage
servicing rights and mortgage-related securities would be valued using
prepayment, default, and interest rate assumptions that APF believes are
reasonable. The amount of revenue recognized upon the sale of loans or loan
participations will vary depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.91%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.42x and its ratio of debt-to-total assets would
have been 34.82%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former limited partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
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The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience, services
and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or that
of its franchisor or vendors, to adequately address year 2000 issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had no tenants of
Boston Market restaurant properties and five Long John Silver's restaurant
properties of which continue to pay lease payments to your Income Fund.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
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If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive the notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original
Limited Estimated
Partner Value of
Original Investments APF Shares
Limited less per
Partner Distributions Number of Estimated Estimated Average
Investments of Net Sales APF Value of Value of $10,000
less Proceeds per Shares APF Shares APF Shares Original
Distributions $10,000 Offered Payable to Estimated after Limited
of Net Sales Original to Income Income Acquisition Acquisition Partner
Proceeds Investment(1) Fund Fund Expenses Expenses Investment
- ------------- ------------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 1,943,093 $38,861,860 $430,000 $38,431,860 $9,608
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that would otherwise have
been paid to your Income Fund. The notes will bear interest at 7.0% and will
mature on
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, 2005. APF may redeem the notes at any time prior to their maturity at a
price equal to the sum of the outstanding principal balance plus accrued
interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)................................................... $ 30,622
Appraisals and Valuation(2)..................................... 7,750
Fairness Opinions(3)............................................ 30,000
Solicitation Fees(4)............................................ 16,679
Printing & Mailing(5)........................................... 93,544
Accounting and Other Fees(6).................................... 62,154
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Subtotal.................................................... 240,749
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Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)....................... 93,348
Legal Closing Fees(8)........................................... 46,109
Partnership Liquidation Costs(9)................................ 49,794
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Subtotal.................................................... 189,251
--------
Total........................................................... $430,000
========
</TABLE>
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(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your
Income Fund's pro-rata portion of these fees was determined based
on the ratio of the value of the APF Share consideration payable
to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income
Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of
the Income Funds in connection with the Acquisition were $105,420.
Your Income Fund's pro-rata portion of these fees was determined
based on the number of restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and
incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your
Income Fund's pro-rata portion of these fees was determined based
on the number of Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$1,399,998. Your Income Fund's pro-rata portion of these fees was
determined based on the number of Limited Partners in your Income
Fund.
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(6) Aggregate accounting and other fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$841,245. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of your Income Fund's total assets
as of June 30, 1999 to the total assets of all of the Income Funds
as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by
all of the Income Funds in connection with the Acquisition is
estimated to be $1,313,596. Your Income Fund's pro-rata portion of
these fees was determined based on the ratio of the value of the
APF Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your
Income Fund's pro-rata portion of these fees was determined based
on the ratio of your Income Fund's total assets as of June 30,
1999 to the total assets of all of the Income Funds as of June 30,
1999.
(9) Aggregate partnership liquidation costs to be incurred by all of
the Income Funds in connection with the Acquisition is estimated
to be $698,901. Your Income Fund's pro-rata portion of these costs
was determined based on the ratio of the value of the APF Share
consideration payable to your Income Fund, based on the exchange
value, to the total value of the APF Share consideration payable
to all of the Income Funds, based on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (March 17, 1993). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding of units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership agreement
currently provides that your Income Fund may not participate in any
transaction involving (1) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(2) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
S-10
<PAGE>
If the Limited Partners holding greater than 50% of the outstanding units
approve this amendment to your Income Fund's partnership agreement, Article 21
will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would change your Income Fund to a general partnership, change our liability or
your liability, or allow you to take part in the control or management of your
Income Fund. The form of opinion of Baker & Hostetler LLP is attached to this
supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired, or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials, and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent, constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999 a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date
S-11
<PAGE>
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the solicitation period. Under no circumstances will the
solicitation period be extended beyond March 31, 2000. Any consent form
received by Corporate Election Services prior to 5:00 p.m., Eastern time, on
the last day of the solicitation period will be effective provided that such
consent form has been properly completed and signed. If you fail to return a
signed consent form by the end of the solicitation period, your units will be
counted as voting "Against" the Acquisition of your Income Fund and you will
receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners Following the Acquisition":
S-12
<PAGE>
<TABLE>
<CAPTION>
Six
Months
Ended
Year Ended December 31, June
-------------------------- 30,
1996 1997 1998 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Historical Distributions Paid to the
General Partners and Affiliates:
General Partner Distributions............ -- -- -- --
Accounting and Administrative Services... $ 91,272 $ 87,322 $ 98,719 $47,917
Broker/Dealer Commissions................ -- -- -- --
Property Management Fees................. 35,675 34,321 35,257 17,777
Due Diligence and Marketing Support Fee.. -- -- -- --
Acquisition Fees......................... -- -- -- --
Asset Management Fees.................... -- -- -- --
Real Estate Disposition Fees(1).......... -- -- -- --
-------- -------- -------- -------
Total historical....................... $126,947 $121,643 $133,976 $65,694
Pro Forma Distributions to Be Paid to the
General Partners Following the
Acquisition:
Cash Distributions on APF Shares(2)...... -- -- -- --
Salary Compensation...................... -- -- -- --
-------- -------- -------- -------
Total pro forma........................ -- -- -- --
======== ======== ======== =======
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........ $756 $821 $800 $751 $617 $251 $246
Distributions from Sales of
Properties...................... -- -- -- -- -- -- --
Distributions from Return of
Capital(1)...................... -- 23 50 99 233 174 120
---- ---- ---- ---- ---- ---- ----
Total........................ $756 $844 $850 $850 $850 $425 $366
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-13
<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired, all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from ongoing liabilities with respect to the
Income Funds if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the
S-14
<PAGE>
limitations contained in your Income Fund's partnership agreement and limited
capital resources, your investments have less of an opportunity to appreciate.
Because APF is a growth-oriented operating company you will have the
opportunity, as an APF stockholder, to participate in APF's future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
.the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition or
the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to
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<PAGE>
you and the other Limited Partners. The effect of the Acquisition and the cash
available for distribution will vary, however, from Income Fund to Income Fund.
In addition to the receipt of cash available for distribution, you and the
other Limited Partners will be able to benefit from the potential growth of APF
as an operating company and will also receive investment liquidity through the
public market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Average Trading
Original Limited Partner Value of APF Estimated Prices of
Limited Investments less Shares Paid Estimated Liquidation Units
Partner Distributions of per Going Concern Value per per Average
Investments Net Sales average $10,000 Value per Average $10,000
less Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------------ ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund XIII,
Ltd. .................. $40,000,000 $10,000 $9,608 $9,571 $8,676 $8,940
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4)Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund of units as part of its
distribution reinvestment program, and do not necessarily reflect the
prices in a secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interests in the completion of the Acquisition
may conflict with yours as a Limited Partner of the Income Fund and with their
own as general partners of your Income Fund.
S-16
<PAGE>
Benefits to General Partners
As a result of the Acquisition assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr. Seneff
serving as Chairman of APF and Mr. Bourne serving as Vice Chairman.
Furthermore, they will be entitled to receive performance-based
incentives, including stock options, under APF's 1999 Performance
Incentive Plan or any other such plan approved by the stockholders. The
benefits that may be realized by Messrs. Seneff and Bourne are likely to
exceed the benefits that they would expect to derive from the Income
Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all of
your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement for
your Income Fund prohibits the Income Fund from incurring indebtedness,
the only liabilities the Income Fund has are liabilities with respect to
its ongoing business operations. In the event that your Income Fund is
acquired by APF, we would be relieved of our legal obligation to satisfy
the liabilities of the acquired Income Fund.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation with respect to certain restaurant
properties than that used by your Income Fund. As a result, APF's tax
depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income
S-17
<PAGE>
will generally be ordinary dividend income to you and will be classified as
portfolio income under the passive loss rules, except with respect to capital
gains dividends, discussed below. Furthermore, if APF incurs a taxable loss,
the loss will not be passed through to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF, the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Partner Investment
---------------------
<S> <C>
CNL Income Fund XIII, Ltd. ............................... $710
</TABLE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between;
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares, and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
S-18
<PAGE>
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
S-19
<PAGE>
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 $(9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,072,345 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,359,414)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provisions for
Loss on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,309,088)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provisions For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,309,088)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net
Earnings(Losses).. $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,783,348)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund XIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 1,696,832 $ 23,535 (j) $32,677,881
Fees............. 2,616,185 0 (48,188)(k) 2,567,997
Interest and
Other Income..... 16,269,383 12,993 0 16,282,376
------------ ------------ ------------------ ------------
Total Revenue... $49,843,082 $1,709,825 $ (24,653) $51,528,254
Expenses:
General and
Administrative... 9,579,902 109,501 (54,122)(l),(m) 9,635,281
Management and
Advisory Fees.... 0 17,777 (17,777)(n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 21,476 7,463 (o) 493,905
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 199,667 71,011 (p) 4,939,831
Amortization..... 1,082,081 1,004 0 1,083,085
Transaction
Costs............ 483,005 113,883 0 596,888
------------ ------------ ------------------ ------------
Total Expenses.. 26,817,176 463,308 6,575 27,287,059
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provisions for
Loss on
Properties....... $23,025,906 $ 1,246,517 $ (31,228) $24,241,195
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 120,554 (10,234)(q) 141,561
Gain (Loss) on
Sale of
Properties....... (201,843) (352,285) 0 (554,128)
Provisions For
Losses on
Properties....... (540,522) 0 0 (540,522)
------------ ------------ ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,314,782 1,014,786 (41,462) 23,288,106
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ------------ ------------------ ------------
Net
Earnings(Losses).. $22,314,782 $ 1,014,786 $ (41,462) $23,288,106
============ ============ ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared........ $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252(s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,666,560 (u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,624,046 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund XIII, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- ---------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 47 n/a 628
============== =========== ==================== ===============
Earnings per
share/unit...... $ n/a $ 0.25 $ n/a $ 0.51
============== =========== ==================== ===============
Book value per
share/unit...... $ n/a $ 8.27 $ n/a $ 16.30
============== =========== ==================== ===============
Dividends per
share/unit...... $ n/a $ 1.00 $ n/a $ 0.76
============== =========== ==================== ===============
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.90x
============== =========== ==================== ===============
Cash
distributions
declared........ $ 33,165,402 $ 1,700,004 $ (234,828)(s) $ 34,630,578
============== =========== ==================== ===============
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,921,593 45,419,476
============== =========== ==================== ===============
Shares
outstanding..... 43,498,464 n/a 1,921,593 45,420,057
============== =========== ==================== ===============
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $29,901,608 $5,962,320 (u2) $ 730,676,911
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 78,930 $ (48,066)(x) $ 9,277,962
Investment in
joint ventures.. $ 1,081,046 $ 2,447,615 $ 839,991 (u2) $ 4,368,652
Total assets.... $1,170,777,172 $34,693,708 $1,885,746 (u2),(x) $1,207,356,626
Total
liabilities/minority
interest........ $ 465,485,738 $ 1,629,523 $ (48,066)(x) $ 467,067,195
Total equity.... $ 705,291,434 $33,064,185 $1,933,812 (u2) $ 740,289,431
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
------------
Total...................................................... $(8,599,248)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,072,345
</TABLE>
S-23
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $23,535 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $(17,777)
Reimbursement of administrative costs......................... (30,411)
--------
$(48,188)
========
</TABLE>
(l) Represents the elimination of $30,411 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $23,711 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $17,777 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,463 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $71,011 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $10,234
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from July
1, 1999 through July 31, 1999 as if these properties had been acquired
on June 30, 1999. Based on historical results through July 31, 1999,
all interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma adjustments
to interest expense.
S-24
<PAGE>
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration Received. $81,583,724 $50,453,093 $38,283,180 $170,319,997
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $34,997,997 $157,997,997
Cash Consideration...... -- -- 430,000 430,000
APF Transaction Costs... 5,583,724 3,453,093 2,855,183 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,583,724 $50,453,093 $38,283,180 $170,319,997
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $33,064,185 $ 51,529,747
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 4,750,292 4,750,292
Net investment in
direct financing
leases................ -- -- 1,212,027 1,212,027
Investment in joint
ventures.............. -- -- 839,991 839,991
Accrued rental income.. -- -- (1,532,130) (1,532,130)
Intangibles and other
assets................ -- (2,575,792) (51,185) (2,626,977)
Goodwill*.............. -- 42,893,798 -- 42,893,798
Excess purchase price.. 73,253,249 -- -- 73,253,249
----------- ----------- ----------- ------------
Total Allocation...... $81,583,724 $50,453,093 $38,283,180 $170,319,997
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is
assumed to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,253,249 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $42,893,798 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1. Common Stock (CFA, CFS, CFC)--Class A............. 8,600
Common Stock (CFA, CFS, CFC)--Class B................ 4,825
Additional Paid-in Capital (CFA, CFS, CFC)........... 12,568,974
Retained Earnings.................................... 5,883,163
Accumulated distributions in excess of earnings...... 73,253,249
Goodwill for CFC/CFS (Intangibles and other assets).. 42,893,798
CFC/CFS Organizational Costs/Other Assets.......... 2,575,792
Cash to pay APF transaction costs.................. 9,036,817
APF Common Stock................................... 61,500
APF Capital in Excess of Par Value................. 122,938,500
(To record acquisition of CFA, CFS and CFC)
2. Partners' Capital................................. 33,064,185
Land and buildings on operating leases............... 4,750,292
Net investment in direct financing leases............ 1,212,027
Investment in joint ventures......................... 839,991
Accrued rental income.............................. 1,532,130
Intangibles and other assets....................... 51,185
Cash to pay APF Transaction costs.................. 2,855,183
Cash consideration to Income Funds................. 430,000
APF Common Stock................................... 19,216
APF Capital in Excess of Par Value................. 34,978,781
(To record acquisition of Income Fund)
</TABLE>
S-25
<PAGE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $48,066 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XIII, LTD.
The following table sets forth selected financial information for the
Income Fund, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations of CNL Income
Fund XIII, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,830,379 $ 1,632,204 $3,482,210 $ 3,832,470 $ 3,795,754 $ 3,956,874 $3,679,212
Net income (2).......... 1,014,786 1,313,726 2,495,855 3,035,627 3,231,815 3,319,174 3,117,632
Cash distributions
declared............... 1,700,004 1,700,004 3,400,008 3,400,008 3,400,008 3,375,011 3,025,009
Net income per unit (2). 0.25 0.33 0.62 0.75 0.80 0.82 0.77
Cash distributions
declared per unit...... 0.43 0.43 0.85 0.85 0.85 0.84 0.76
GAAP book value per
unit................... 8.27 8.57 8.44 8.66 8.75 8.80 8.81
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $34,693,708 $35,200,074 $34,687,493 $35,523,590 $35,945,070 $36,054,757 $36,145,882
Total partners' capital. 33,064,185 34,267,278 $33,749,403 34,653,556 35,017,937 35,186,130 $35,241,967
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures and adjustments to
accrued rental income due to the tenant of certain restaurant properties
filing for bankruptcy.
(2) Net income for the six months ended June 30, 1999 includes a loss on
disposal of building of $352,285. In addition, net income for the year
ended December 31, 1998, includes a provision for loss on building of
$297,885. Net income for the year ended December 31, 1997, includes a loss
on sale of land and direct financing lease of $48,538. Net income for the
year ended December 31, 1996, includes a gain on sale of land of $82,855.
S-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 25, 1992, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 47 restaurant properties
which included two restaurant properties owned by joint ventures in which the
Income Fund is a co-venturer and three restaurant properties owned with
affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998 was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,633,260 and
$1,733,901 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, is primarily a result of
changes in the Income Fund's working capital.
In November 1998, the Income Fund entered into a new lease for the
restaurant property located in Tampa, Florida with a new tenant to operate the
restaurant property as a Steak-N-Shake restaurant. In connection with the new
lease agreement, during the six months ended June 30, 1999, the building
located on the Income Fund's restaurant property was demolished. As a result,
the undepreciated cost of the building of $352,285 was charged to net income
for financial reporting purposes. As of June 30, 1999, a new building had been
constructed and became operational. The Income Fund will use a portion of the
net sales proceeds from the sale of the restaurant property in Houston, Texas,
to pay such costs, as described below.
In May 1999, the Income Fund entered into a new lease for the restaurant
property in Philadelphia, Pennsylvania, with a new tenant to operate the
property as an Arby's restaurant. In connection with the lease the Income Fund
agreed to pay up to $433,000 in renovation costs relating to this restaurant
property. No such amounts have been incurred as of June 30, 1999. The Income
Fund intends to use a portion of the net sales proceeds from the sale of the
restaurant property in Houston, Texas, to pay such costs, as described below.
In July 1999, the Income Fund sold its restaurant property in Houston,
Texas, to a third party for $1,073,887 and received net sales proceeds of
$1,063,318, resulting in a gain of $176,159 for financial reporting purposes.
The Income Fund intends to use the net sales proceeds to pay for the renovation
costs described above.
Currently, rental income from the Income Fund's restaurant properties and
any net sales proceeds from the sale of restaurant properties, pending the use
of such proceeds to pay construction and renovation costs as described above,
are invested in money market accounts or other short-term, highly liquid
investments such as demand deposits at commercial banks, certificates of
deposit, and money markets with less than a 30-day maturity date. At June 30,
1999, the Income Fund had $682,240 invested in such short-term investments, as
compared to $766,859 at December 31, 1998. The funds remaining at June 30, 1999
will be used to pay distributions and other liabilities.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three
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<PAGE>
additional Limited Partners as plaintiffs. Additionally, on June 22, 1999, a
Limited Partner in several Income Funds served a lawsuit against us, APF, CNL
Group, Inc. and the CNL Restaurant Businesses in connection with the
Acquisition. We and APF believe that the lawsuits are without merit and intend
to defend vigorously against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital is cash from operations, which
includes cash received from tenants, distributions from joint ventures and
interest received, less cash paid for expenses. Cash from operations was
$3,277,301, $3,273,557, $3,367,581 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in cash from operations during 1998, as
compared to 1997, and the decrease in cash from operations during 1997 as
compared to 1996, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Income Fund's
working capital during each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In November 1996, the Income Fund sold its restaurant property in Richmond,
Virginia, to the tenant and received sales proceeds of $550,000, resulting in a
gain of $82,855, for financial reporting purposes. This restaurant property was
originally acquired by the Income Fund in March 1994, and had a cost of
approximately $415,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $134,600 in excess of its original purchase price. In January
1997, the Income Fund reinvested the net sales proceeds in a restaurant
property located in Akron, Ohio, with one of our affiliates as tenants-in-
common. In connection therewith, the Income Fund and the affiliate entered into
an agreement whereby each co-venture will share in the profits and losses of
the restaurant property in proportion to its applicable percentage interest. As
of December 31, 1998, the Income Fund owned a 63.09% interest in this
restaurant property. The sale of the restaurant property in Richmond, Virginia,
and the reinvestment of the net sales proceeds in a restaurant property in
Akron, Ohio, were structured to qualify as a like-kind exchange transaction in
accordance with Section 1031 of the Internal Revenue Code. As a result, no gain
was recognized for federal income tax purposes. Therefore, the Income Fund was
not required to distribute any of the net sales proceeds from the sale of this
restaurant property to Limited Partners for the purpose of paying federal and
state income taxes.
In October 1997, the Income Fund sold its restaurant property in Orlando,
Florida, to a third party, for $953,371 and received net sales proceeds of
$932,849, resulting in a loss of $48,538 for financial reporting purposes. In
December 1997, the Income Fund reinvested the net sales proceeds in a
restaurant property located in Miami, Florida, with certain of our affiliates
as tenants-in-common. In connection therewith, the Income Fund and its
affiliates entered into an agreement whereby each co-venturer will share in the
profits and losses of the restaurant property in proportion to its applicable
percentage interest. As of December 31, 1998, the Income Fund owned a 47.83%
interest in this restaurant property.
During the year ended December 31, 1997, the Income Fund loaned $196,980 to
the former tenant of the Denny's restaurant property in Orlando, Florida in
order to facilitate the sale of the restaurant property. Upon the sale of the
restaurant property in October 1997, the Income Fund collected $127,843 of the
amounts advanced and wrote off the balance of $69,137.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any
S-29
<PAGE>
borrowing so that it will not constitute "acquisition indebtedness" for federal
income tax purposes and also will limit the Income Fund's outstanding
indebtedness to three percent of the aggregate adjusted tax basis of its
restaurant properties. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Rental income from the Income Fund restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At December 31, 1998, the Income
Fund had $766,859 invested in such short-term investments as compared to
$907,980 at December 31, 1997. The decrease in cash and cash equivalents during
the year ended December 31, 1998, is primarily the result of an increase in
rents due at December 31, 1998. As of December 31, 1998, the average interest
rate earned on the rental income deposited in demand deposit accounts at
commercial banks was approximately three percent annually. The funds remaining
at December 31, 1998, will be used towards the payment of distributions and
other liabilities.
Short-Term Liquidity
Six Months Ended June 3, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who meet specified
financial standards minimizes the Income Fund's operating expenses. We believe
that the leases will continue to generate cash flow in excess of operating
expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current and
future anticipated cash from operations, the Income Fund declared distributions
to the Limited Partners of $1,700,004 for each of the six months ended June 30,
1999 and 1998, or $850,002 for each applicable quarter. This represents
distributions of $0.43 per unit for each applicable six months, or $0.21 per
unit for each applicable quarter. No distributions were made to us for the
quarters and six months ended June 30, 1999 and 1998. No amounts distributed to
the Limited Partners for the six months ended June 30, 1999 and 1998 are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $1,629,523 at June 30, 1999, from $938,090 at December 31, 1998,
primarily as a result of the Income Fund accruing construction costs relating
to the Steak-N-Shake restaurant property described above. Liabilities at June
30, 1999, to the extent they exceed cash and cash equivalents at June 30, 1999,
will be paid from net sales proceeds from the sale of a restaurant property, as
described above, future cash from operations, or in the event we elect to make
capital contributions or loans, from future contributions or loans from us.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flows, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties
S-30
<PAGE>
are on a triple-net basis, it is not anticipated that a permanent reserve for
maintenance and repairs will be established at this time. To the extent,
however, that the Income Fund has insufficient funds for such purposes, we will
contribute to the Income Fund an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs. We have the right to cause the
Income Fund to maintain additional reserves if, in our discretion, we determine
such reserves are required to meet the Income Fund's working capital needs.
Based on current and future anticipated cash from operations, the Income
Fund declared distributions to the Limited Partners of $3,400,008 for each of
the years ended December 31, 1998, 1997, and 1996. This represents
distributions of $0.85 per Unit for each of the years ended December 31, 1998,
1997 and 1996. No amounts distributed to the Limited Partners for the years
ended December 31, 1998, 1997, and 1996, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions. The
Income Fund intends to continue to make distributions of cash available for
distribution to the Limited Partners on a quarterly basis.
During 1998, 1997, and 1996, certain of our affiliates incurred on behalf of
the Income Fund $101,134, $87,870, and $97,819, respectively, for certain
operating expenses. As of December 31, 1998 and 1997, the Income Fund owed
$22,529 and $6,791, respectively, to related parties for such amounts,
accounting and administrative services and management fees. As of March 11,
1999, the Income Fund had reimbursed the affiliates all such amounts. Other
liabilities, including distributions payable, increased to $915,561 at December
31, 1998, from $863,243 at December 31, 1997, primarily as the result of an
increase in rents paid in advance and deposits at December 31, 1998. Total
liabilities for the year ended December 31, 1998, to the extent they exceed
cash and cash equivalents, will be paid from future cash from operations. We
believe that the Income Fund has sufficient cash on hand to meet its current
working capital needs.
In November 1998, the Income Fund entered into a new lease for the
restaurant property located in Tampa, Florida, with a new tenant to operate the
restaurant property as a Steak-N-Shake restaurant. In connection therewith, the
Income Fund has agreed to fund up to $600,000 in conversion costs associated
with this restaurant property. No amounts were funded as of the year ended
December 31, 1998.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During each of the six months ended June 30, 1999 and 1998, the Income Fund
owned and leased 42 wholly owned restaurant properties to operators of fast-
food and family-style restaurant chains. During the six months ended June 30,
1999 and 1998, the Income Fund earned $1,586,589 and $1,336,528, respectively,
in rental income from operating leases, net of adjustments to accrued rental
income, and earned income from direct financing leases from these restaurant
properties, $797,194 and $500,978 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively. Rental and earned income was lower during
the quarter and six months ended June 30, 1998, as compared to the quarter and
six months ended June 30, 1999, due to the fact that in June 1998, Long John
Silver's, Inc. filed for bankruptcy and rejected the leases relating to three
of the eight restaurant properties it leased and ceased making rental payments
on the three rejected leases. As a result, during the quarter and six months
ended June 30, 1998, the Income Fund wrote off accrued rental income, or non-
cash accounting adjustments relating to the straight-lining of future scheduled
rent increases over the lease term in accordance with generally accepted
accounting principles, relating to these restaurant properties. No amounts were
written-off during the quarter and six months ended June 30, 1999. The effect
from the write-off of accrued rental income was partially offset by the fact
that the Income Fund recorded rental and earned income during the quarter and
six months ended June 30, 1998, prior to the tenant vacating the restaurant
properties in June 1998. No rental and earned income was recognized during the
quarter and six
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<PAGE>
months ended June 30, 1999 from the former tenant. The Income Fund has
continued to receive rental payments relating to the leases not rejected by the
tenant.
Rental and earned income increased during the quarter and six months ended
June 30, 1999, by approximately $46,500 and $85,000, respectively, due to the
fact that the Income Fund re-leased two of these restaurant properties to new
tenants with rental payments commencing in December 1998 for one lease and June
1999 for the other lease. In May 1999, the Income Fund released the remaining
vacant restaurant property to a new tenant, and intends to renovate the
restaurant property into an Arby's restaurant, as described above in "Capital
Resources." While Long John Silver's, Inc. has not rejected or affirmed the
remaining five leases, there can be no assurance that some or all of the leases
will not be rejected in the future. The lost revenues that would result in the
event the remaining five leases are rejected could have an adverse effect on
the results of operations of the Income Fund if the Income Fund is not able to
re-lease these restaurant properties in a timely manner.
During the six months ended June 30, 1999 and 1998, the Income Fund also
earned $110,243 and $141,008, respectively, in contingent rental income,
$69,638 and $75,085 of which was earned during the quarters ended June 30, 1999
and 1998, respectively. Contingent rental income was higher during the quarter
and six months ended June 30, 1998, as compared to the quarter and six months
ended June 30, 1999, due to the fact that during the quarter and six months
ended June 30, 1998, the Income Fund recorded additional contingent rental
amounts as a result of adjusting estimated contingent rental amounts accrued at
December 31, 1997, to actual amounts.
During the six months ended June 30, 1999 and 1998, the Income Fund also
owned and leased two restaurant properties indirectly through joint venture
arrangements and three restaurant properties with our affiliates as tenants-in-
common. In connection therewith, during the six months ended June 30, 1999 and
1998, the Income Fund earned $120,554 and $121,482, respectively, $60,327 and
$57,175 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively.
Operating expenses, including depreciation and amortization expense, were
$463,308 and $318,478 for the six months ended June 30, 1999 and 1998,
respectively, of which $234,316 and $156,655 were incurred for the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, is primarily due to the
fact that the Income Fund incurred $80,702 and $113,883, during the quarter and
six months ended June 30, 1999, respectively, in transaction costs related to
our retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition with APF. If the Limited Partners reject the
Acquisition, the Income Fund will bear the portion of the transaction costs
based upon the percentage of "For" votes and we will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.
In addition, the increase in operating expenses during the six months ended
June 30, 1999, as compared to the six months ended June 30, 1998, is partially
attributable to an increase in insurance, legal fees and real estate tax
expenses as a result of Long John Silver's, Inc. filing for bankruptcy and
rejecting the leases relating to three restaurant properties in June 1998, as
described above. During 1998, the Income Fund entered into two leases, each
with a new tenant for two of the three vacant restaurant properties, to operate
the restaurant properties as a Lions Choice restaurant and a Steak-N-Shake
restaurant. In addition, in May 1999, the Income Fund re-leased the remaining
restaurant property to a new tenant and intends to renovate the restaurant
property into an Arby's restaurant, as described above in "Capital Resources."
In accordance with the lease agreements, the new tenant of the Lions Choice
restaurant property became responsible for real estate taxes, insurance and
maintenance relating to this restaurant property during 1998 and the new tenant
of the Arby's restaurant property became responsible for these expenses in May
1999. The Income Fund will continue to incur these expenses relating to the
restaurant property that is expected to be converted into a Steak-N-Shake until
the conversion of this restaurant property is completed, at which point this
tenant will be responsible for these expenses under the terms of its lease. The
Income Fund will also incur additional insurance and real estate tax expenses
if one or more of the leases relating to the five restaurant properties still
leased by Long John Silver's, Inc. are rejected.
S-32
<PAGE>
The Years Ended December 31, 1998, 1997 and 1996
During 1996, the Income Fund owned and leased 44 wholly-owned restaurant
properties, including one restaurant property in Richmond, Virginia, which was
sold in November 1996, during 1997, the Income Fund owned and leased 43 wholly-
owned restaurant properties, including one restaurant property in Orlando,
Florida, which was sold in October 1997, and during 1998, the Income Fund owned
and leased 42 wholly-owned restaurant properties. During 1998, 1997, and 1996,
the Income Fund was a co-venturer in two separate joint ventures that each
owned and leased one restaurant property. In addition, during 1996, the Income
Fund owned and leased one restaurant property, and during 1997 and 1998, owned
and leased three restaurant properties, with certain of our affiliates as
tenants-in-common. As of December 31, 1998, the Income Fund owned, either
directly, as tenants-in-common with affiliates or through joint venture
arrangements, 47 restaurant properties, which are subject to long-term, triple-
net leases. The leases of the restaurant properties provide for minimum base
annual rental amounts, payable in monthly installments, ranging from
approximately $27,400 to $191,900. A majority of the leases provide for
percentage rent based on sales in excess of a specified amount. In addition,
the majority of the leases provide that, commencing in specified lease years,
the annual base rent required under the terms of the lease will increase.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $2,862,491, $3,347,609, and $3,376,286, respectively, in rental income
from operating leases, net of adjustments to accrued rental income, and earned
income from direct financing leases from restaurant properties wholly-owned by
the Income Fund. Rental and earned income decreased by approximately $211,400
during 1998, as compared to 1997, primarily due to the fact that in June 1998,
Long John Silver's, Inc., filed for bankruptcy and rejected the leases relating
to three of the eight restaurant properties it leased and ceased making rental
payments on the three rejected leases. The Income Fund continued receiving
rental payments relating to the leases not yet rejected by the tenant. In
conjunction with the three rejected leases, during the year ended December 31,
1998, the Income Fund wrote off approximately $307,400 of accrued rental
income, or non-cash accounting adjustment relating to the straight-lining of
future scheduled rent increases over the lease term in accordance with
generally accepted accounting principles.
The decrease in rental and earned income during 1997, as compared to 1996,
was partially attributable to a decrease of approximately $116,200 as a result
of the fact that in February 1997, the former tenant of the Denny's restaurant
property in Orlando, Florida, ceased making rental payments as a result of the
former tenant vacating the restaurant property.
The decrease in rental and earned income during 1997, as compared to 1996,
was partially offset by the fact that the Income Fund established an allowance
for doubtful accounts of approximately $15,300 and $85,400 during 1997 and
1996, respectively, for past due rental amounts relating to the Denny's
restaurant property in Orlando, Florida, due to financial difficulties the
tenant was experiencing. The decrease during 1997, as compared to 1996, was
also offset by the fact that during 1996, the Income Fund established an
allowance for doubtful accounts of approximately $72,700 for accrued rental
income amounts previously recorded, due to the fact that future scheduled rent
increased are recognized on a straight-line basis over the term of the lease in
accordance with generally accepted accounting principles. No such allowance was
recorded during 1997. The Income Fund sold this restaurant property in October
1997, and reinvested the net sales proceeds in a restaurant property in Miami,
Florida, as tenants-in-common, with certain of our affiliates, as described
above in "Capital Resources."
In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is partially attributable to a decrease of approximately
$46,200, due to the fact that the Income Fund sold its restaurant property in
Richmond, Virginia, in November 1996. The Income Fund reinvested the net sales
proceeds in a restaurant property located in Akron, Ohio, as tenants-in-common,
with one of our affiliates, as described above in "Capital Resources."
For the years ended December 31, 1998, 1997, and 1996, the Income Fund also
earned $326,906, $287,751, and $299,495, respectively, in contingent rental
income. The increase in contingent rental income
S-33
<PAGE>
during 1998, as compared to 1997, is primarily the result of the gross sales of
four restaurant properties meeting the threshold during 1998, under the terms
of their leases requiring payment of contingent rental income. The decrease in
contingent rental income during 1997, as compared to 1996, is primarily the
result of the Income Fund adjusting estimated contingent rental amounts accrued
at December 31, 1996, to actual amounts during the year ended December 31,
1997.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $243,492, $150,417, and $60,654, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The increase in net income earned by these joint ventures during
1998, as compared to 1997, is primarily attributable to the fact that in
December 1997, the Income Fund reinvested the net sales proceeds it received
from the sale, in October 1997, of the restaurant property in Orlando, Florida,
in a restaurant property located in Miami, Florida, with certain of our
affiliates as tenants-in-common, as described above in "Capital Resources." The
increase during 1997, as compared to 1996 is primarily attributable to the fact
that in January 1997, the Income Fund reinvested the net sales proceeds from
the sale of the restaurant property in Richmond, Virginia, in a restaurant
property in Akron, Ohio, with one of our affiliates, as tenants-in-common as
described above in "Capital Resources."
During the year ended December 31, 1998, four of the Income Fund's lessees,
Flagstar Enterprises, Inc., Long John Silver's, Inc., Golden Corral
Corporation, and Foodmaker, Inc. each contributed more than 10% of the Income
Fund's total rental income, including the Income Fund's share of rental income
from two restaurant properties owned by joint ventures and three restaurant
properties owned with affiliates as tenants-in-common. As of December 31, 1998,
Flagstar Corporation was the lessee under leases relating to 11 restaurants,
Long John Silver's, Inc. was the lessee under leases relating to five
restaurants, excluding three restaurants for which Long John Silver's, Inc.
rejected the leases as a result of filing for bankruptcy, as described above,
Golden Corral Corporation was the lessee under leases relating to three
restaurants, and Foodmaker, Inc. was the lessee under leases relating to five
restaurants. In addition, during the year ended December 31, 1998, five
restaurant chains, Long John Silver's, Hardee's, Golden Corral, Jack in the
Box, and Burger King, each accounted for more than 10% of the Income Fund's
share of rental income, including the Income Fund's share of rental income from
two restaurant properties owned by joint ventures and three restaurant
properties owned with affiliates as tenants-in-common. It is anticipated that
Hardee's, Golden Corral, Jack in the Box and Burger King, each will continue to
account for more than ten percent of the total rental income under the terms of
its leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income if the Income Fund is not able to re-lease the
restaurant properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$688,470, $748,305 and $646,794 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998, as
compared to 1997, is partially attributable to, and the increase in operating
expenses during 1997, as compared to 1996, is primarily the result of, the fact
that during 1997, the Income Fund recorded bad debts expense of approximately
$54,000 for rental amounts due from the former tenant of the Denny's restaurant
property in Orlando, Florida, as a result of the fact that the former tenant
ceased making rental payments. The Income Fund ceased collection efforts on
rental amounts not collected from the tenant at the sale of the restaurant
property in October 1997, as described above in "Capital Resources." In
addition, during 1997 the Income Fund recorded bad debt expense of
approximately $69,100 relating to the advances made to the former tenant of the
Denny's restaurant property in Orlando, Florida, that were not recovered from
the former tenant, as described above in "Capital Resources."
The decrease in operating expenses during 1998, as compared to 1997, is
partially offset by an increase in insurance and real estate tax expenses as a
result of Long John Silver's Inc. filing for bankruptcy and rejecting the
leases relating to three restaurant properties in June 1998. In addition, the
decrease in operating expenses during 1998 is partially offset by an increase
in depreciation expense due to the fact that during 1998, the Income Fund
reclassified the three vacant restaurant properties from net investment in
direct financing leases to land and building on operating leases.
S-34
<PAGE>
The decrease in operating expenses during 1998 is also partially offset by
the fact that the Income Fund has incurred $23,291 in transaction costs related
to our retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition with APF.
During the year ended December 31, 1998, the Income Fund recorded a
provision for loss on building in the amount of $297,885 for financial purposes
relating to one of the restaurant properties for which Long John Silver's, Inc.
rejected the lease. The allowance represents the difference between the
restaurant property's carrying value at December 31, 1998 and the current
estimate of net realizable value at December 31, 1998 for the restaurant
property. No such allowance was established during the years ended December 31,
1997 and 1996.
As a result of the sale of the restaurant property in Orlando, Florida, as
described above in "Capital Resources, " the Income Fund recognized a loss for
financial reporting purposes of $48,538 for the year ended December 31, 1997.
In addition, as a result of the sale of the restaurant property in Richmond,
Virginia, as described above in "Capital Resources," the Income Fund recognized
a gain of $82,855 for financial reporting purposes for the year ended December
31, 1996. No restaurant properties were sold during 1998.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we Partners believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
S-35
<PAGE>
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
S-36
<PAGE>
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the
S-37
<PAGE>
economy could affect the ability of the Income Fund's tenants to pay rent and,
accordingly, could have a material impact on the results of operations of the
Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-38
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1999 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-22
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-23
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-25
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-27
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-29
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-31
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-33
</TABLE>
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,299,486 and
$2,107,624, respectively, and allowance for loss on
building of $297,885 in 1999 and 1998................ $22,393,406 $22,945,358
Net investment in direct financing leases............. 7,508,202 6,951,890
Investment in joint ventures.......................... 2,447,615 2,451,336
Cash and cash equivalents............................. 682,240 766,859
Receivables, less allowance for doubtful accounts of
$1,734 and $532, respectively........................ 78,930 121,119
Prepaid expenses...................................... 16,322 8,453
Lease costs, less accumulated amortization of $887 in
1999................................................. 34,863 17,875
Accrued rental income................................. 1,532,130 1,424,603
----------- -----------
$34,693,708 $34,687,493
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 88,908 $ 4,068
Accrued construction costs payable.................... 600,000 --
Accrued and escrowed real estate taxes payable........ 8,229 6,923
Distributions payable................................. 850,002 850,002
Due to related parties................................ 48,066 22,529
Rents paid in advance and deposits.................... 34,318 54,568
----------- -----------
Total liabilities................................. 1,629,523 938,090
Commitments and Contingencies (Note 3)
Partners' capital..................................... 33,064,185 33,749,403
----------- -----------
$34,693,708 $34,687,493
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 600,198 $ 613,911 $1,196,643 $1,232,426
Adjustments to accrued rental
income........................ -- (311,118) -- (311,118)
Earned income from direct fi-
nancing leases................ 196,996 198,185 389,946 415,220
Contingent rental income....... 69,638 75,085 110,243 141,008
Interest and other income...... 6,225 12,991 12,993 33,186
--------- --------- ---------- ----------
873,057 589,054 1,709,825 1,510,722
--------- --------- ---------- ----------
Expenses:
General operating and adminis-
trative....................... 33,055 40,490 74,574 70,584
Professional services.......... 8,954 6,230 20,993 14,635
Bad debt expense............... 615 -- 615 --
Management fees to related par-
ty............................ 9,181 8,821 17,777 17,774
Real estate taxes.............. 4,979 2,888 13,319 2,888
State and other taxes.......... -- 231 21,476 16,184
Depreciation and amortization.. 96,830 97,995 200,671 196,413
Transaction costs.............. 80,702 -- 113,883 --
--------- --------- ---------- ----------
234,316 156,655 463,308 318,478
--------- --------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures and Loss on
Demolition of Building.......... 638,741 432,399 1,246,517 1,192,244
Equity in Earnings of Joint Ven-
tures........................... 60,327 57,175 120,554 121,482
Loss on Demolition of Building... (352,285) -- (352,285) --
--------- --------- ---------- ----------
Net Income....................... $ 346,783 $ 489,574 $1,014,786 $1,313,726
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 5,348 $ 4,895 $ 12,028 $ 13,137
Limited partners............... 341,435 484,679 1,002,758 1,300,589
--------- --------- ---------- ----------
$ 346,783 $ 489,574 $1,014,786 $1,313,726
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.09 $ 0.12 $ 0.25 $ 0.33
========= ========= ========== ==========
Weighted Average Number of Lim-
ited Partner Units Outstanding.. 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 163,874 $ 137,207
Net income..................................... 12,028 26,667
----------- -----------
175,902 163,874
----------- -----------
Limited partners:
Beginning balance.............................. 33,585,529 34,516,349
Net income..................................... 1,002,758 2,469,188
Distributions ($0.43 and $0.85 per limited
partner unit, respectively)................... (1,700,004) (3,400,008)
----------- -----------
32,888,283 33,585,529
----------- -----------
Total partners' capital.......................... $33,064,185 $33,749,403
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities......... $ 1,633,260 $ 1,733,901
----------- -----------
Cash Flows from Investing Activities:
Payment of lease costs.......................... (17,875) --
----------- -----------
Net cash used in investing activities......... (17,875) --
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners............... (1,700,004) (1,700,004)
----------- -----------
Net cash used in financing activities......... (1,700,004) (1,700,004)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equiva-
lents.............................................. (84,619) 33,897
Cash and Cash Equivalents at Beginning of Period.... 766,859 907,980
----------- -----------
Cash and Cash Equivalents at End of Period.......... $ 682,240 $ 941,877
=========== ===========
Supplemental Schedule of Non-Cash Investing and Non-
Cash Financing Activities:
Construction costs incurred and unpaid at end of
period........................................... $ 600,000 $ --
Distributions declared and unpaid at end of quar-
ter.............................................. $ 850,002 $ 850,002
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XIII, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Buildings:
In November 1998, the Partnership entered into a new lease for the property
in Tampa, Florida with a new tenant to operate the property as a Steak-N-Shake
restaurant. In connection with the new lease agreement, during the six months
ended June 30, 1999, the building located on the Partnership's property was
demolished. As a result, the undepreciated cost of the building of $352,285 was
charged to net income for financial reporting purposes.
3. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,943,093 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $38,283,180 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the Properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
F-5
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
In May 1999, the Partnership entered into a new lease for the property in
Philadelphia, Pennsylvania, with a new tenant to operate the property as an
Arby's restaurant. In connection therewith, the Partnership agreed to pay up to
$433,000 in renovation costs, none of which have been incurred as of June 30,
1999.
4. Subsequent Event:
In July 1999, the Partnership sold its property in Houston, Texas, to a
third party for $1,073,887 and received net sales proceeds of $1,063,318,
resulting in a gain of $176,159 for financial reporting purposes.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XIII, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XIII, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except for Note 11
for which the date is March 11, 1999 and Note 12 for which the date is June
3, 1999
F-7
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.......................................... $22,945,358 $22,788,618
Net investment in direct financing leases.......... 6,951,890 7,910,470
Investment in joint ventures....................... 2,451,336 2,457,810
Cash and cash equivalents.......................... 766,859 907,980
Receivables, less allowance for doubtful accounts
of $532 in 1998................................... 121,119 23,946
Prepaid expenses................................... 8,453 10,368
Lease costs........................................ 17,875 --
Organization costs, less accumulated amortization
of $10,000 and $9,422............................. -- 578
Accrued rental income.............................. 1,424,603 1,423,820
----------- -----------
$34,687,493 $35,523,590
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable................................... $ 4,068 $ 7,671
Accrued and escrowed real estate taxes payable..... 6,923 --
Distributions payable.............................. 850,002 850,002
Due to related parties............................. 22,529 6,791
Rents paid in advance and deposits................. 54,568 5,570
Total liabilities.............................. 938,090 870,034
Commitment (Note 10)
Partners' capital.................................. 33,749,403 34,653,556
----------- -----------
$34,687,493 $35,523,590
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,404,934 $2,371,062 $2,477,156
Adjustments to accrued rental income...... (307,405) -- --
Earned income from direct financing
leases................................... 764,962 976,547 899,130
Contingent rental income.................. 326,906 287,751 299,495
Interest and other income................. 49,321 46,693 59,319
---------- ---------- ----------
3,238,718 3,682,053 3,735,100
---------- ---------- ----------
Expenses:
General operating and administrative...... 150,239 152,918 156,466
Bad debt expense.......................... -- 123,071 --
Professional services..................... 26,869 25,595 33,746
Management fees to related party.......... 35,257 34,321 35,675
Real estate taxes......................... 13,989 -- 10,680
State and other taxes..................... 16,172 18,301 16,793
Depreciation and amortization............. 422,653 394,099 393,434
Transaction costs......................... 23,291 -- --
---------- ---------- ----------
688,470 748,305 646,794
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land,
Buildings and Investment in Direct
Financing Lease, and Provision for Loss on
Building................................... 2,550,248 2,933,748 3,088,306
Equity in Earnings of Joint Ventures........ 243,492 150,417 60,654
Gain (Loss) on Sale of Land, Buildings and
Investment in Direct Financing Lease....... -- (48,538) 82,855
Provision for Loss on Building.............. (297,885) -- --
---------- ---------- ----------
Net Income.................................. $2,495,855 $3,035,627 $3,231,815
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 26,667 $ 30,690 $ 31,490
Limited partners.......................... 2,469,188 3,004,937 3,200,325
---------- ---------- ----------
$2,495,855 $3,035,627 $3,231,815
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.62 $ 0.75 $ 0.80
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------------- ----------------------------------------------------
Accumu- Accumu-
lated lated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- -------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 74,027 $40,000,000 $ (7,528,384) $ 7,304,656 $(4,665,169) $35,186,130
Distribution to
limited partners
($0.85 per limited
partner unit)........ -- -- -- (3,400,008) -- -- (3,400,008)
Net income............ -- 31,490 -- -- 3,200,325 -- 3,231,815
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 105,517 40,000,000 (10,928,392) 10,504,981 (4,665,169) 35,017,937
Distribution to
limited partners
($0.85 per limited
partner unit)........ -- -- -- (3,400,008) -- -- (3,400,008)
Net income............ -- 30,690 -- -- 3,004,937 -- 3,035,627
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 136,207 40,000,000 (14,328,400) 13,509,918 (4,665,169) 34,653,556
Distribution to
limited partners
($0.85 per limited
partner unit)........ -- -- -- (3,400,008) -- -- (3,400,008)
Net income............ -- 26,667 -- -- 2,469,188 -- 2,495,855
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $162,874 $40,000,000 $(17,728,408) $15,979,106 $(4,665,169) $33,749,403
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............ $ 3,235,985 $ 3,329,633 $ 3,476,985
Distributions from joint ventures..... 250,270 151,322 93,700
Cash paid for expenses................ (245,273) (236,793) (251,454)
Interest received..................... 36,319 29,395 48,350
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,277,301 3,273,557 3,367,581
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................. -- 932,849 550,000
Advances to tenant.................... -- (196,980) --
Repayment of advances................. -- 127,843 --
Investment in joint ventures.......... (539) (1,482,849) --
Payment of lease costs................ (17,875) -- --
Decrease (increase) in restricted
cash................................. -- 550,000 (550,000)
----------- ----------- -----------
Net cash used in investing
activities......................... (18,414) (69,137) --
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners..... (3,400,008) (3,400,008) (3,400,008)
----------- ----------- -----------
Net cash used in financing
activities......................... (3,400,008) (3,400,008) (3,400,008)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents............................ (141,121) (195,588) (32,427)
Cash and Cash Equivalents at Beginning
of Year................................ 907,980 1,103,568 1,135,995
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 766,859 $ 907,980 $ 1,103,568
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,495,855 $ 3,035,627 $ 3,231,815
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense.................... -- 123,071 --
Depreciation........................ 421,840 391,434 391,434
Amortization........................ 637 2,665 2,000
Equity in earnings of joint
ventures, net of distributions..... 6,954 905 33,046
Loss (gain) on sale of land and
building........................... -- 48,538 (82,855)
Provision for loss on building...... 297,885 -- --
Decrease (increase) in receivables.. (97,173) 23,845 (28,034)
Decrease in net investment in direct
financing leases................... 82,115 84,646 80,214
Increase (decrease) in prepaid
expenses........................... 1,915 (1,225) (5,005)
Increase in accrued rental income... (783) (378,850) (313,540)
Increase (decrease) in accounts
payable and accrued expenses....... 3,320 (12,761) 12,137
Increase (decrease) in due to
related parties.................... 15,738 4,197 (4,773)
Increase (decrease) in rents paid in
advance and deposits............... 48,998 (48,535) 51,142
----------- ----------- -----------
Total adjustments................. 781,446 237,930 135,766
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,277,301 $ 3,273,557 $ 3,367,581
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 850,002 $ 850,002 $ 850,002
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XIII, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and
F-12
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
accrued rental income, and to decrease rental or other income for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its interest in
Attalla Joint Venture and Salem Joint Venture, and a property in Arvada,
Colorado, a property in Akron, Ohio, and a property in Miami, Florida, for
which each property is held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the term of the new lease using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." Some of the leases are classified
as operating leases
F-13
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of the majority of these leases are operating leases. Substantially
all leases are for 15 to 20 years and provide for minimum and contingent
rentals. In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to five
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $12,742,897 $12,742,897
Buildings....................................... 12,607,970 11,743,041
----------- -----------
25,350,867 24,485,938
Less accumulated depreciation................... (2,107,624) (1,697,320)
----------- -----------
23,243,243 22,788,618
----------- -----------
Less allowance for loss on building............. (297,885) --
----------- -----------
$22,945,358 $22,788,618
=========== ===========
</TABLE>
In October 1997, the Partnership sold its property in Orlando, Florida, to a
third party for $953,371 and received net sales proceeds of $932,849, resulting
in a loss of $48,538 for financial reporting purposes. In December 1997, the
Partnership reinvested the net sales proceeds in a property located in Miami,
Florida, as tenants-in-common, with affiliates of the general partners (see
Note 5).
At December 31, 1998, the Partnership established an allowance for loss on
building of $297,885, relating to one property in Philadelphia, Pennsylvania.
The tenant of this property filed for bankruptcy and ceased payment of rents
under the terms of its lease agreement. The allowance represents the difference
between the carrying value of the property at December 31, 1998, and the
current estimate of net realizable value for this property.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $783 (net
of $307,405 in write-offs), $378,850, and $313,540, respectively, of such
rental income.
F-14
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,188,225
2000.......................................................... 2,179,331
2001.......................................................... 2,190,526
2002.......................................................... 2,220,532
2003.......................................................... 2,257,154
Thereafter.................................................... 20,981,325
-----------
$32,017,093
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $13,789,643 $15,747,868
Estimated residual values....................... 2,344,575 2,582,058
Less unearned income............................ (9,182,328) (10,419,456)
----------- -----------
Net investment in direct financing leases....... $ 6,951,890 $ 7,910,470
=========== ===========
</TABLE>
In October 1997, the Partnership sold its property in Orlando, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payment receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts and the loss from the sale relating to the land
portion of the property and the net investment in direct financing lease was
reflected in income (Note 3).
In June 1998, three of the Partnership's leases with Long John Silver's,
Inc. were rejected in connection with the tenant filing for bankruptcy. As a
result, the Partnership reclassified these assets from net investment in direct
financing leases to land and buildings on operating leases. In accordance with
Statement of Financial Accounting Standards #13, "Accounting for Leases," the
Partnership recorded the reclassified assets at the lower of original cost,
present fair value, or present carrying value. No loss on termination of direct
financing leases was recorded for financial reporting purposes.
F-15
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 857,997
2000.......................................................... 857,997
2001.......................................................... 870,737
2002.......................................................... 888,571
2003.......................................................... 889,113
Thereafter.................................................... 9,425,228
-----------
$13,789,643
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 50 percent and a 27.8% interest in the profits and
losses of Attalla Joint Venture and Salem Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
The Partnership also owns a property in Arvada, Colorado, as tenants-in-
common with an affiliate of the general partners. The Partnership accounts for
its investment in this property using the equity method since the Partnership
shares control with an affiliate. As of December 31, 1998, the Partnership
owned a 66.13% interest in this property.
In January 1997, the Partnership used the net sales proceeds from the 1996
sale of the property in Richmond, Virginia, to acquire a property in Akron,
Ohio, as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 63.09% interest in this property.
In addition, in December 1997, the Partnership acquired a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 47.83% interest in this property.
F-16
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Attalla Joint Venture and Salem Joint Venture and the Partnership and
affiliates, as tenants-in-common in three separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food or family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the properties held
as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $4,174,420 $4,256,861
Net investment in direct financing leases......... 360,790 364,479
Cash.............................................. 19,083 18,729
Receivables....................................... 546 --
Prepaid expenses.................................. 454 380
Accrued rental income............................. 182,217 106,653
Liabilities....................................... 16,028 15,653
Partners' capital................................. 4,721,482 4,731,449
Revenues.......................................... 569,719 347,971
Net income........................................ 476,700 285,922
</TABLE>
The Partnership recognized income totalling $243,492, $150,417, and $60,654
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
6. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties, not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their Limited Partners' 10% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from the sale of a property, not in
liquidation of the Partnership, is in general, allocated in the same manner as
net sales proceeds will be distributable. Any loss from the sale of a property
is, in general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts
F-17
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
balances, in proportion to such balances, up to amounts sufficient to reduce
such positive balances to zero, and v) thereafter, any funds remaining shall
then be distributed 95 percent to the limited partners and five percent to the
general partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of $3,400,008. No
distributions have been made to the general partners to date.
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,495,855 $3,035,627 $3,231,815
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (59,127) (100,696) (103,634)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 82,115 84,646 80,214
Capitalization of transaction costs for
tax reporting purposes................. 23,291 -- --
Equity in earnings of joint ventures for
tax reporting purposes in excess of
(less than) equity in earnings of joint
ventures for financial reporting
purposes............................... (27,118) (19,727) 6,819
Gain on sale of property for financial
reporting purposes, deferred for tax
reporting purposes..................... -- -- (82,855)
Loss on sale of property for financial
reporting purposes in excess of loss
for tax reporting purposes............. -- 38,823 --
Allowance for loss on building.......... 297,885 -- --
Allowance for doubtful accounts......... 532 (150,734) 102,198
Accrued rental income................... (783) (378,850) (313,540)
Rents paid in advance................... 38,165 (48,535) 51,142
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,850,815 $2,460,554 $2,972,159
========== ========== ==========
</TABLE>
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors.
During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors,
Inc. (hereinafter referred to as the "Affiliate") performed certain services
for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures and the property held as
tenants-in-common with an affiliate. The management fee, which will not
F-18
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
exceed fees which are competitive for similar services in the same geographic
area, may or may not be taken, in whole or in part as to any year, in the sole
discretion of the Affiliate. All or any portion of the management fee not taken
as to any fiscal year shall be deferred without interest and may be taken in
such other fiscal year as the Affiliates shall determine. The Partnership
incurred management fees of $35,257, $34,321, and $35,675 for the years ended
December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. For the years ended December 31, 1998, 1997, and 1996, the expenses
incurred for these services were $98,719, $87,322, and $91,272, respectively.
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Akron, Ohio, as tenants-in-common for a purchase price
of $872,625 (of which the Partnership contributed $550,000 or 63.03%) from CNL
BB Corp., also an affiliate of the general partners. CNL BB Corp. had purchased
and temporarily held title to this property in order to facilitate the
acquisition of the property by the Partnership and the affiliate, as tenants-
in-common. The purchase price paid by the Partnership and the affiliate
represented the costs incurred by CNL BB Corp. to acquire and carry the
property, including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $22,529,
and $6,791, respectively.
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc..................... $649,525 $744,199 $765,109
Long John Silver's, Inc. ..................... 571,066 759,064 764,565
Golden Corral Corporation..................... 542,900 536,886 539,568
Foodmaker, Inc. .............................. 458,690 450,816 450,393
Checkers Drive-In Restaurants, Inc............ N/A N/A 412,422
</TABLE>
F-19
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common with affiliates) for each of the years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Hardee's....................................... $649,525 $649,762 $670,249
Long John Silver's............................. 571,066 759,064 764,565
Golden Corral Family Steakhouse Restaurants.... 542,900 536,886 539,568
Burger King.................................... 497,670 484,111 431,280
Jack in the Box................................ 458,690 450,816 450,393
Checkers Drive-In Restaurants.................. N/A N/A 412,422
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
In June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected the
leases relating to three of the eight Properties it leased and ceased making
rental payments to the Partnership. During 1998, the Partnership entered into a
new lease for two of the three properties with new tenants. The general
partners are currently seeking either a new tenant or a purchaser for the
remaining property. The Partnership will not recognize rental and earned income
from this property until a new tenant is located or until the property is sold
and the proceeds from such sale is reinvested in an additional property. While
Long John Silver's, Inc. has not rejected or affirmed the remaining five
leases, there can be no assurance that some or all of the leases will not be
rejected in the future. The lost revenues resulting from the vacant property,
and the possible rejection of the remaining five leases could have an adverse
effect on the results of operations of the Partnership if the Partnership is
unable to re-lease these properties in a timely manner.
10. Commitment:
In November 1998, the Partnership entered into a new lease for the property
in Tampa, Florida, with a new tenant to operate the property as a Steak-N-Shake
restaurant. In connection therewith, the Partnership agreed to pay up to
$600,000 in renovation costs, none of which were incurred as of the year ended
December 31, 1998.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 3,886,185 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger
F-20
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $38,283,180 as of December 31,
1998. The APF Shares are expected to be listed for trading on the New York
Stock Exchange concurrently with the consummation of the Merger, and,
therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. The general partners intend to
recommend that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
12. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 1,943,093 shares valued at $20.00 per
APF share.
F-21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, Advisor and CNL Restaurant Financial
Services Group. The pro forma balance sheet assumes that the Acquisition
occurred on June 30, 1999, and the pro forma consolidated statements of
earnings and statements of cash flows assume that the acquisition of properties
by APF from January 1, 1998 through July 31, 1999, the acquisition of the
Advisor, the CNL Restaurant Financial Services Group and the Acquisition
occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $3,369,856(A) $572,936,859 $ 0 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0 290,522,671
Other Investments....... 16,197,812 0 16,197,812 0 0 6,361,082
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036 1,767,517
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0 2,482,041
Receivables (net
allowances)/Due from
Related Party.......... 649,972 0 649,972 8,668,738 5,417,084 1,125,933
Accrued Rental Income... 5,875,698 0 5,875,698 0 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486 2,479,317
Goodwill................ 0 0 0 0 0 0
------------ ---------- ------------ ---------- ---------- ------------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ ========== ============ ========== ========== ============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969 $ 2,013,172
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0 0
Distributions Payable... 0 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981 30,170,185
Income Tax Payable...... 0 0 0 51,466 16,906 274,485
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0 267,685,382
Deferred Income......... 2,466,355 0 2,466,355 0 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0 0
Minority Interest....... 644,611 0 644,611 0 0 0
Common Stock............ 373,484 0 373,484 0 0 0
Common Stock--Class A... 0 0 0 6,400 2,000 200
Common Stock--Class B... 0 0 0 3,600 724 501
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503 3,937,095
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523 657,541
Partners' Capital....... 0 0 0 0 0 0
------------ ---------- ------------ ---------- ---------- ------------
Total Liabilities and
Equity................ $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606 $304,738,561
============ ========== ============ ========== ========== ============
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund XIII, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 572,936,859 $22,393,406 $ 4,750,292 (B2) $ 600,080,557
Net Investment in Direct
Financing Leases....... 0 132,179,949 7,508,202 1,212,027 (B2) 140,900,178
Mortgages and Notes
Receivable............. 0 353,874,178 0 0 353,874,178
Other Investments....... 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 1,081,046 2,447,615 839,991 (B2) 4,368,652
Cash and Cash
Equivalents............ (9,036,817)(B1) 12,467,064 682,240 (2,855,183)(B2) 9,864,121
(430,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)/Due from
Related Party.......... (6,614,629)(C) 9,247,098 78,930 (48,066)(E) 9,277,962
Accrued Rental Income... 0 5,875,698 1,532,130 (1,532,130)(B2) 5,875,698
Other Assets............ (2,575,792)(B1) 13,173,857 51,185 (51,185)(B2) 13,173,857
Goodwill................ 42,893,798 (B1) 42,893,798 0 0 42,893,798
------------ -------------- ----------- ------------ --------------
Total Assets........... $ 24,666,560 $1,170,777,172 $34,693,708 $ 1,885,746 $1,207,356,626
============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 0 $ 5,104,303 $ 97,137 $ 0 $ 5,201,440
Accrued Construction
Costs
Payable................ 0 9,745,014 600,000 0 10,345,014
Distributions Payable... 0 0 850,002 0 850,002
Due to Related Parties.. (6,614,629)(C) 25,500,981 48,066 (48,066)(E) 25,500,981
Income Tax Payable...... (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 1,617,367 34,318 0 1,651,685
Minority Interest....... 0 644,611 0 0 644,611
Common Stock............ 61,500 (B1) 434,984 0 19,216 (B2) 454,200
Common Stock--Class A... (8,600)(B1) 0 0 0 0
Common Stock--Class B... (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 122,938,500 (B1) 792,936,215 0 34,978,781 (B2) 827,914,996
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ (5,883,163)(B1) (88,079,765) 0 0 (88,079,765)
(73,253,249)(B1)
342,857 (D)
Partners' Capital....... 0 0 33,064,185 (33,064,185)(B2) 0
------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $ 24,666,560 $1,170,777,172 $34,693,708 $ 1,885,746 $1,207,356,626
============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 45,419,476
==============
Shares Outstanding...... 45,420,057
==============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
----------- ---------- ----------- ----------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties .. $23,564,432 $2,089,441 $25,653,873 $ 3,877,654 $ 42,804 $ 239,337
Equity in Earnings of
Joint
Ventures/Minority
Interest ............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
----------- ---------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $22,853,308 $2,089,441 $24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
=========== ========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Cash Distributions
Declared............... $28,476,150 $ 0 $28,476,150 $ n/a $ n/a $ n/a
=========== ========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
=========== ========== =========== =========== ========== ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund XIII, Ltd. Adjustments Pro Forma
----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $1,696,832 $ 23,535 (j) $32,677,881
Fees................... (9,812,516)(b),(c) 2,616,185 0 (48,188)(k) 2,567,997
Interest and Other
Income................ 144,014 (d) 16,269,383 12,993 0 16,282,376
----------- ----------- ---------- --------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $1,709,825 $ (24,653) $51,528,254
Expenses:
General and
Administrative........ (774,311)(e) 9,579,902 109,501 (54,122)(l),(m) 9,635,281
Management and Advisory
Fees.................. (2,913,775)(f) 0 17,777 (17,777)(n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 21,476 7,463 (o) 493,905
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 199,667 71,011 (p) 4,939,831
Amortization........... 1,072,345 (h) 1,082,081 1,004 0 1,083,085
Transaction Costs...... 0 483,005 113,883 0 596,888
----------- ----------- ---------- --------- -----------
Total Expenses......... (3,359,414) 26,817,176 463,308 6,575 27,287,059
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,309,088) $23,025,906 $1,246,517 $ (31,228) $24,241,195
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 120,554 (10,234)(q) 141,561
Gain (Loss) on Sale of
Properties............ 0 (201,843) (352,285) 0 (554,128)
Provision for Losses on
Properties............ 0 (540,522) 0 0 (540,522)
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (6,309,088) 22,314,782 1,014,786 (41,462) 23,288,106
Benefit/(Provision) for
Federal Income Taxes.. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)... $(4,783,348) $22,314,782 $1,014,786 $ (41,462) $23,288,106
=========== =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.25 $ n/a $ 0.51
=========== =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.27 $ n/a $ 16.30
=========== =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.43 $ n/a $ 0.76
=========== =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.90x
=========== =========== ========== ========= ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,700,004 $(234,828)(s) $34,630,578
=========== =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,921,593 45,419,476 (r)
=========== =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,921,593 45,420,057
=========== =========== ========== ========= ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision for Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,556,592(t) $51,005,741 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,578,292 34,226,511 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Combining Historical
Pro Forma Combined CNL Income Pro Forma Adjusted
Adjustments APF Fund XIII, Ltd. Adjustments Pro Forma
------------ ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $3,189,397 $ 47,069 (i) $59,317,926
Fees................... (32,715,768)(b),(c) 3,226,263 0 (69,563) (k) 3,156,700
Interest and Other
Income................ 207,144 (d) 32,221,925 49,321 0 32,271,246
------------ ----------- ---------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $3,238,718 $ (22,494) $94,745,872
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 191,097 (76,253) (l),(m) 16,054,400
Management and Advisory
Fees.................. (4,658,434)(f) 0 35,257 (35,257) (n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 16,172 11,948 (o) 595,566
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 421,840 142,022 (p) 10,512,201
Amortization........... 2,144,690 (h) 2,308,691 813 0 2,309,504
Transaction Costs...... 0 157,054 23,291 0 180,345
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,258,258) 51,477,619 688,470 42,460 52,208,549
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties... (23,250,366) 40,052,029 2,550,248 (64,954) $42,537,323
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 243,492 (20,468) (q) 208,886
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Provision for Losses on
Properties............ 0 (611,534) (297,885) 0 (909,419)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (23,250,366) 43,120,708 2,495,855 (85,422) 45,531,141
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,351,932) $43,120,708 $2,495,855 $ (85,422) $45,531,141
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.62 $ n/a $ 1.08
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.44 $ n/a $ 16.44
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.85 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Changes.......... n/a n/a n/a n/a 3.06x
============ =========== ========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,384,245 $3,400,008 $(469,655)(t) $63,314,598
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,376,511 n/a 1,921,593 42,298,104 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,921,593 45,409,520
============ =========== ========== ========= ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct
financing leases...... 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------- ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------- ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash............... (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year.................. 123,199,837 (110,320,355) 12,879,482 713,308 962,573 2,526,078
------------- ------------- ------------- ----------- --------- ------------
Cash at end of year.... $ 18,764,033 $ 14,451,827 $ 33,215,860 $ 333,295 $ 639,036 $ 1,767,517
============= ============= ============= =========== ========= ============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XIII, Ltd. Adjustments Pro Forma
------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,783,348)(a) $ 22,314,782 $1,014,786 $ (41,462)(a) $ 23,288,106
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 0 4,774,655 199,667 71,011 (b) 5,045,333
Amortization expense... 1,072,345 (c) 1,982,098 1,004 0 1,983,102
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 3,604 10,234 (d) 38,958
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 352,285 0 554,128
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 0 0 444,047
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 42,189 0 (2,159,771)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (7,869) 0 (328,294)
Decrease in net
investment in direct
financing leases...... 0 721,624 43,668 0 765,312
Increase in accrued
rental income......... 0 (1,915,785) (107,527) 0 (2,023,312)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 86,146 0 (577,332)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 25,537 0 611,264
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (20,250) 0 646,469
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,072,345 (75,917,467) 618,474 81,245 (75,217,748)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,633,260 39,783 (51,929,642)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 0 0 3,696,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Acquisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 (17,875) 0 (17,875)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) (17,875) 0 (111,752,401)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,700,004) 234,828 (g) (51,929,642)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (g) (1,700,004) 234,828 178,798,299
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (84,619) 274,611 15,116,256
Cash at beginning of
year................... (11,169,075) 5,912,366 766,859 (2,738,460) 3,940,765
------------ ------------- ---------- ----------- -------------
Cash at end of year..... $(15,117,078) $ 20,838,630 $ 682,240 $ 2,465,227 $ 19,057,021
============ ============= ========== =========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Restated Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided
by(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
0 0 0 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,556,592)(j) (51,005,741) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,186,736) 305,648,805 (8,200,077) 51,854 (700,074)
Net increase(decrease)
in cash................ 75,613,060 (110,320,355) (34,707,295) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,320,355) $ 12,879,482 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund XIII, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,351,932)(a) $ 43,120,708 $ 2,495,855 $ (85,422)(a) $ 45,531,141
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 421,840 142,022 (b) 10,711,358
Amortization expense... 2,144,690 (c) 4,458,774 813 0 4,459,587
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 6,778 20,468 (d) 11,806
Loss(gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 297,885 0 1,307,461
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease(increase) in
other receivables..... 0 (2,543,413) (97,173) 0 (2,640,586)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease(increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 1,915 0 9,161
Decrease in net
investment in direct
financing leases...... 0 1,971,634 82,115 0 2,053,749
Increase in accrued
rental income......... 0 (2,187,652) (783) 0 (2,188,435)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 0 846,680 3,320 0 850,000
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 15,738 0 (117,626)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 48,998 0 485,841
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,803,792 13,333,597 781,446 162,490 14,277,533
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 56,454,305 3,277,301 77,068 59,808,674
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 0 0 2,385,941
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) (539) 0 (975,235)
Acquisition of
businesses............ (9,036,817)(f) (9,036,817) 0 (2,855,783)(g) (12,322,000)
(430,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
0 0 0 0 0
Other.................. 0 200,000 (17,875) 0 182,125
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) investing
activities............ 12,757,569 (387,793,073) (18,414) (3,285,183) (391,096,670)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,748,733) (3,400,008) 469,655 (j) (72,679,086)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) financing
activities............ (9,378,504) 287,422,004 (3,400,008) 469,655 284,491,651
Net increase(decrease)
in cash................ (11,169,075) (43,916,764) (141,121) (2,738,460) (46,796,345)
Cash at beginning of
year................... 0 49,829,130 907,980 0 50,737,110
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(11,169,075) $ 5,912,366 $ 766,859 $(2,738,460) $ 3,940,765
============ ============= =========== =========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received.............. $81,583,724 $50,453,093 $38,283,180 $170,319,997
=========== =========== =========== ============
Share Consideration.... $76,000,000 $47,000,000 $34,997,997 $157,997,997
Cash Consideration..... -- -- 430,000 430,000
APF Transaction Costs.. 5,583,724 3,453,093 2,855,183 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price............. $81,583,724 $50,453,093 $38,283,180 $170,319,997
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets -
Historical............ $ 8,330,475 $10,135,087 $33,064,185 $ 51,529,747
Purchase Price
Adjustments:
Land and buildings on
operating leases.... -- -- 4,750,292 4,750,292
Net investment in
direct financing
leases.............. -- -- 1,212,027 1,212,027
Investment in joint
ventures............ -- -- 839,991 839,991
Accrued rental
income.............. -- -- (1,532,130) (1,532,130)
Intangibles and other
assets.............. -- (2,575,792) (51,185) (2,626,977)
Goodwill*............ -- 42,893,798 -- 42,893,798
Excess purchase
price............... 73,253,249 -- -- 73,253,249
----------- ----------- ----------- ------------
Total Allocation... $81,583,724 $50,453,093 $38,283,180 $170,319,997
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,253,249 was expensed at June 30, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations". Goodwill of $42,893,798
relating to the acquisition of the CNL Financial Services Group is
being amortized over 20 years. APF did not acquire any intangibles as
part of any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC) - Class A......... 8,600
Common Stock (CFA, CFS, CFC) - Class B......... 4,825
Additional Paid-In Capital (CFA, CFS, CFC)..... 12,568,974
Retained Earnings.............................. 5,883,163
Accumulated distributions in excess of
earnings...................................... 73,253,248
Goodwill for CFC/CFS (Intangibles and other
assets)....................................... 42,893,799
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 9,036,817
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital............................... 33,064,185
Land and buildings on operating leases......... 4,750,292
Net investment in direct financing leases...... 1,212,027
Investment in joint ventures................... 839,991
Accrued rental income......................... 1,532,130
Intangibles and other assets.................. 51,185
Cash to pay APF Transaction costs............. 2,855,183
Cash consideration to Income Fund............. 430,000
APF Common Stock.............................. 19,216
APF Capital in Excess of Par Value............ 34,978,781
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $48,066 in related
party payables recorded as receivables by the Advisor.
5. Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999 through July 31,
1999 had been acquired and leased on January 1, 1998. No pro forma
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
adjustments were made for any properties for the periods prior to
their construction completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
-----------
Total.................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term of
the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which were
deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during the
period under development.
<TABLE>
<S> <C>
General and administrative costs............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above.
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,072,345
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $23,535 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $(17,777)
Reimbursement of administrative costs......................... (30,411)
--------
$(48,188)
========
</TABLE>
(l) Represents the elimination of $30,411 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $23,711 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $17,777 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $7,463 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $71,011 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the remaining
useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $10,234 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1,
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
1998. For purposes of the pro forma financial statements, it is
assumed that the stockholders approved a proposal for a one-for-two
reverse stock split and a proposal to increase the number of
authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates.......................... $ (1,773,406)
Secured equipment lease fees.............................. (54,998)
Advisory fees............................................. (305,030)
Reimbursement of administrative costs..................... (408,762)
Acquisition fees.......................................... (21,794,386)
Underwriting fees......................................... (388,491)
Administrative, executive and guarantee fees.............. (1,233,043)
Servicing fees............................................ (1,570,331)
Development fees.......................................... (229,153)
Management fees........................................... (1,851,004)
------------
Total..................................................... $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $207,144
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(4,241,719)
</TABLE>
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,851,004)
Administrative executive and guarantee fees................ (1,233,043)
Servicing fees............................................. (1,269,357)
Advisory fees.............................................. (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,144,690
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $47,069 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................... $(35,257)
Reimbursement of administrative costs......................... (34,306)
--------
$(69,563)
========
</TABLE>
(l) Represents the elimination of $34,306 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $41,947 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $35,257 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $11,948 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
(p) Represents an increase in depreciation expense of $142,022 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense of
$20,468 as a result of adjusting the historical basis of the real
estate owned by the Income Fund, indirectly through joint venture or
tenancy in common arrangements, to fair value as a result of
accounting for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings
owned indirectly by the Income Fund is being depreciated using the
straight-line method over the remaining useful lives of the
properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as part
of the basis of the building.
(s) Common shares issued during the period required to fund acquisitions
as if they had been acquired on January 1, 1998 were assumed to have
been issued and outstanding as of January 1, 1998. For purposes of
the pro forma financial statements, it is assumed that the
stockholders approved a one-for-two reverse stock split proposal and
a proposal to increase the number of authorized common shares of APF
on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6.Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the six months ended June 30, 1999, as if
the Acquisition was consummated as of January 1, 1999.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B)
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July 1,
1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant Financial
Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisition from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire the
Advisor, CNL Restaurant Financial Services Group and the Income Fund, as
described in 4(A) and 4(B).
F-41
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XIII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XIII, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a
Delaware corporation (the "OP General Partner"), CNL Income Fund XIII, Ltd., a
Florida limited partnership (the "Fund"), and Robert A. Bourne, James M.
Seneff, Jr., and CNL Realty Corporation, a Florida corporation (together with
Messrs. Borne and Seneff, the "General Partners"). APF, the Operating
Partnership, the OP General Partner, the Fund and the General Partners are
referred to collectively herein as the "Parties" and individually as a
"Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund
will be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. Amendments to Merger Agreement
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if APF
consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option." In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such limited
partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the Registration
Statement) of the Share Consideration such Dissenting Partners would
have otherwise received had such partners not elected to receive the
Notes (the "Note Option"). The Notes will mature on the fifth
anniversary of the Closing Date and will bear interest at a fixed rate
equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Note
Option."
B-1
<PAGE>
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to
Dissenting Limited Partners shall not have exceeded 15% of the value of
the Share Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. General
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XIII, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XIII, Ltd., a Florida limited
partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL
Realty Corporation, a Florida corporation (together with Messrs. Bourne and
Seneff, the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-5
<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
B-6
<PAGE>
"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,886,185 fully paid and nonassessable APF Common
Shares (1,943,093 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $34,688,461, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,113,815 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,886,185 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $388,619 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
B-33
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-34
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-35
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XIII, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-36
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XIII, Ltd.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statues, this Florida
limited partnership, whose certificate was filed with the Florida Department of
State on September 25, 1992, adopts the following certificate of amendment to
its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
-------------------------------------
James M. Seneff, Jr.
-------------------------------------
Robert A. Bourne
CNL REALTY CORPORATION
By:
-------------------------------------
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XIII, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XIII, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
D-1
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
D-2
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XIV, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XIV, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying Prospectus
Consent Solicitation Statement, which includes detailed discussions regarding
APF and the other Income Funds being acquired by APF. Accordingly, the
discussions in this supplement are qualified by the more expanded treatment of
these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships,which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general partners
of the Income Funds and members of APF's Board of Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in the
completion of the Acquisition may conflict with yours as a Limited
Partner of the Income Fund and with their own as general partners of
your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and
S-1
<PAGE>
mortgage financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 2,156,521 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties and to make mortgage loans and to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
S-2
<PAGE>
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will
be incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that the taxable gain per
average original $10,000 investment in your Income Fund will be $303.
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 2,156,521 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares may trade at prices
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substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Income Funds who
become APF stockholders as a result of the Acquisition, will have transformed
their investment in non-tradable units into an investment in freely tradable
APF Shares. Consequently, some of these stockholders may choose to sell their
APF Shares upon listing at a time when demand for APF Shares may be relatively
low. The market price of the APF Shares may be volatile after the Acquisition,
and the APF Shares could trade at prices substantially less than the exchange
value as a result of increased selling activity following the issuance of the
APF Shares, the interest level of investors in purchasing the APF Shares after
the Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $825 to you per $10,000 investment. While historically, APF
has made distributions equal to 7.625% per APF Share, based on the exchange
value, we cannot be sure that APF will be able to maintain this level of
distributions in the future. In the event that APF is unable to maintain this
level of distributions in the future, your distributions per $10,000 investment
may decrease substantially after the Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
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The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,249 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, an investment in APF may not outperform your investment in your Income
Fund. Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of your
Income Fund's assets, to an investment in an entity in which you may realize
the value of your investment only through the sale of your APF Shares, not from
liquidation proceeds from restaurant properties. Continuation of your Income
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the Income Fund's restaurant properties, and
your share of these sale proceeds could be higher than the amount realized from
the sale of your APF Shares or from the payments on any notes if you elect to
receive notes.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely effect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances, APF would also have to seek a
different source for funding its operations than securitizations.
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APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholder distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.90%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.45x and its ratio of debt-to-total assets would
have been 34.72%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make required
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant
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property is in a market in which APF has not invested before, APF will have
relatively little experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had no Boston
Market restaurant properties and tenants of six Long John Silver's restaurant
properties of which one Long John Silver's restaurant property has ceased to
pay lease payments to your Income Fund. The aggregate lost rental, interest and
earned income of the leases of the property for the six months ended June 30,
1999 was $37,979, which constitutes 1.98% of total rental, interest and earned
income, including lost rental, interest and earned income, for such period.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the leases of these
properties, whether due to bankruptcy or otherwise, for the six months ended
June 30, 1999 would have been equal to $1,175,483, which constitutes 1.33% of
total rental, interest and earned income, including lost rental, interest and
earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income
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taxes. Unless APF is entitled to relief under specific statutory provisions, it
could not elect to be taxed as a REIT for four taxable years following the year
during which it was disqualified. Therefore, if APF loses its REIT status, the
funds available for distribution to you, as an APF stockholder, would be
reduced substantially for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive the notes. You should note
that the APF Shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
<TABLE>
<CAPTION>
Original Limited Estimated Estimated Value
Original Limited Partner Investments Value of of APF Shares
Partner Investments less Distributions of Number of APF Estimated Value APF Shares per Average
less Distributions Net Sales Proceeds Shares of APF Shares Estimated after $10,000 Original
of Net Sales per 10,000 Offered to Payable to Acquisition Acquisition Limited Partner
Proceeds(1) Original Investment(1) Income Fund Income Fund Expenses Expenses Investment
- ------------------- ---------------------- ------------- --------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 2,156,521 $43,130,420 $464,000 $42,666,420 $9,481
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due ,
2005. The payment received by you and other Limited Partners who elect to
receive notes will be equal to 97% of the value of your portion of the APF
Share consideration, based on the exchange value, that
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would otherwise have been paid to your Income Fund. The notes will bear
interest at 7.0% and will mature on , 2005. APF may redeem the notes at any
time prior to their maturity at a price equal to the sum of the outstanding
principal balance plus accrued interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
<TABLE>
<CAPTION>
Pre-closing Transaction Costs
<S> <C>
Legal Fees(1)...................................... $ 34,529
Appraisals and Valuation(2)........................ 9,570
Fairness Opinions(3)............................... 30,000
Solicitation Fees(4)............................... 16,488
Printing and Mailing Fees(5)....................... 92,470
Accounting and Other Fees(6)....................... 71,198
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Subtotal....................................... 254,255
--------
<CAPTION>
Closing Transaction Costs
<S> <C>
Title, Transfer Tax and Recording Fees(7).......... 103,601
Legal Closing Fees(8).............................. 51,173
Partnership Liquidation Costs(9)................... 54,971
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Subtotal....................................... 209,745
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Total.............................................. $464,000
========
</TABLE>
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(1) Aggregate legal fees to be incurred by all of the Income Funds
in connection with the Acquisition is estimated to be
$423,998. Your Income Fund's pro-rata portion of these fees
was determined based on the ratio of the value of the APF
Share consideration payable to your Income Fund, based on the
exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the
exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all
of the Income Funds in connection with the Acquisition were
$105,420. Your Income Fund's pro-rata portion of these fees
was determined based on the number of restaurant properties in
your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason
and incurred a fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds
in connection with the Acquisition is estimated to be
$250,000. Your Income Fund's pro-rata portion of these fees
was determined based on the number of Limited Partners in your
Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the
Income Funds in connection with the Acquisition is estimated
to be $1,399,998. Your Income Fund's pro-rata portion of these
fees was determined based on the number of Limited Partners in
your Income Fund.
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(6) Aggregate accounting and other fees to be incurred by the
Income Funds in connection with the Acquisition is estimated
to be $841,245. Your Income Fund's pro-rata portion of these
fees was determined based on the ratio of your Income Fund's
total assets as of June 30, 1999 to the total assets of all of
the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be
incurred by all of the Income Funds in connection with the
Acquisition is estimated to be $1,313,596. Your Income Fund's
pro-rata portion of these fees was determined based on the
ratio of the value of the APF Share consideration payable to
your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the
Income Funds, based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income
Funds in connection with the Acquisition is estimated to be
$648,842. Your Income Fund's pro-rata portion of these fees
was determined based on the ratio of your Income Fund's total
assets as of June 30, 1999 to the total assets of all of the
Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all
of the Income Funds in connection with the Acquisition is
estimated to be $698,901. Your Income Fund's pro-rata portion
of these costs was determined based on the ratio of the value
of the APF Share consideration payable to your Income Fund,
based on the exchange value, to the total value of the APF
Share consideration payable to all of the Income Funds, based
on the exchange value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of your Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (September 1993). Because the Acquisition of your Income Fund is a
"Liquidating Sale" within the meaning of the partnership agreement, it may not
be consummated without the approval of Limited Partners representing greater
than 50% of the outstanding units.
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership agreement
currently provides that your Income Fund may not participate in any
transaction involving (1) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and (2)
the issuance of securities of any other partnership, real estate investment
trust, corporation, trust or other entity that would be created or would
survive after the successful completion of such transaction.
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If the Limited Partners holding greater than 50% of the outstanding units
approve this amendment to your Income Fund's partnership agreement, Article 21
will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this Supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would change your Income Fund to a general partnership, change our liability or
your liability, or allow you to take part in the control or management of your
Income Fund. The form of opinion of Baker & Hostetler LLP is attached to this
supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management intend
to solicit actively your support for the Acquisition and would like to use the
special meeting to answer questions about the Acquisition and the solicitation
materials and to explain in person our reasons for recommending that you vote
"For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999,
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999, a
date not less than 60 calendar days from the initial delivery of the
solicitation materials, or (b) such later date
S-11
<PAGE>
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the solicitation period. Under no circumstances will the
solicitation period be extended beyond March 31, 2000. Any consent form
received by Corporate Election Services prior to 5:00 p.m., Eastern time, on
the last day of the solicitation period will be effective provided that such
consent form has been properly completed and signed. If you fail to return a
signed consent form by the end of the solicitation period, your units will be
counted as voting "Against" the Acquisition of your Income Fund and you will
receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to be Paid to the
General Partners Following the Acquisition":
S-12
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
-------------------------- June 30,
1996 1997 1998 1999
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to
the General Partners and
Affiliates:
General Partner Distributions... -- -- -- --
Accounting and Administration
Services....................... $96,082 $89,910 $110,618 $54,168
Property Management Fees........ 38,785 38,626 37,430 19,472
Broker/Dealer Commissions.......
Due Diligence and Marketing
Support Fees................... -- -- -- --
Acquisition Fees................ -- -- -- --
Asset Management Fees........... -- -- -- --
Real Estate Disposition
Fees(1)........................ -- -- -- --
-------- -------- -------- -------
Total historical.............. $134,867 $128,536 $148,048 $73,640
Pro Forma Distributions to be Paid
to the General Partners Following
the Acquisition:
Cash Distributions on APF
Shares(2)...................... -- -- -- --
Salary Compensation............. -- -- -- --
-------- -------- -------- -------
Total pro forma............... -- -- -- --
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $650 $806 $825 $807 $704 $310 $246
Distributions from Return of
Capital(1)..................... -- -- -- 18 121 103 115
---- ---- ---- ---- ---- ---- ----
Total......................... $650 $806 $825 $825 $825 $413 $361
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-13
<PAGE>
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
. the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired, all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the
Income Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict
with yours as a Limited Partner of the Income Fund and with their own
as general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity as an APF stockholder to participate in APF's
future growth.
S-14
<PAGE>
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
3. Valuation of Alternatives. Based on the appraisal of your Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a going concern. On the basis of these calculations, we believe that the
ultimate value of the APF Shares, based on the exchange value, will exceed the
going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
S-15
<PAGE>
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
less Net Sales Average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund XIV,
Ltd. .................. 45,000,000 10,000 9,481 9,430 8,518 8,960
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to your Income Fund
and also on APF's Board of Directors. Additionally, as stockholders of APF,
Messrs. Seneff's and Bourne's interest in the completion of the Acquisition may
conflict with yours as a Limited Partner of the Income Fund and with their own
as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition, assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including
S-16
<PAGE>
stock options, under APF's 1999 Performance Incentive Plan or any other
such plan approved by the stockholders. The benefits that may be
realized by Messrs. Seneff and Bourne are likely to exceed the benefits
that they would expect to derive from the Income Funds if the
Acquisition does not occur.lp4
. As general partners of your Income Fund, we are legally liable for all
of your Income Fund's liabilities to the extent that your Income Fund is
unable to satisfy such liabilities. Because the partnership agreement
for your Income Fund prohibits the Income Fund from incurring
indebtedness, the only liabilities the Income Fund has are liabilities
with respect to its ongoing business operations. In the event that your
Income Fund is acquired by APF, we would be relieved of our legal
obligation to satisfy the liabilities of the acquired Income Fund.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences
of the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive
APF Shares. If you have voted "Against" the Acquisition but your Income Fund
is acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of
cash to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will
be taxed based on the amount of distributions you receive from APF. Each year
APF will send you a Form 1099-DIV reporting the amount of taxable and
nontaxable distributions paid to you during the preceding year. The taxable
portion of these distributions depends on the amount of APF's earnings and
profits. Because the Acquisition is a taxable transaction, APF's tax basis in
the acquired restaurant properties will be higher than your Income Fund's tax
basis had been in the same properties. At the same time, however, APF may be
required to utilize a slower method of depreciation with respect to certain
restaurant properties than that used by your Income Fund. As a result, APF's
tax depreciation from the acquired restaurant properties will differ from your
Income Fund's tax depreciation. Accordingly, under some circumstances, even if
APF were to make the same level of distributions as your Income Fund, a larger
portion of the distributions could constitute taxable income to you. In
addition, the character of this income to you as a stockholder of APF does not
depend on its character to APF. The income will generally be ordinary dividend
income to you and will be classified as portfolio income under the passive
loss rules, except with respect to capital gains dividends, discussed below.
Furthermore, if APF incurs a taxable loss, the loss will not be passed through
to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares
S-17
<PAGE>
and/or notes. Your Income Fund will then immediately liquidate and distribute
such property to you. The IRS requires that you recognize a share of the income
or loss, subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Partner Investment
---------------------
<S> <C>
CNL Income Fund XIV, Ltd. ................................ $303
</TABLE>
- --------
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if any,
assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a portion of your Income
Fund's gain may be deferred under the "installment sale" rules. Pursuant to
this method, and assuming that none of the principal amount of the notes is
collected in the year of the Acquisition, the amount of gain recognized by your
Income Fund in the year of the Acquisition will be equal to the value of the
APF Shares received by your Income Fund multiplied by the ratio that the gross
profit realized by your Income Fund in the Acquisition bears to the total
contract price for your Income Fund's assets. To the extent your Income Fund
realizes depreciation recapture income under section 1245 or section 1250 of
the Code, the recapture income will also be recognized by your Income Fund in
the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
S-18
<PAGE>
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable asset used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition, including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to the difference between the fair market value of the APF Shares
that you receive and your adjusted tax basis in your units. Your basis in the
APF Shares will then equal the fair market value of the APF Shares on the
closing date of the Acquisition, and your holding period for the APF Shares for
purposes of determining capital gain or loss will begin on the closing date of
the Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units, and your holding period
for the notes for purposes of determining capital gain or loss from the
disposition of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501 (c)(7), (9), (17) or
(20) of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
S-19
<PAGE>
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ----------- ---------- ----------- -----------
Total Revenue... $32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 (9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,070,127 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ----------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,361,632)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest and Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $ 3,877,654 $ 42,804 $ (239,337) $(6,306,870)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ----------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,306,870)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740 (i)
----------- ---------- ----------- ----------- ---------- ----------- -----------
Net Earnings
(Losses)......... $22,853,308 $2,089,441 $24,942,749 $ 2,282,618 $ 25,898 $ (153,135) $(4,781,130)
=========== ========== =========== =========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund XIV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 1,858,822 $ 31,852 (j) $32,848,188
Fees............. 2,616,185 0 (53,661)(k) 2,562,524
Interest and
Other Income..... 16,269,383 17,480 0 16,286,863
------------ ------------ ------------------ ------------
Total Revenue... 49,843,082 1,876,302 (21,809) 51,697,575
Expenses:
General and
Administrative... 9,579,902 104,090 (57,431)(l),(m) 9,626,561
Management and
Advisory Fees.... 0 19,472 (19,472)(n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 30,688 8,283 (o) 503,937
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 195,858 54,194 (p) 4,919,205
Amortization..... 1,079,863 2,414 0 1,082,277
Transaction
Costs............ 483,005 118,213 0 601,218
------------ ------------ ------------------ ------------
Total Expenses.. 26,814,958 470,735 (14,426) 27,271,267
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest and Gain
(Loss) on Sale of
Properties, and
Provision for
Losses on
Properties....... $23,028,124 $ 1,405,567 $ (7,383) $24,426,308
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 188,822 (12,142)(q) 207,921
Gain (Loss) on
Sale of
Properties....... (201,843) (60,882) 0 (262,725)
Provision For
Losses on
Properties....... (540,522) (121,207) 0 (661,729)
------------ ------------ ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,317,000 1,412,300 (19,525) 23,709,775
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ------------ ------------------ ------------
Net Earnings
(Losses)......... $22,317,000 $ 1,412,300 $ (19,525) $23,709,775
============ ============ ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges .. 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
Distributions
declared........ $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252 (s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,810,028 (u1),(v)
Total
liabilities/minority
interest........ $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,767,514 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund XIV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 56 n/a 637
============== =========== ==================== =================
Earnings per
share/unit...... $ n/a $ 0.31 $ n/a $ 0.52
============== =========== ==================== =================
Book value per
share/unit...... $ n/a $ 8.67 $ n/a $ 16.31
============== =========== ==================== =================
Dividends per
share/unit...... $ n/a $ .41 $ n/a $ 0.76
============== =========== ==================== =================
Ratio of
Earnings to
Fixed Charges .. n/a n/a n/a 2.93x
============== =========== ==================== =================
Cash
Distributions
declared........ $ 33,165,402 $ 1,856,260 $ (229,645)(s) $ 34,792,017
============== =========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 2,133,321 45,631,204(r)
============== =========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 2,133,321 45,631,785
============== =========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $32,685,507 $4,839,689 (u2) $ 732,338,158
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 56,816 $ (47,290)(x) $ 9,256,624
Investment in
joint ventures.. $ 1,081,046 $ 3,850,463 $ 681,828 (u2) $ 5,613,337
Total assets.... $1,170,920,640 $40,168,986 $ (194,871)(u2),(x) $1,210,894,755
Total
liabilities/minority
interest........ $ 465,485,738 $ 1,137,222 $ (47,290)(x) $ 466,575,670
Total equity.... $ 705,434,902 $39,031,764 $ (147,581)(u2) $ 744,319,085
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation expense
of $967,179 as if restaurant properties that had been operational when they
were acquired by APF from January 1, 1999 through July 31, 1999 had been
acquired and leased on January 1, 1998. No pro forma adjustments were made
for any restaurant properties for the periods prior to their construction
completion and availability for occupancy.
(b) Represents the elimination of intercompany fees between APF, the Advisor,
the CNL Restaurant Financial Services Group and the Income Fund:
<TABLE>
<S> <C>
Origination fees from affiliates............................ $ (689,425)
Secured equipment lease fees................................ (67,967)
Advisory fees............................................... (126,788)
Reimbursement of administrative costs....................... (382,728)
Acquisition fees............................................ (4,452,252)
Underwriting fees........................................... (54,248)
Administrative, executive and guarantee fees................ (532,389)
Servicing fees.............................................. (572,728)
Development fees............................................ (38,853)
Management fees............................................. (1,681,870)
-----------
Total..................................................... $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from borrowers
in conjunction with originating loans on behalf of CNL Financial Corp. On a
historical basis, CNL Financial Services, Inc. records all of the loan
origination fees received as revenue. For purposes of presenting pro forma
financial statements of these entities on a combined basis, these loan
origination fees are required to be deferred and amortized into revenues
over the term of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999 of
$1,213,268 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by CNL
Financial Services Inc. from borrowers during the six months ended June 30,
1999 and the year ended December 31, 1998, which were deferred for pro
forma purposes as described in 5(I)(c). These deferred loan origination
fees are being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income.................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to the
Advisor, and ii) the capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired during the
period as if costs relating to properties developed by APF were subject to
capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................. $(1,681,870)
Administrative executive and guarantee fees................. (532,389)
Servicing fees.............................................. (572,728)
Advisory fees............................................... (126,788)
-----------
$(2,913,775)
===========
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and the
CNL Restaurant Financial Services Group resulting from agreements between
these entities.
(h) Represents the amortization of the goodwill resulting from the acquisition
of the CNL Restaurant Financial Services Group referred to in footnote (u)
below:
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,070,127
</TABLE>
S-23
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal income
taxes as a result of the merger of the Advisor and the CNL Restaurant
Financial Services Group into the REIT corporate structure that exists
within APF. APF expects to continue to qualify as a REIT and does not
expect to incur federal income taxes.
(j) Represents $31,852 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the Income Fund as if the leases had been acquired on
January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income Fund:
<TABLE>
<S> <C>
Management fees................................................ $(19,472)
Reimbursement of administrative costs.......................... (34,189)
--------
$(53,661)
========
</TABLE>
(l) Represents the elimination of $34,189 in administrative costs reimbursed by
the Income Fund to the Advisor.
(m) Represents savings of $23,242 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports for
one combined entity instead of individual entities.
(n) Represents the elimination of $19,472 in management fees by the Income Fund
to the Advisor.
(o) Represents additional state income taxes of $8,283 resulting from assuming
that acquisitions of restaurant properties that had been operational when
APF acquired them from January 1, 1999 through July 31, 1999 had been
acquired on January 1, 1998 and assuming that the shares issued in
conjunction with acquiring the Advisor, CNL Financial Services Group and
the Income Fund had been issued as of January 1, 1998 and that these
entities had operated under a REIT structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $54,194 as a result of
adjusting the historical basis of the real estate wholly owned by the
Income Fund to fair value as a result of accounting for the Acquisition of
the Income Fund under the purchase accounting method. The adjustment to the
basis of the buildings is being depreciated using the straight-line method
over the remaining useful lives of the restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $12,142 as a
result of adjusting the historical basis of the real estate owned by the
Income Fund, indirectly through joint venture or tenancy in common
arrangements, to fair value as a result of accounting for the Acquisition
of the Income Fund under the purchase accounting method. The adjustment to
the basis of the buildings owned indirectly by the Income Fund is being
depreciated using the straight-line method over the remaining useful lives
of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1998 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the pro forma
financial statements, it is assumed that the stockholders approved a
proposal for a one-for-two reverse stock split and a proposal to increase
the number of authorized common shares of APF on January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1, 1998.
The pro forma distributions were based on APF's historical monthly
distribution rate of $.12708 that was in effect during the pro forma period
presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility at
June 30, 1999 to pro forma restaurant properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June 30,
1999. Based on historical results through July 31, 1999, all interest costs
related to the borrowings under the credit facility were eligible for
capitalization, resulting in no pro forma adjustments to interest expense.
(u) Represents the effect of recording the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group and the Income Fund using the purchase
accounting method.
S-24
<PAGE>
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,440,256 $50,364,369 $42,435,558 $174,240,183
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $38,884,183 $161,884,183
Cash Consideration...... -- -- 464,000 464,000
APF Transaction Costs... 5,440,256 3,364,369 3,087,375 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,440,256 $50,364,369 $42,435,558 $174,240,183
----------- ----------- ----------- ------------
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $39,031,764 $ 57,497,326
Purchase Price
Adjustments:
Land and buildings on
operating leases...... -- -- 3,855,854 3,855,854
Net investment in
direct financing
leases................ -- -- 983,813 983,813
Investment in joint
ventures.............. -- -- 681,828 681,828
Accrued rental income.. -- -- (2,068,192) (2,068,192)
Intangibles and other
assets................ -- (2,575,792) (49,509) (2,625,301)
Goodwill*.............. -- 42,805,074 -- 42,805,074
Excess purchase price.. 73,109,781 -- -- 73,109,781
----------- ----------- ----------- ------------
Total Allocation...... $81,440,256 $50,364,369 $42,435,558 $174,240,183
=========== =========== =========== ============
</TABLE>
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,109,781 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations." Goodwill of $42,805,074 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC) - Class A............ 8,600
Common Stock (CFA, CFS, CFC) - Class B............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)......... 12,568,974
Retained Earnings.................................. 5,883,163
Accumulated distributions in excess of earnings.... 73,109,781
Goodwill for CFC/CFS (Intangibles and other
assets)........................................... 42,805,074
CFC/CFS Organizational Costs/Other Assets......... 2,575,792
Cash to pay APF transaction costs................. 8,804,625
APF Common Stock.................................. 61,500
APF Capital in Excess of Par Value................ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners' Capital................................. 39,031,764
Land and buildings on operating leases............. 3,855,854
Net investment in direct financing leases.......... 983,813
Investment in joint ventures....................... 681,828
Accrued rental income.............................. 2,068,192
Intangibles and other assets...................... 49,509
Cash to pay APF Transaction costs................. 3,087,375
Cash consideration to Income Fund................. 464,000
APF Common Stock.................................. 21,333
APF Capital in Excess of Par Value................ 38,862,850
(To record acquisition of Income Fund)
</TABLE>
(v) Represents the elimination by APF of $1,444,444 in related party payables
recorded as receivables by the Advisor, and the elimination of intercompany
balances of $5,170,185 between CFC and CFS.
(w) Represents the elimination of federal income taxes payable of $342,857 from
liabilities assumed in the acquisition since the Merger Agreement requires
that the Advisor and CNL Restaurant Financial Services Group have no
accumulated or current earnings and profits for federal income tax purposes
at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $47,290 in related party
payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XIV, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XIV, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,065,124 $ 1,833,277 $ 3,831,810 $ 4,268,693 $ 4,503,039 $ 4,406,707 $ 3,371,695
Net income (2).......... 1,412,300 1,635,021 3,199,087 3,665,940 3,916,329 3,751,237 2,932,075
Cash distributions
declared............... 1,856,260 1,856,260 3,712,520 3,712,520 3,712,522 3,628,130 2,850,554
Net income per unit
(2).................... 0.31 0.36 0.70 0.81 0.86 0.83 0.66
Cash distributions
declared per unit...... 0.41 0.41 0.83 0.83 0.83 0.81 0.65
GAAP book value per
unit................... 8.67 8.84 8.77 8.89 8.90 8.85 9.06
Weighted average number
of Limited Partner
units outstanding...... 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000 4,383,150
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $40,168,986 $40,820,360 $40,538,159 $40,984,624 $41,045,849 $40,838,104 $40,866,591
Total partners'
capital................ 39,031,764 39,767,918 39,475,724 39,989,157 40,035,737 39,831,930 39,708,823
</TABLE>
- --------
(1) Revenues include equity in earnings of the joint ventures and adjustments
to accrued rental income due to the tenants of certain restaurant
properties filing for bankruptcy.
(2) Net income for the six months ended June 30, 1999, includes $121,207 for a
provision for loss on building and $60,882 from a loss on land and
building. Net income for the six months ended June 30, 1998, includes
$112,206 from gains on sale of land and building. Net income for the year
ended December 31, 1998, includes $37,155 for a provision for loss on
building and $112,206 from gains on sales of land and building. Net income
for the year ended December 31, 1995, includes $66,518 from loss on sale of
land.
S-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CNL INCOME FUND XIV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 25, 1992, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessee
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of June 30, 1999, the Income Fund owned 56 restaurant properties,
which included interests in ten restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998 was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,746,523 and
$1,845,728 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, is primarily a result of
changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In April 1998, the Income Fund reinvested a portion of the net sales
proceeds from the 1998 sale of the restaurant property in Madison, Alabama in a
joint venture arrangement, Melbourne Joint Venture, with one of our affiliates,
to construct and hold one restaurant property. As of June 30, 1999, the Income
Fund had contributed approximately $539,100, of which approximately $44,100 was
contributed during the six months ended June 30, 1999, to the joint venture to
purchase land and pay for construction costs relating to the joint venture. As
of June 30, 1999, the Income Fund owned a 50 percent interest in the profits
and losses of the joint venture.
In May 1999, the Income Fund sold its restaurant property in Stockbridge,
Georgia, to an unrelated third party for $700,000 and received net sales
proceeds of $696,300. As a result of this transaction, the Income Fund
recognized a loss of $60,882 for financial reporting purposes. The Income Fund
intends to reinvest these net sales proceeds in an additional restaurant
property.
In May 1999, the Income Fund entered into an agreement with an unrelated
third party to sell the Long John Silver's property in Shelby, North Carolina.
At June 30, 1999, the Income Fund established a provision for loss on building
related to the anticipated sale of this property. As of August 9, 1999, the
sale had not occurred.
Currently, rental income from the Income Fund's restaurant properties and
any net sales proceeds held by the Income Fund, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term, highly liquid investments, such as demand deposit accounts at
commercial banks, certificates of deposit, and money market accounts with less
than a 30-day maturity date, pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At June 30,
1999, the Income Fund had $1,458,499 invested in such short-term investments,
as compared to $949,056 at December 31, 1998. The increase in cash and cash
equivalents during the six months ended June 30, 1999, is primarily due to the
receipt of $696,300 in net sales proceeds from the sale of the restaurant
property in Stockbridge, Georgia. The funds remaining at June 30, 1999, after
payment of distributions and other liabilities,
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<PAGE>
will be used to acquire an additional restaurant property and to meet the
Income Fund's working capital and other needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital for the years ended December 31,
1998, 1997, and 1996, was cash from operations, which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses. Cash from operations was $3,514,544, $3,606,190, and
$3,706,296 for the years ended December 31, 1998, 1997, and 1996, respectively.
The decrease in cash from operations during 1998 and 1997, each as compared to
the previous year, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Income Fund's
working capital during each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In September 1996, Wood-Ridge Real Estate Joint Venture, a joint venture in
which the Income Fund owns a 50 percent interest, sold its two restaurant
properties to the tenant for $5,020,878 and received net sales proceeds of
$5,001,180, resulting in a gain to the joint venture of approximately $261,100
for financial reporting purposes. These restaurant properties were originally
acquired by Wood-Ridge Real Estate Joint Venture in September 1994 and had a
combined, total cost of approximately $4,302,500, excluding acquisition fees
and miscellaneous acquisition expenses; therefore, the joint venture sold these
properties for approximately $698,700 in excess of their original purchase
price. In October 1996, Wood-Ridge Real Estate Joint Venture reinvested
$4,404,046 of the net sales proceeds in five restaurant properties. In January
1997, the joint venture reinvested $502,598 of the remaining net sales proceeds
in an additional restaurant property. During 1997, the Income Fund and the
other joint venture partner each received approximately $52,000, representing a
return of capital, for the remaining uninvested net sales proceeds.
In September 1997, the Income Fund entered into a joint venture arrangement,
CNL Kingston Joint Venture, with one of our affiliates to construct and hold
one restaurant property. As of December 31, 1998, the Income Fund owned a 39.94
percent interest in the profits and losses of the joint venture.
In January 1998, the Income Fund sold its restaurant property in Madison,
Alabama and two restaurant properties in Richmond, Virginia, to third parties
for a total of $1,667,462 and received net sales proceeds of $1,606,702,
resulting in a total gain of $70,798 for financial reporting purposes. These
restaurant properties were originally acquired by the Income Fund in 1993 and
1994, and had costs totaling approximately $1,393,400, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
these restaurant properties for a total of $213,300 in excess of their original
purchase prices. In April 1998, the Income Fund reinvested a portion of the net
sales proceeds from the sale of the restaurant property in Madison, Alabama in
a joint venture arrangement, as described above. The Income Fund distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, if any, at a level reasonably assumed by us, resulting from these
sales.
In April 1998, the Income Fund reached an agreement to accept $360,000 for
the restaurant property in Riviera Beach, Florida, which was taken through a
right of way taking in December 1997. The Income Fund had received preliminary
sales proceeds of $318,592 as of December 31, 1997. Upon agreement of the final
sales price of $360,000, and receipt of the remaining sales proceeds of
$41,408, the Income Fund recognized a
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gain of $41,408 for financial reporting purposes. This restaurant property was
originally acquired by the Income Fund in 1994 and had a cost of approximately
$276,400, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Income Fund sold this restaurant property for a total of
approximately $83,600 in excess of its original purchase price. In October
1998, the Income Fund reinvested the net sales proceeds from the right of way
taking of the restaurant property in Riviera Beach, Florida in a restaurant
property in Fayetteville, North Carolina, as described below.
In addition, in April 1998, the Income Fund reinvested a portion of the net
sales proceeds from the sale of the property in Madison, Alabama, as described
above, in a joint venture arrangement, Melbourne Joint Venture, with an
affiliate of ours, to construct and hold one restaurant property, at a total
cost of $1,052,552. During 1998, the Income Fund contributed amounts to
purchase land and pay for construction costs relating to the joint venture and
has agreed to contribute additional amounts in 1999 for additional construction
costs. When funding is completed, the Income Fund expects to have an
approximate 50 percent interest in the profits and losses of the joint venture.
As of December 31, 1998, the Income Fund had a 50 percent interest in the
profits and losses of this joint venture.
In October 1998, the Income Fund reinvested approximately $1,537,000 of the
net sales proceeds it received from the sales of the restaurant properties in
Richmond, Virginia, the right of way taking of the restaurant property in
Riviera Beach, Florida, and a portion of the net sales proceeds it received
from the sale of the restaurant property in Madison, Alabama, along with
additional funds held as cash and cash equivalents at December 31, 1997, in a
restaurant property located in Fayetteville, North Carolina. The Income Fund
acquired the restaurant property from one of our affiliates. The affiliate had
purchased and temporarily held title to the restaurant property in order to
facilitate the acquisition of the restaurant property by the Income Fund. The
purchase price paid by the Income Fund represented the costs incurred by the
affiliate to acquire the restaurant property, including closing costs.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. Certain of our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Rental income from the Income Fund's restaurant properties and net sales
proceeds from the sale of restaurant properties, pending reinvestment in
additional restaurant properties, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money markets accounts with less than a 30-day
maturity date, pending the Income Fund's use of such funds to pay Income Fund
expenses or make distributions to partners. At December 31, 1998, the Income
Fund had $949,056 invested in such short-term investments as compared to
$1,285,777 at December 31, 1997. The decrease in cash is primarily attributable
to the Income Fund investing a portion of the amounts held at December 31, 1997
in a restaurant property in Fayetteville, North Carolina, as described above.
As of December 31, 1998, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately
three percent annually. The funds remaining at December 31, 1998, after the
payment of distributions and other liabilities, will be used to meet the Income
Fund's working capital and other needs. Total liabilities at December 31, 1998,
to the extent they exceed cash and cash equivalents at December 31, 1998, will
be paid from future cash from operations, and in the event we elect to make
additional contributions, from future general partner contributions.
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<PAGE>
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current and
anticipated future cash from operations, the Income Fund declared distributions
to the Limited Partners of $1,856,260 for each of the six months ended June 30,
1999 and 1998, or $928,130 for each of the quarters ended June 30, 1999 and
1998. This represents distributions for each applicable six months of $0.41 per
unit, or $0.21 per unit for each applicable quarter. No distributions were made
to us for the quarters and six months ended June 30, 1999 and 1998. No amounts
distributed to the Limited Partners for the six months ended June 30, 1999 and
1998 are required to be or have been treated by the Income Fund as a return of
capital for purposes of calculating the Limited Partners' return on their
adjusted capital contribution. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $1,137,222 at June 30, 1999, from $1,062,435 at December 31, 1998.
The increase in liabilities at June 30, 1999 is partially a result of the
Income Fund accruing transaction costs relating to the Acquisition. We believe
that the Income Fund has sufficient cash on hand to meet its current working
capital needs.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because leases of the Income Fund's restaurant properties are on a triple-net
basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs. We have the right to cause the Income Fund to
maintain additional reserves if, in our discretion, we determine such reserves
are required to meet the Income Fund's working capital needs.
Based primarily on current and future cash from operations, the Income Fund
declared distributions to the Limited Partners of $3,712,520, $3,712,520 and
$3,712,522 for the years ended December 31, 1998, 1997, and 1996, respectively.
This represents distributions of $0.83 per unit for each of the years ended
December 31, 1998, 1997, and 1996. No amounts distributed or to be distributed
to the Limited Partners for the years ended 1998, 1997, and 1996 are required
to be or have been treated by the Income Fund as a return of capital for
purposes of calculating the Limited Partners' return of their adjusted capital
contributions.
During 1998, 1997, and 1996, the affiliates incurred on behalf of the Income
Fund $113,352, $87,695, and $94,152, respectively, for certain operating
expenses. At December 31, 1998 and 1997, the Income Fund owed $25,432 and
$7,853, respectively, to affiliates for such amounts and accounting and
administrative services and management fees. As of March 11, 1999, the Income
Fund had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, increased to $1,037,003 at December 31, 1998,
from $987,614 at December 31, 1997, primarily as a result of an increase in
rents paid in advance at December 31, 1998.
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<PAGE>
Liabilities, at December 31, 1998, to the extent they exceed cash and cash
equivalents at December 31, 1998, will be paid from future cash from
operations.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During the six months ended June 30, 1998, the Income Fund owned and leased
49 wholly owned restaurant properties, including three restaurant properties
which were sold during 1998, and during the six months ended June 30, 1999, the
Income Fund owned and leased 47 wholly owned restaurant properties, including
one restaurant property which was sold during 1999, to operators of fast-food
and family-style restaurant chains. During the six months ended June 30, 1999
and 1998, the Income Fund earned $1,858,822 and $1,622,184, respectively, in
rental income from operating leases, net of adjustments to accrued rental
income, and earned income from direct financing leases from these restaurant
properties, $952,851 and $662,688 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively.
Rental and earned income was lower during the quarter and six months ended
June 30, 1998, as compared to the quarter and six months ended June 30, 1999,
primarily due to the fact that in June 1998 Long John Silver's, Inc. filed for
bankruptcy and rejected the leases relating to four of the nine restaurant
properties it leased. As a result, this tenant ceased making rental payments on
the four rejected leases. In connection with the four rejected leases, during
the six months ended June 30, 1998, the Income Fund wrote off approximately
$263,000 of accrued rental income, or non-cash accounting adjustments relating
to the straight-lining of future scheduled rent increases over the lease term
in accordance with generally accepted accounting principles, relating to these
four restaurant properties. The Income Fund has continued to receive rental
payments relating to the five leases not rejected by the tenant. The Income
Fund has entered into new leases, each with a new tenant, for two of the four
vacant restaurant properties. In connection with the new leases, the tenant for
each restaurant property has agreed to pay for all costs necessary to convert
these restaurant properties into different restaurant concepts. Conversion of
both restaurant properties was completed in March 1999, at which time rental
payments commenced. In May 1999, the Income Fund sold one of the vacant
restaurant properties and intends to reinvest the net sales proceeds in an
additional restaurant property. The Income Fund will not recognize any rental
and earned income from the remaining vacant restaurant property until a
replacement tenant for this restaurant property is located, or until the
restaurant property is sold and the proceeds from the sale are reinvested in an
additional restaurant property. While Long John Silver's, Inc. has not rejected
or affirmed the remaining five leases, there can be no assurance that some or
all of these leases will not be rejected in the future. The lost revenues
resulting from the remaining vacant restaurant property, as described above,
and the possible rejection of the remaining five leases, could have an adverse
effect on the results of operations of the Income Fund, if the Income Fund was
not able to re-lease these restaurant properties in a timely manner.
The increase in rental and earned income during the quarter and six months
ended June 30, 1999, as compared to the quarter and six months ended June 30,
1998, was partially offset by a decrease in rental and earned income during the
quarter and six months ended June 30, 1999, as a result of the 1998 sales of
the restaurant properties in Madison, Alabama and Richmond, Virginia. This
decrease in rental and earned income was partially offset by the fact in
October 1998 the Income Fund reinvested the majority of the net sales proceeds
from the sale of the above restaurant properties in a restaurant property in
Fayetteville, North Carolina. The Income Fund reinvested the remaining net
sales proceeds in Melbourne Joint Venture, as described below.
During the six months ended June 30, 1999 and 1998, the Income Fund also
owned and leased ten and nine restaurant properties respectively, indirectly
through joint venture arrangements. In connection therewith,
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<PAGE>
during the six months ended June 30, 1999 and 1998, the Income Fund earned
$188,822 and $164,631, respectively, $95,136 and $82,126 of which was earned
during the quarters ended June 30, 1999 and 1998, respectively. The increase in
net income earned by joint ventures during the quarter and six months ended
June 30, 1999, as compared to the quarter and six months ended June 30, 1998,
is primarily attributable to the Income Fund investing in Melbourne Joint
Venture in April 1998.
In addition, during the six months ended June 30, 1999 and 1998, the Income
Fund earned $17,480 and $46,462, respectively, in interest and other income,
$6,960 and $25,483 of which was earned during the quarters ended June 30, 1999
and 1998, respectively. Interest and other income was higher during the quarter
and six months ended June 30, 1998 than that earned during the quarter and six
months ended June 30, 1999, primarily due to the fact that the Income Fund
earned interest on the net sales proceeds relating to the sales of two
restaurant properties during 1998, as described above, pending reinvestment in
additional restaurant properties. These net sales proceeds were reinvested in
October 1998.
Operating expenses, including depreciation and amortization expense, were
$470,735 and $310,462 for the six months ended June 30, 1999 and 1998,
respectively, of which $232,735 and $148,972 were incurred during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was primarily due to the fact that
during the quarter and six months ended June 30, 1999, the Income Fund incurred
$85,038 and $118,213, respectively, in transaction costs related to our
retaining financial and legal advisors to assist us in evaluating and
negotiating the Acquisition with APF. If the Limited Partners reject the
Acquisition, the Income Fund will bear the portion of the transaction costs
based upon the percentage of "For" votes and we will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.
The increase in operating expenses during the six months ended June 30,
1999, as compared to the six months ended June 30, 1998, was also partially
attributable to an increase in depreciation expense due to the fact that during
the six months ended June 30, 1998, Long John Silver's, Inc. filed for
bankruptcy and rejected the leases relating to four restaurant properties, as
described above. In conjunction therewith, the Income Fund reclassified these
assets from net investment in direct financing leases to land and buildings on
operating leases.
During the six months ended June 30, 1999 and 1998, the Income Fund incurred
certain expenses, such as real estate taxes, insurance and maintenance relating
to the four restaurant properties whose leases were rejected by the tenant, as
described above. The Income Fund has entered into new leases, each with a new
tenant, for two of the four rejected restaurant properties. The new tenants are
responsible for real estate taxes, insurance, and maintenance relating to the
respective restaurant properties and the Income Fund also sold one of the
vacant restaurant properties, as described above; therefore, we do not
anticipate the Income Fund will incur these expenses for these three restaurant
properties in the future. However, the Income Fund will continue to incur
certain expenses, such as real estate taxes, insurance and maintenance relating
to the remaining, vacant restaurant property until a new tenant or purchaser is
located. The Income Fund is currently seeking either a new tenant or purchaser
for this restaurant property. In addition, the Income Fund will incur certain
expenses such as real estate taxes, insurance, and maintenance relating to one
or more of the five restaurant properties still leased by Long John Silver's,
Inc. if one or more of the leases are rejected.
As a result of the sale of the restaurant property in Stockbridge, Georgia,
as described above in "Capital Resources," the Income Fund recognized a loss of
$60,882 for financial reporting purposes during the quarter and six months
ended June 30, 1999. As a result of the sale of the restaurant property in
Richmond, Virginia during the six months ended June 30, 1998, and the receipt
of proceeds from the right of way taking of the restaurant property in Riviera
Beach, Florida, during the quarter and six months ended June 30, 1998, the
Income Fund recognized gains of $41,408 and $112,206, respectively, for
financial reporting purposes.
At June 30, 1999, the Income Fund recorded a provision for loss on building
in the amount of $121,207 for financial reporting purposes relating to a Long
John Silver's restaurant property in Shelby, North Carolina
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<PAGE>
the lease for which was rejected by the tenant, as described above. The tenant
of this restaurant property filed for bankruptcy and ceased payment of rents
under the terms of its lease agreement. The allowance represents the difference
between the carrying value of the restaurant property at June 30, 1999 and the
estimated net sales proceeds from the sale of the restaurant property based on
a sales contract with an unrelated third party.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund owned and leased 50 wholly-owned restaurant properties
during 1998, 1997, and 1996, including one restaurant property in Riviera
Beach, Florida which was condemned through a total right of way taking in
December 1997 and two restaurant properties in Richmond, Virginia and one
restaurant property in Madison, Alabama, each sold during the year ended
December 31, 1998. In addition, during 1996, the Income Fund was a co-venturer
in three joint ventures that owned and leased nine restaurant properties,
including two restaurant properties in Wood-Ridge Real Estate Joint Venture,
which were sold in September 1996, during 1997, the Income Fund was a co-
venture in four separate joint ventures that owned and leased nine restaurant
properties, and during 1998, the Income Fund was a co-venturer in five separate
joint ventures that owned and leased 10 restaurant properties. As of December
31, 1998, the Income Fund owned, either directly or through joint venture
arrangements, 57 restaurant properties, which are, in general, subject to long-
term, triple-net leases. The leases of the restaurant properties provide for
minimum base annual rental amounts, payable in monthly installments, ranging
from approximately $18,900 to $203,600. All of the leases provide for
percentage rent based on sales in excess of a specified amount. In addition,
the majority of the leases provide that, commencing in specified lease years,
generally the sixth or ninth year, the annual base rent required under the
terms of the lease will increase.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
earned $3,359,955, $3,911,527, and $3,987,525, respectively, in rental income
from operating leases, net of adjustments to accrued rental income, and earned
income from direct financing leases from restaurant properties wholly-owned by
the Income Fund.
The decrease in rental and earned income during 1998, as compared to 1997,
is primarily attributable to a decrease of approximately $212,300 due to the
fact that in June 1998, Long John Silver's Inc. filed for bankruptcy and
rejected the leases relating to four of the nine restaurant properties leased
by Long John Silver's, Inc., as described above. In conjunction with the four
rejected leases, during 1998, the Income Fund wrote off approximately $265,000
of accrued rental income, or non-cash accounting adjustments relating to the
straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles, relating to these
four restaurant properties.
In addition, rental and earned income decreased by approximately $162,600 in
1998, as compared to 1997, as a result of the 1998 sales of the restaurant
properties in Madison, Alabama and Richmond, Virginia and the 1997 right of way
taking of the restaurant property in Riviera Beach, Florida. The decrease in
rental and earned income was partially offset by the fact that in October 1998,
the Income Fund reinvested the majority of the net sales proceeds from the sale
of the above restaurant properties in a restaurant property in Fayetteville,
North Carolina, as described above in "Capital Resources." In addition, the
decrease during 1998 is partially offset by an increase in rental income
relating to the restaurant property in Akron, Ohio, as described below, being
operational for a full year in 1998 as compared to a partial year in 1997.
The decrease in rental and earned income during 1997, as compared to 1996,
was primarily attributable to the fact that during May 1997, the temporary
operator of the restaurant property in Akron, Ohio ceased restaurant operations
and vacated the restaurant property. The Income Fund ceased recording rental
income and wrote off the related allowance for doubtful accounts. The Income
Fund entered into a long-term, triple-net lease for this restaurant property
with the operator of an Arlington Big Boy in September 1997, and rental income
commenced in December 1997.
The decrease in rental and earned income during 1997 as compared to 1996,
was partially due to the fact that the Income Fund wrote off accrued rent
relating to the restaurant property in Madison, Alabama to adjust
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<PAGE>
the carrying value of the asset to the net proceeds received from the sale of
this restaurant property in January 1998.
During the years ended December 31, 1998, 1997, and 1996, the Income Fund
also earned $63,776, $21,617, and $7,014, respectively, in contingent rental
income. The increase in contingent rental income during 1998 and 1997, each as
compared to the previous year, is primarily attributable to increased gross
sales of certain restaurant properties requiring the payments of contingent
rental income.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $317,654, $309,879, and $459,137, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The increase in net income earned by joint ventures during 1998, as
compared to 1997, is primarily attributable to the fact that CNL Kingston Joint
Venture was operational for a full year in 1998, as compared to a partial year
in 1997. The decrease in net income earned by joint ventures during 1997 as
compared to 1996, is primarily attributable to the fact that in September 1996,
Wood-Ridge Real Estate Joint Venture, in which the Income Fund owns a 50
percent interest, recognized a gain of approximately $261,000 for financial
reporting purposes as a result of the sale of its restaurant properties in
September 1996, as described above in "Capital Resources."
During the year ended December 31, 1998, five lessees (or group of
affiliated lessees) of the Income Fund, Flagstar Enterprises, Inc., Foodmaker,
Inc., Long John Silver's, Inc., Checkers Drive-In Restaurants, Inc., and Golden
Corral Corporation, each contributed more than 10 percent of the Income Fund's
total rental income, including the Income Fund's share of rental income from 10
restaurant properties owned by joint ventures. As of December 31, 1998,
Flagstar Enterprises, Inc. was the lessee under leases relating to six
restaurants, Foodmaker, Inc. was the lessee under leases relating to six
restaurants, Long John Silver's, Inc. was the lessee under leases relating to
five restaurants, excluding the four leases rejected by this tenant, as
described above, Checkers Drive-In Restaurants, Inc. was the lessee under
leases relating to 15 restaurants, and Golden Corral Corporation was the lessee
under leases relating to four restaurants. It is anticipated that based on the
minimum rental payments required by the leases, that Flagstar Enterprises,
Inc., Foodmaker, Inc., Checkers Drive-In Restaurants, Inc., and Golden Corral
Corporation each will continue to contribute more than 10 percent of the Income
Fund's total rental income in 1999. In addition, during the year ended December
31, 1998, six restaurant chains, Hardee's, Denny's, Jack in the Box, Long John
Silver's, Checkers, and Golden Corral, each accounted for more than 10 percent
of the Income Fund's total rental income, including the Income Fund's share of
rental income from 10 restaurant properties owned by joint ventures. During
1998, Long John Silver's, Inc. filed for bankruptcy, as described above. In
1999, it is anticipated that Hardee's, Denny's, Jack in the Box, Checkers, and
Golden Corral each will account for more than 10 percent of the total rental
income to which the Income Fund is entitled under the terms of the leases. Any
failure of these lessees or restaurant chains could materially affect the
Income Fund's income if the Income Fund is not able to re-lease the restaurant
properties in a timely manner.
In addition, during the years ended December 31, 1998, 1997, and 1996, the
Income Fund earned $90,425, $47,287, and $56,377, respectively in interest and
other income. The increase in interest and other income during 1998, as
compared to 1997, is primarily due to an increase in interest income earned on
net sales proceeds relating to the sales of several restaurant properties
during 1998 described above, pending the reinvestment of the net sales proceeds
in additional restaurant properties.
Operating expenses, including depreciation and amortization expense, were
$707,774, $602,753, and $586,710 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during the year
ended December 31, 1998, as compared to the year ended December 31, 1997, is
partially attributable to the fact that the Income Fund accrued insurance and
real estate tax expenses as a result of Long John Silver's, Inc. filing for
bankruptcy and rejecting the leases relating to four restaurant properties in
June 1998, as described above. In addition, the increase in operating expenses
during 1998 is partially attributable to an increase in depreciation expense
due to the fact that during 1998, the Income Fund reclassified these assets
from net investment in direct financing leases to land and buildings on
operating leases.
S-34
<PAGE>
In accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," the Income Fund recorded the reclassified assets at
the lower of original cost, present fair value, or present carrying amount,
which resulted in a loss on termination of direct financing lease of $21,873
for financial reporting purposes during the year ended December 31, 1998. No
such loss was recorded during 1997 and 1996. The Income Fund has since entered
into new leases, each with a new tenant, for two of the four restaurant
properties, as described above. The new tenants are responsible for real estate
taxes, insurance and maintenance relating to their respective restaurant
properties; therefore, we do not anticipate the Income Fund will incur these
expenses for these two restaurant properties in the future. However, the Income
Fund will continue to incur certain expenses, such as real estate taxes,
insurance and maintenance relating to the two remaining, vacant restaurant
properties until new tenants or purchasers are located. As described above, the
Income Fund is currently seeking either new tenants or purchasers for these
restaurant properties.
In addition, the increase in operating expenses for 1998, is also partially
due to the fact that the Income Fund incurred $25,231 in transaction costs
related to our retaining financial and legal advisors to assist us in
evaluating and negotiating the proposed Acquisition with APF, as described
above in "Capital Resources."
The increase in operating expenses during 1997, as compared to 1996, was
primarily attributable to the fact that the Income Fund recorded bad debt
expense of $10,500 during 1997 relating to the restaurant property in Akron,
Ohio. Due to the fact that the temporary operator ceased operating the
restaurant property in May, 1997, as described above in "Capital Resources," we
ceased further collection efforts of these past due amounts.
As a result of the former tenant of the restaurant property in Akron, Ohio,
defaulting under the terms of its lease during 1994 and the Income Fund leasing
the restaurant property to temporary operators who subsequently ceased
operating the restaurant property, the Income Fund incurred real estate taxes
during the years ended December 31, 1998, 1997, and 1996. The Income Fund
entered into a long-term, triple-net lease for this restaurant property with
the operator of an Arlington Big Boy in September 1997, and rental income
commenced in December 1997. The new tenant is responsible for real estate
taxes; therefore, we do not anticipate the Income Fund will incur these
expenses in the future.
As a result of the sales of several restaurant properties and the receipt of
proceeds from the right of way taking of the restaurant property in Riviera
Beach, Florida, as described above in "Capital Resources," the Income Fund
recognized gains totaling $112,206 for financial reporting purposes during the
year ended December 31, 1998. No restaurant properties were sold during 1997
and 1996.
At December 31, 1998, the Income Fund recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating to
a Long John Silver's restaurant property whose lease was rejected by the
tenant, as described above. The tenant of this restaurant property filed for
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
restaurant property at December 31, 1998 and the estimated net realizable value
for the restaurant property.
The Income Fund's leases as of December 31, 1998, are, in general, triple-
net leases and contain provisions that we Partners believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level
and/or automatic increases in base rent at specified times during the term of
the lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
for certain restaurant properties over time. Continued inflation also may cause
capital appreciation of the Income Fund's restaurant properties. Inflation and
changing prices, however, also may have an adverse impact on the sales of the
restaurants and on potential capital appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately
S-35
<PAGE>
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
S-36
<PAGE>
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the
S-37
<PAGE>
positive responses from the financial institutions, we cannot be assured that
the financial institutions have addressed all possible year 2000 issues. The
loss of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-38
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998........ F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999 and 1998........................................................ F-2
Condensed Statements of Partners' Capital for the Six Months Ended June
30, 1998 and for the Year Ended December 31, 1998........................ F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................. F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................. F-5
Report of Independent Certified Public Accountants........................ F-7
Balance Sheets as of December 31, 1998 and 1997........................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-23
Unaudited Pro Forma Balance Sheet as of June 30, 1999..................... F-24
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................. F-26
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998..................................................................... F-28
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................. F-30
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................. F-32
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-34
</TABLE>
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building............................................. $24,871,707 $26,509,264
Net investment in direct financing leases............. 7,813,800 7,300,102
Investment in joint ventures.......................... 3,850,463 3,813,175
Cash and cash equivalents............................. 1,458,499 949,056
Receivables, less allowance for doubtful accounts of
$1,105 in 1999 and 1998.............................. 56,816 62,824
Prepaid expenses...................................... 18,407 8,389
Lease costs, less accumulated amortization of $1,898
in 1999.............................................. 31,102 --
Accrued rental income, less allowance for doubtful
accounts of $12,622 in 1999 and 1998................. 2,068,192 1,895,349
----------- -----------
$40,168,986 $40,538,159
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 88,637 $ 2,577
Accrued and escrowed real estate taxes payable........ 5,152 18,198
Distributions payable................................. 928,130 928,130
Due to related party.................................. 47,290 25,432
Rents paid in advance and deposits.................... 68,013 88,098
----------- -----------
Total liabilities................................... 1,137,222 1,062,435
Commitments and Contingencies (Note 3)
Partners' capital..................................... 39,031,764 39,475,724
----------- -----------
$40,168,986 $40,538,159
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 730,510 $ 707,601 $1,437,315 $1,424,878
Adjustments to accrued
rental income.............. -- (262,969) -- (262,969)
Earned income from direct
financing leases........... 222,341 218,056 421,507 460,275
Interest and other income... 6,960 25,483 17,480 46,462
---------- ---------- ---------- ----------
959,811 688,171 1,876,302 1,668,646
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative............. 32,840 42,628 81,183 78,931
Professional services....... 9,792 10,695 17,576 16,877
Management fees to related
party...................... 9,928 9,280 19,472 18,786
Real estate taxes........... 457 1,276 5,331 4,726
State and other taxes....... 334 40 30,688 21,036
Depreciation and
amortization............... 94,346 85,053 198,272 170,106
Transaction costs........... 85,038 -- 118,213 --
---------- ---------- ---------- ----------
232,735 148,972 470,735 310,462
---------- ---------- ---------- ----------
Income Before Equity in
Earnings of Joint Ventures,
Gain (Loss) on Sale of Land
and Buildings and Provision
for Loss on Building......... 727,076 539,199 1,405,567 1,358,184
Equity in Earnings of Joint
Ventures..................... 95,136 82,126 188,822 164,631
Gain (Loss) on Sale of Land
and Buildings................ (60,882) 41,408 (60,882) 112,206
Provision for Loss on
Building..................... (60,325) -- (121,207) --
---------- ---------- ---------- ----------
Net Income.................... $ 701,005 $ 662,733 $1,412,300 $1,635,021
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 7,695 $ 6,214 $ 15,163 $15,228
Limited partners............ 693,310 656,519 1,397,137 1,619,793
---------- ---------- ---------- ----------
$ 701,005 $ 662,733 $1,412,300 $1,635,021
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.15 $ 0.15 $ 0.31 $ 0.36
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 177,733 $ 146,640
Net income..................................... 15,163 31,093
----------- -----------
192,896 177,733
----------- -----------
Limited partners:
Beginning balance.............................. 39,297,991 39,842,517
Net income..................................... 1,397,137 3,167,994
Distributions ($0.41 and $0.83 per limited
partner unit, respectively)................... (1,856,260) (3,712,520)
----------- -----------
38,838,868 39,297,991
----------- -----------
Total partners' capital...................... $39,031,764 $39,475,724
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities.......... $ 1,746,523 $ 1,845,728
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 696,300 1,250,140
Investment in joint ventures..................... (44,120) (310,097)
Increase in restricted cash...................... -- (193,654)
Payment of lease costs........................... (33,000) --
----------- -----------
Net cash proovided by investing activities..... 619,180 746,389
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (1,856,260) (1,856,260)
----------- -----------
Net cash used in financing activities.......... (1,856,260) (1,856,260)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 509,443 735,857
Cash and Cash Equivalents at Beginning of Period..... 949,056 1,285,777
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,458,499 $ 2,021,634
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period.......................................... $ 928,130 $ 928,130
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XIV, Ltd. (the "Partnership") for the year ended December 31, 1998.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications had no
effect on partners' capital or net income.
2. Land and Building on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land........................................... $15,900,097 $16,195,936
Buildings...................................... 10,966,349 12,024,577
----------- -----------
26,866,446 28,220,513
Less accumulated depreciation.................. (1,836,377) (1,674,094)
----------- -----------
25,030,069 26,546,419
Less allowance for loss on building............ (158,362) (37,155)
----------- -----------
$24,871,707 $26,509,264
=========== ===========
</TABLE>
As of December 31, 1998, the Partnership recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating to
the Long John Silver's property in Shelby, North Carolina. The tenant of this
property filed for bankruptcy and ceased payment of rents under the terms of
its lease agreement. The allowance represented the difference between the
carrying value of the property at December 31, 1998 and the estimated net
realizable value for the property. During the six months ended June 30, 1999,
the Partnership increased the allowance by $121,207 to a total of $158,362. The
adjusted allowance represented the difference between the carrying value of the
property at June 30, 1999 and the estimated net sales proceeds from the sale of
the property based on a sales contract with an unrelated third party.
In May 1999, the Partnership sold its property in Stockbridge, Georgia to a
third party for $700,000, and received net sales proceeds of $696,300,
resulting in a loss of $60,882 for financial reporting purposes.
F-5
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Six Months Ended June 30, 1999 and 1998
3. Commitments and Contingencies
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 2,156,521 shares of
its
common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split effective June 3, 1999) in three previous
offerings, the most recent of which was completed in December 1998. In order to
assist the general partners in evaluating the proposed merger consideration,
the general partners retained Valuation Associates, a nationally recognized
real estate appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the Partnership's property
portfolio and other assets were valued on a going concern basis (meaning the
Partnership continues unchanged) at $42,435,559 as of December 31, 1998. Legg
Mason Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
In May 1999, the Partnership entered into an agreement with an unrelated
third party to sell the Long John Silver's property in Shelby, North Carolina.
At June 30, 1999, the Partnership established a provision for loss on building
related to the anticipated sale of this property (see Note 2). As of August 9,
1999, the sale had not occurred.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XIV, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XIV, Ltd. (a
Florida limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 22, 1999, except for Note 11
for which the date is March 11, 1999 and
Note 12 for which the date is June 3, 1999
F-7
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
building.............................................. $26,509,264 $25,217,725
Net investment in direct financing leases.............. 7,300,102 9,041,485
Investment in joint ventures........................... 3,813,175 3,271,739
Cash and cash equivalents.............................. 949,056 1,285,777
Restricted cash........................................ -- 318,592
Receivables, less allowance for doubtful accounts of
$1,105 in 1998........................................ 62,824 19,912
Prepaid expenses....................................... 8,389 7,915
Organization costs, less accumulated amortization of
$10,000 and $8,599.................................... -- 1,401
Accrued rental income less allowance for doubtful
accounts of $12,622 and $6,295........................ 1,895,349 1,820,078
----------- -----------
$40,538,159 $40,984,624
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 2,577 $ 10,258
Accrued and escrowed real estate taxes payable......... 18,198 19,570
Distributions payable.................................. 928,130 928,130
Due to related parties................................. 25,432 7,853
Rents paid in advance and deposits..................... 88,098 29,656
----------- -----------
Total liabilities.................................. 1,062,435 995,467
Partners' capital...................................... 39,475,724 39,989,157
----------- -----------
$40,538,159 $40,984,624
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,792,931 $2,872,283 $2,953,895
Adjustments to accrued rental income....... (277,319) -- --
Earned income from direct financing
leases.................................... 844,343 1,017,627 1,026,616
Contingent rental income................... 63,776 21,617 7,014
Interest and other income.................. 90,425 47,287 56,377
---------- ---------- ----------
3,514,156 3,958,814 4,043,902
---------- ---------- ----------
Expenses:
General operating and administrative....... 168,184 154,654 162,163
Professional services...................... 34,309 29,746 24,138
Bad debt expense........................... -- 10,500 --
Management fees to related parties......... 37,430 38,626 38,785
Real estate taxes.......................... 17,435 7,192 3,426
State and other taxes...................... 22,498 21,874 18,109
Loss on termination of direct financing
lease..................................... 21,873 -- --
Depreciation and amortization.............. 380,814 340,161 340,089
Transaction costs.......................... 25,231 -- --
---------- ---------- ----------
707,774 602,753 586,710
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Land and Building from
Right of Way Taking, Gain on Sale of Land
and Building, and Provision for Loss on
Building................................... 2,806,382 3,356,061 3,457,192
Equity in Earnings of Joint Ventures........ 317,654 309,879 459,137
Gain on Land and Building from Right of Way
Taking..................................... 41,408 -- --
Gain on Sale of Land and Building........... 70,798 -- --
Provision for Loss on Building.............. (37,155) -- --
---------- ---------- ----------
Net Income.................................. $3,199,087 $3,665,940 $3,916,329
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 31,093 $ 36,659 $ 39,163
Limited partners........................... 3,167,994 3,629,281 3,877,166
---------- ---------- ----------
$3,199,087 $3,665,940 $3,916,329
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.70 $ 0.81 $ 0 .86
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 69,818 $45,000,000 $ (6,710,883) $ 6,855,940 $(5,383,945) $39,831,930
Distributions to
limited
partners ($0.83 per
limited partner
unit)................ -- -- -- (3,712,522) -- -- (3,712,522)
Net income............ -- 39,163 -- -- 3,877,166 -- 3,916,329
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 108,981 45,000,000 (10,423,405) 10,733,106 (5,383,945) 40,035,737
Distributions to
limited
partners ($0.83 per
limited partner
unit)................ -- -- -- (3,712,520) -- -- (3,712,520)
Net income............ -- 36,659 -- -- 3,629,281 -- 3,665,940
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 145,640 45,000,000 (14,135,925) 14,362,387 (5,383,945) 39,989,157
Distributions to
limited
partners ($0.83 per
limited partner
unit)................ -- -- -- (3,712,520) -- -- (3,712,520)
Net income............ -- 31,093 -- -- 3,167,994 -- 3,199,087
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $176,733 $45,000,000 $(17,848,445) $17,530,381 $(5,383,945) $39,475,724
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants.......... $ 3,391,042 $ 3,501,064 $ 3,572,793
Distributions from joint ventures... 343,684 308,220 340,299
Cash paid for expenses.............. (293,428) (243,326) (250,885)
Interest received................... 73,246 40,232 44,089
----------- ----------- -----------
Net cash provided by operating
activities....................... 3,514,544 3,606,190 3,706,296
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building........................... 1,606,702 -- --
Proceeds received from right of way
taking............................. 41,408 318,592 --
Additions to land and buildings on
operating leases................... (605,712) -- --
Investment in direct financing
leases............................. (931,237) -- --
Investment in joint ventures........ (568,498) (121,855) (7,500)
Return of capital from joint
venture............................ -- 51,950 --
Decrease (increase) in restricted
cash............................... 318,592 (318,592) --
----------- ----------- -----------
Net cash used in investing
activities....................... (138,745) (69,905) (7,500)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners... (3,712,520) (3,712,520) (3,712,522)
----------- ----------- -----------
Net cash used in financing
activities....................... (3,712,520) (3,712,520) (3,712,522)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents.......................... (336,721) (176,235) (13,726)
Cash and Cash Equivalents at Beginning
of Year.............................. 1,285,777 1,462,012 1,475,738
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................. $ 949,056 $ 1,285,777 $ 1,462,012
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 3,199,087 $ 3,665,940 $ 3,916,329
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense.................... -- 10,500 --
Loss on termination of direct
financing lease.................... 21,873 -- --
Depreciation........................ 378,381 337,180 337,181
Amortization........................ 2,433 2,981 2,908
Equity in earnings of joint
ventures, net of distributions..... 26,030 (1,659) (118,889)
Gain on land and building from right
of way taking...................... (41,408) -- --
Gain on sale of land and building... (70,798) -- --
Provision for loss on building...... 37,155 -- --
Decrease in net investment in direct
financing leases................... 82,359 83,787 74,798
Increase in receivables............. (38,232) (6,935) (13,946)
Decrease (increase) in prepaid
expenses........................... (474) 328 (4,802)
Increase in accrued rental income... (148,845) (471,287) (491,221)
Increase (decrease) in accounts
payable and accrued expenses....... (9,038) 12,017 (8,408)
Increase (decrease) in due to
related parties.................... 17,579 6,202 (5,218)
Increase (decrease) in rents paid in
advance and deposits............... 58,442 (32,864) 17,564
----------- ----------- -----------
Total adjustments................. 315,457 (59,750) (210,033)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,514,544 $ 3,606,190 $ 3,706,296
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 928,130 $ 928,130 $ 928,130
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XIV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write downs.
F-12
<PAGE>
CNL INCOME FUND XIV , LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to decrease rental
or other income or increase bad debt expense for the current period, although
the Partnership continues to pursue collection of such amounts. If amounts are
subsequently determined to be uncollectible, the corresponding receivable and
allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its interests in
Attalla Joint Venture, Wood-Ridge Real Estate Joint Venture, Salem Joint
Venture, Melbourne Joint Venture, and CNL Kingston Joint Venture using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institution with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases
F-13
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. Substantially all
leases are for 15 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to five
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land............................................ $16,195,936 $16,425,914
Buildings....................................... 12,024,577 10,087,524
----------- -----------
28,220,513 26,513,438
Less accumulated depreciation................... (1,674,094) (1,295,713)
----------- -----------
26,546,419 25,217,725
Less allowance for loss on building............. (37,155) --
----------- -----------
$26,509,264 $25,217,725
=========== ===========
</TABLE>
During the year ended December 31, 1998, the Partnership sold its property
in Madison, Alabama and two properties in Richmond, Virginia, to third parties
for a total of $1,667,462 and received net sales proceeds of $1,606,702,
resulting in a total gain of $70,798 for financial reporting purposes. These
properties were originally acquired by the Partnership in 1993 and 1994, and
had costs totalling approximately $1,393,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold these
properties for a total of approximately $213,300 in excess of their original
purchase prices.
In addition, in April 1998, the Partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was taken through a
right of way taking in December 31, 1997. The Partnership had received
preliminary sales proceeds of $318,592 as of December 31, 1997. Upon agreement
of the final sales price of $360,000, and receipt of the remaining sales
proceeds of $41,408, the Partnership recognized a gain of $41,408 for financial
reporting purposes. This property was originally acquired by the Partnership in
1994 and had a cost of approximately $276,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold this
property for a total of approximately $83,600 in excess of its original
purchase price.
In October 1998, the Partnership reinvested approximately $1,537,000 of the
net sales proceeds it received from the sales of the properties in Richmond,
Virginia and the right of way taking of the property in Riviera Beach, Florida,
and a portion of the net sales proceeds it received from the sale of the
property in Madison, Alabama, in a property located in Fayetteville, North
Carolina.
At December 31, 1998, the Partnership recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating to
a Long John Silver's Property. The tenant of this Property filed for
F-14
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
bankruptcy and ceased payment of rents under the terms of its lease agreement.
The allowance represents the difference between the carrying value of the
Property at December 31, 1998 and the estimated net realizable value for the
Property.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997, and 1996, the Partnership recognized $148,845
(net of $6,327 in reserves and $277,319 in write-offs), $471,287 (net of $6,295
in reserves), and $491,221, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,486,272
2000.......................................................... 2,538,562
2001.......................................................... 2,557,759
2002.......................................................... 2,615,117
2003.......................................................... 2,632,784
Thereafter.................................................... 27,438,256
-----------
$40,268,750
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Minimum lease payments receivable.............. $14,282,003 $ 18,621,827
Estimated residual values...................... 2,373,313 2,842,002
Less unearned income........................... (9,355,214) (12,422,344)
----------- ------------
Net investment in direct financing leases...... $ 7,300,102 $ 9,041,485
=========== ============
</TABLE>
F-15
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 898,054
2000.......................................................... 899,947
2001.......................................................... 902,770
2002.......................................................... 911,239
2003.......................................................... 914,901
Thereafter.................................................... 9,755,092
-----------
$14,282,003
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
In January 1998, the Partnership sold its property in Madison, Alabama, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and the estimated residual value) and unearned income relating to the building
were removed from the accounts (see Note 3).
In June 1998, four of the Partnership's leases with Long John Silver's, Inc.
were rejected in connection with the tenant filing for bankruptcy. As a result,
the Partnership reclassified these assets from net investment in direct
financing leases to land and buildings on operating leases. In accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," in
June 1998, the Partnership recorded the reclassified assets at the lower of
original cost, present fair value, or present carrying amount, which resulted
in a loss on termination of direct financing lease of $21,873 for financial
reporting purposes.
5. Investment in Joint Ventures:
The Partnership owns a 50 percent, a 72.2% and a 50 percent interest in the
profits and losses of Attalla Joint Venture, Salem Joint Venture and Wood-Ridge
Real Estate Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
In January 1997, Wood-Ridge Real Estate Joint Venture reinvested $502,598 of
the remaining net sales proceeds, from the 1996 sales of two properties, in a
Taco Bell property in Anniston, Alabama. During the year ended December 31,
1997, the Partnership and the other joint venture partner had each received
approximately $52,000, representing a return of capital, for the remaining
uninvested net sales proceeds. As of December 31, 1998, the Partnership owned a
50 percent interest in the profits and losses of this joint venture.
In September 1997, the Partnership entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. In connection therewith, the
Partnership contributed amounts to CNL Kingston Joint Venture to fund
construction costs relating to the property owned by the joint venture. As of
December 31, 1998, the Partnership owned a 39.94% interest in the profits and
losses of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares control
with an affiliate.
F-16
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property, at a total cost of $1,052,552.
During 1998, the Partnership contributed amounts to purchase land and pay for
construction costs relating to the joint venture and has agreed to contribute
additional amounts in 1999 for additional construction costs. As of December
31, 1998, the Partnership owned a 50 percent interest in the profits and losses
of this joint venture. When funding is complete, the Partnership expects to
have an approximate 50 percent interest in the profits and losses of the joint
venture. The Partnership accounts for its investment in this joint venture
under the equity method since the Partnership shares control with an affiliate.
As of December 31, 1998, Attalla Joint Venture, Salem Joint Venture, CNL
Kingston Joint Venture, and Melbourne Joint Venture each owned and leased one
property, and Wood-Ridge Real Estate Joint Venture owned and leased six
properties, to operators of fast-food or family-style restaurants. The
following presents the joint ventures' condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,913,765 $6,008,240
Net investment in direct financing lease......... 360,790 364,479
Cash............................................. 87,922 13,842
Receivables...................................... 47,545 2,571
Accrued rental income............................ 194,526 150,621
Other assets..................................... 1,055 1,257
Liabilities...................................... 171,590 231,061
Partners' capital................................ 7,434,013 6,309,949
Revenues......................................... 750,147 712,004
Net income....................................... 615,127 588,835
</TABLE>
The Partnership recognized income totalling $317,654, $309,879, and $459,137
for the years ended December 31, 1998, 1997, and 1996, respectively, from these
joint ventures.
6. Restricted Cash:
In December 1997, the Partnership received preliminary sales proceeds of
$318,592 for the property in Riviera Beach, Florida which was taken through a
right of way taking. In October 1998, the Partnership reinvested these proceeds
in a property in Fayetteville, North Carolina (see Note 3).
7. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sales of properties not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
F-17
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
their Limited Partners' 10% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from a sale of a property not in
liquidation of the Partnership is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
in general, allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts, and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a sale of properties, in liquidation of
the Partnership will be used in the following order: i) first to pay and
discharge all of the Partnership's liabilities to creditors, ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, iii) third, to pay
all of the Partnership's liabilities, if any, to the general and limited
partners, iv) fourth, after allocations of net income, gains and/or losses, to
the partners with positive capital account balances, in proportion to such
balances, up to amounts sufficient to reduce such positive balances to zero,
and v) thereafter, any funds remaining shall then be distributed 95 percent to
the limited partners and five percent to the general partners.
During each of the years ended December 31, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,712,520 and during the
year ended December 31, 1996, the Partnership declared distributions to the
limited partners of $3,712,522. No distributions have been made to the general
partners to date.
F-18
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $3,199,087 $3,665,940 $3,916,329
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes.... (77,202) (130,766) (130,766)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 82,359 83,787 74,798
Gain on sale of land and building for
tax reporting purposes in excess of
gain for financial reporting
purposes............................ 94,442 -- --
Gain on land and building from right
of way taking deferred for tax
reporting purposes.................. (41,408) -- --
Allowance for loss on building....... 37,155 -- --
Equity in earnings of joint ventures
for financial reporting purposes
less than (in excess of) equity in
earnings of joint ventures for tax
reporting purposes.................. 35,645 3,109 (174,253)
Capitalization of transaction costs
for tax reporting purposes.......... 25,231 -- --
Allowance for doubtful accounts...... 1,105 -- --
Accrued rental income................ (148,845) (471,287) (491,221)
Loss on lease termination of direct
financing lease..................... 21,873 -- --
Rents paid in advance................ 53,442 (32,864) 17,564
Other................................ 1,034 (21,988) 23,878
---------- ---------- ----------
Net income for federal income tax
purposes............................ $3,283,918 $3,095,931 $3,236,329
========== ========== ==========
</TABLE>
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of directors of CNL Fund
Advisors, Inc. During the years ended December 31, 1998, 1997, and 1996, CNL
Fund Advisors, Inc. (hereinafter referred to as the "Affiliate") performed
certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the
F-19
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Affiliate. All or any portion of the management fee not taken as to any fiscal
year shall be deferred without interest and may be taken in such other fiscal
year as the Affiliates shall determine. The Partnership incurred management
fees of $37,430, $38,626, and $38,785 for the years ended December 31, 1998,
1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties, based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate Limited Partners' 10%
Return plus their invested capital contributions. No deferred, subordinated
real estate disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $110,618, $89,910, and $96,082 for the
years ended December 31, 1998, 1997, and 1996, respectively, for such services.
During 1998, the Partnership acquired a property for a purchase price of
approximately $1,537,000 from CNL First Corp., an affiliate of the general
partners. CNL First Corp. had purchased and temporarily held title to this
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by CNL First Corp. to acquire and carry the property, including
closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,432
and $7,853, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from joint ventures)
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's, Inc. ..................... $634,121 $850,159 $853,992
Checkers Drive-In Restaurants, Inc. .......... 628,816 724,612 732,941
Foodmaker, Inc. .............................. 574,481 562,725 556,100
Golden Corral Corporation..................... 534,624 520,911 476,350
Flagstar Enterprises, Inc. ................... 427,801 483,606 498,655
Denny's, Inc. ................................ N/A 379,767 380,939
</TABLE>
F-20
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from joint ventures) for each of the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $634,121 $850,159 $853,992
Checkers Drive-in Restaurants................. 628,816 724,612 732,941
Denny's....................................... 625,101 618,154 615,021
Jack in the Box............................... 574,481 562,725 556,100
Golden Corral Family Steakhouse Restaurants... 534,624 520,911 476,350
Hardee's...................................... 427,801 483,606 498,655
</TABLE>
The information denoted by N/A indicates that for each period presented, the
tenant or group of affiliated tenants and the chains did not represent more
than ten percent of the Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any lessee or restaurant chain contributing more than ten
percent of the Partnership's revenues could significantly impact the results of
operations of the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
In June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected the
leases relating to four of its nine leases and ceased making rental payments to
the Partnership on the rejected leases. The Partnership will not recognize any
rental and earned income from these Properties until new tenants for these
Properties are located, or until the Properties are sold and the proceeds from
such sales are reinvested in additional Properties. While Long John Silver's,
Inc. has not rejected or affirmed the remaining five leases, there can be no
assurance that some or all of these leases will not be rejected in the future.
The lost revenues resulting from the four leases that were rejected, as
described above, and the possible rejection of the remaining five leases could
have an adverse effect on the results of operations of the Partnership if the
Partnership is not able to re-lease these properties in a timely manner. The
Partnership entered into new leases, each with a new tenant, for two of the
four rejected leases.
11. Subsequent Event:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 4,313,041 shares of
its common stock, par value $0.01 per shares (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $10.00
per APF Share, the price paid by APF investors in APF's most recent public
offering. In order to assist the general partners in evaluating the proposed
merger consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the Partnership's
restaurant property portfolio. Based on Valuation Associates' appraisal, the
Partnership's property portfolio and other assets were valued on a going
concern basis (meaning the Partnership continues unchanged) at $42,435,559 as
of December 31, 1998. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger,
and, therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is
F-21
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
expected to be held in the third quarter of 1999, limited partners holding in
excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. The general
partners intend to recommend that the limited partners of the Partnership
approve the Merger. In connection with their recommendation, the general
partners will solicit the consent of the limited partners at the special
meeting. If the limited partners reject the Merger, the Partnership will bear
the portion of the transaction costs based upon the percentage of "For" votes
and the general partners will bear the portion of such transaction costs based
upon the percentage of "Against" votes and abstentions.
12. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 11 being adjusted to 2,156,521 shares valued at $20.00 per
APF share.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC")) and should be
read in conjunction with the selected historical financial data and
accompanying notes of APF, Income Fund, the Advisor and CNL Restaurant
Financial Services Group. The pro forma balance sheet assumes that the
Acquisition occurred on June 30, 1999, and the pro forma consolidated
statements of earnings and statements of cash flows assume that the acquisition
of properties by APF from January 1, 1998 through July 31, 1999, the
acquisition of the Advisor, the CNL Restaurant Financial Services Group and the
Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating
leases (net
depreciation).......... $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing
Leases................. 132,179,949 0 132,179,949 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0
Other Investments....... 16,197,812 0 16,197,812 0 0
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0
Cash and Cash
Equivalents............ 18,764,033 0 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0
Receivables (net
allowances)
/Due from Related
Party.................. 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income... 5,875,698 0 5,875,698 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued
Liabilities............ $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0
Distributions Payable... 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981
Income Tax Payable...... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income......... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0
Minority Interest....... 644,611 0 644,611 0 0
Common Stock............ 373,484 0 373,484 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital....... 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund Pro Forma Adjusted
Corp. Adjustments APF XIV, Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $24,871,707 $ 3,855,854 (B2) $ 601,664,420
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 7,813,800 983,813 (B2) 140,977,562
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 0 0 353,874,178
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 3,850,463 681,828 (B2) 5,613,337
Cash and Cash
Equivalents............ 1,767,517 (8,804,625)(B1) 12,699,256 1,458,499 (3,087,375)(B2) 10,606,380
(464,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)
/Due from Related
Party.................. 1,125,933 (6,614,629)(C) 9,247,098 56,816 (47,290)(E) 9,256,624
Accrued Rental Income... 0 0 5,875,698 2,068,192 (2,068,192)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 49,509 (49,509)(B2) 13,173,857
Goodwill................ 0 42,805,074 (B1) 42,805,074 0 0 42,805,074
------------ ------------ -------------- ----------- ----------- --------------
Total Assets........... $304,738,561 $ 24,810,028 $1,170,920,640 $40,168,986 $ (194,871) $1,210,894,755
============ ============ ============== =========== =========== ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 93,789 $ 0 $ 5,198,092
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 928,130 0 928,130
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 47,290 (47,290)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 68,013 0 1,685,380
Minority Interest....... 0 0 644,611 0 0 644,611
Common Stock............ 0 61,500 (B1) 434,984 0 21,333 (B2) 456,317
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 38,862,850 (B2) 831,799,065
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,163)(B1) (87,936,297) 0 0 (87,936,297)
(73,109,781)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 39,031,764 (39,031,764)(B2) 0
------------ ------------ -------------- ----------- ----------- --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,810,028 $1,170,920,640 $40,168,986 $ (194,871) $1,210,894,755
============ ============ ============== =========== =========== ==============
Wtd. Avg. Shares
Outstanding............ 45,631,204(r)
==============
Shares Outstanding...... 45,631,785
==============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 27,900,894 $ 3,056,620(a) $ 30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
------------ ----------- ------------ ----------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative ....... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
------------ ----------- ------------ ----------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $ 23,564,432 $ 2,089,441 $ 25,653,873 $ 3,877,654 $ 42,804 $ (239,337)
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
------------ ----------- ------------ ----------- ---------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
------------ ----------- ------------ ----------- ---------- -----------
Net Earnings (Losses)... $ 22,853,308 $ 2,089,441 $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
============ =========== ============ =========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
============ =========== ============ =========== ========== ===========
Cash Distributions
Declared............... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
============ =========== ============ =========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
============ =========== ============ =========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Combining Historical CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XIV, Ltd. Adjustments Pro Forma
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $1,858,822 $ 31,852 (j) $32,848,188
Fees................... (9,812,516)(b),(c) 2,616,185 0 (53,661)(k) 2,562,524
Interest and Other
Income................ 144,014 (d) 16,269,383 17,480 0 16,286,863
----------- ----------- ---------- --------- -----------
Total Revenue.......... $(9,668,502) $49,843,082 $1,876,302 $ (21,809) $51,697,575
Expenses:
General and
Administrative ....... (774,311)(e) 9,579,902 104,090 (57,431)(l),(m) 9,626,561
Management and Advisory
Fees.................. (2,913,775)(f) 0 19,472 (19,472)(n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 30,688 8,283 (o) 503,937
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 195,858 54,194 (p) 4,919,205
Amortization........... 1,070,127 (h) 1,079,863 2,414 0 1,082,277
Transaction Costs...... 0 483,005 118,213 0 601,218
----------- ----------- ---------- --------- -----------
Total Expenses......... (3,361,632) 26,814,958 470,735 (14,426) 27,271,267
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,306,870) $23,028,124 $1,405,567 $ (7,383) $24,426,308
Equity Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 188,822 (12,142)(q) 207,921
Gain (Loss) on Sale of
Properties............ 0 (201,843) (60,882) 0 (262,725)
Provision for Losses on
Properties............ 0 (540,522) (121,207) 0 (661,729)
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (6,306,870) 22,317,000 1,412,300 (19,525) 23,709,775
Benefit/(Provision) for
Federal Income
Taxes................. 1,525,740 (i) 0 0 0 0
----------- ----------- ---------- --------- -----------
Net Earnings (Losses)... $(4,781,130) $22,317,000 $1,412,300 $ (19,525) $23,709,775
=========== =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.31 $ n/a $ 0.52
=========== =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.67 $ n/a $ 16.31
=========== =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.41 $ n/a $ 0.76
=========== =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.93x
=========== =========== ========== ========= ===========
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $1,856,260 $(229,645)(s) $34,792,017
=========== =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 2,133,321 45,631,204 (r)
=========== =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,498,464 n/a 2,133,321 45,631,785
=========== =========== ========== ========= ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ----------- ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Provision for Losses on
Properties and Gain on
Securitization......... $32,778,080 $16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision for Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ----------- ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== =========== =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $11,559,002(t) $51,008,151 $ n/a $ n/a $ n/a
=========== =========== =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,579,872 34,228,091 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== =========== =========== =========== ========== ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund Pro Forma Adjusted
Adjustments APF XIV, Ltd. Adjustments Pro Forma
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................. $ 0 $56,081,460 $3,423,731 $ 63,704 (j) $59,568,895
Fees.................... (32,715,768)(b),(c) 3,226,263 0 (78,060)(k) 3,148,203
Interest and Other
Income................. 207,144 (d) 32,221,925 90,425 0 32,312,350
------------ ----------- ---------- --------- -----------
Total Revenue........... $(32,508,624) $91,529,648 $3,514,156 $ (14,356) $95,029,448
Expenses:
General and
Administrative......... (4,241,719)(e) 15,939,556 219,928 (94,999) (l),(m) 16,064,485
Management and Advisory
Fees................... (4,658,434)(f) 0 37,430 (37,430) (n) 0
Fees to Related
Parties................ (2,161,897)(g) 858,787 0 0 858,787
Interest Expense........ 0 21,498,589 0 0 21,498,589
State Taxes............. 0 567,446 22,498 13,260 (o) 603,204
Depreciation--Other..... 0 199,157 0 0 199,157
Depreciation--Property.. (340,898)(r) 9,948,339 378,382 108,388 (p) 10,435,109
Amortization............ 2,140,254 (h) 2,304,255 2,432 0 2,306,687
Transaction Costs....... 0 157,054 25,231 0 182,285
------------ ----------- ---------- --------- -----------
Total Expenses.......... (9,262,694) 51,473,183 685,901 (10,781) 52,148,303
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Provision for Losses on
Properties and Gain on
Securitization......... $(23,245,930) $40,056,465 $2,828,255 $ (3,575) $42,881,145
Equity in Earnings of
Joint Venture/Minority
Interest............... 0 (14,138) 317,654 (24,283)(q) 279,233
Gain (Loss) on Sale of
Properties............. 0 0 90,333 0 90,333
Gain on Securitization.. 0 3,694,351 0 0 3,694,351
Provision for Losses on
Properties............. 0 (611,534) (37,155) 0 (648,689)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before Benefit/
(Provision) for Federal
Income Taxes........... (23,245,930) 43,125,144 3,199,087 (27,858) 46,296,373
Benefit/(Provision) for
Federal Income Taxes... 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,347,496) $43,125,144 $3,199,087 $ (27,858) $46,296,373
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ .81 $ n/a $ 1.09
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.77 $ n/a $ 16.46
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ .83 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.10x
============ =========== ========== ========= ===========
Cash Distributions
declared............... $ 9,378,504 (t) $60,386,655 $3,712,520 $(459,291)(t) $63,639,884
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,378,091 n/a 2,133,321 42,511,412 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 2,133,321 45,621,248
============ =========== ========== ========= ===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings,
direct financing
leases and deferred
taxes................. 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Aqcuisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,322,765) 12,877,072 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,449,417 $ 33,213,450 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XIV, Ltd. Adjustments Pro Forma
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ (4,781,130)(a) $ 22,317,000 $1,412,300 $ (19,525)(a) $ 23,709,775
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 0 4,774,655 195,858 54,194 (b) 5,024,707
Amortization expense... 1,070,127 (c) 1,979,880 2,414 0 1,982,294
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 6,316 12,142 (d) 43,578
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 60,882 0 262,725
Provision for loss on
land, buildings,
direct financing
leases and deferred
taxes................. 0 444,047 121,207 0 565,254
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 3,638 0 (2,198,322)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (10,018) 0 (330,443)
Decrease in net
investment in direct
financing leases...... 0 721,624 51,982 0 773,606
Increase in accrued
rental income......... 0 (1,915,785) (172,843) 0 (2,088,628)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 18,621 0 (644,857)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition and stock
issuance costs paid on
behalf of the entity.. 0 585,727 76,251 0 661,978
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (20,085) 0 646,634
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------ ---------- ----------- ------------
Total adjustments...... 1,070,127 (75,919,685) 334,223 66,336 (75,519,126)
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,746,523 46,811 (51,809,351)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 696,300 0 4,392,364
Additions to land and
buildings on operating
leases................ 4,452,252(e) (44,006,783) 0 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) (44,120) 0 (161,783)
Aqcuisition of
businesses............ 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment
income................ 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 (33,000) 0 (33,000)
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) 619,180 0 (111,115,346)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,856,260) 229,645 (g) (34,911,825)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------ ---------- ----------- ------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,856,260) 229,645 178,636,860
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 509,443 276,456 15,712,163
Cash at beginning of
year................... (10,936,883) 6,142,148 949,056 (2,987,271) 4,103,933
------------ ------------ ---------- ----------- ------------
Cash at end of year..... $(14,884,886) $ 21,068,412 $1,458,499 $(2,710,815) $ 19,816,096
============ ============ ========== =========== ============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,559,002)(j) (51,008,151) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,189,146) 305,646,395 (8,200,077) 51,854 (700,074)
Net increase (decrease)
in cash................ 75,613,060 (110,322,765) (34,709,705) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,322,765) $ 12,877,072 $ 713,308 $ 962,573 $ 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Fund Pro Forma Adjusted
Adjustments Combined APF XIV, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(16,347,496)(a) $ 43,125,144 $ 3,199,087 $ (27,858)(a) $ 46,296,373
Adjustments to reconcile
net income(loss) to net
cash provided by
(used in) operating
activities: 0 0
Depreciation........... (340,898)(b) 10,147,496 378,382 108,388 (b) 10,634,266
Amortization expense... 2,140,254 (c) 4,454,338 2,432 0 4,456,770
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 26,030 24,283 (d) 34,873
Loss (gain) on sale of
land, building, net
investment in direct
financing leases....... 0 0 (90,333) 0 (90,333)
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 37,155 0 1,046,731
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease (increase) in
other receivables..... 0 (2,543,413) (38,232) 0 (2,581,645)
Increase in accrued
interest income
included in notes
receivable............. 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 (474) 0 6,772
Decrease in net
investment in direct
financing leases...... 0 1,971,634 82,359 0 2,053,993
Increase in accrued
rental income......... 0 (2,187,652) (148,845) 0 (2,336,497)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities...... 0 846,680 (9,038) 0 837,642
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the
entity................. 0 (133,364) 17,579 0 (115,785)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 58,442 0 495,285
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,799,356 13,329,161 315,457 132,671 13,777,289
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (14,548,140) 56,454,305 3,514,544 104,813 60,073,662
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases,
and equipment.......... 0 2,385,941 1,606,702 0 3,992,643
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) (605,712) 0 (304,616,454)
Investment in direct
financing leases...... 0 (47,115,435) (931,237) 0 (48,046,672)
Investment in joint
venture............... 0 (974,696) (568,498) 0 (1,543,194)
Acquisition of
businesses............ (8,804,625)(f) (8,804,625) (3,087,375)(g) (12,356,000)
(464,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............. 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income...... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 318,592 0 318,592
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 41,408 0 241,408
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 12,989,761 (387,560,881) (138,745) (3,551,375) (391,251,001)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,751,143) (3,712,520) 459,291 (j) (73,004,372)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (9,378,504) 287,419,594 (3,712,520) 459,291 284,166,365
Net increase (decrease)
in cash................ (10,936,883) (43,686,982) (336,721) (2,987,271) (47,010,974)
Cash at beginning of
year................... 0 49,829,130 1,285,777 0 51,114,907
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(10,936,883) $ 6,142,148 $ 949,056 $(2,987,271) $ 4,103,933
============ ============= =========== =========== =============
</TABLE>
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price exceeds the fair
value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent the purchase price paid exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma
adjustments to interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of Considera-
tion Received.......... $81,440,256 $50,364,369 $42,435,558 $174,240,183
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $38,894,183 $161,884,183
Cash Consideration...... -- -- 464,000 464,000
APF Transaction Costs... 5,440,256 3,364,369 3,087,375 11,892,000
----------- ----------- ----------- ------------
Total Purchase
Price.............. $81,440,256 $50,364,369 $42,435,558 $174,240,183
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical.. $ 8,330,475 $10,135,087 $39,031,764 $ 57,497,326
Purchase Price Adjust-
ments:
Land and buildings on
operating leases..... -- -- 3,855,854 3,855,854
Net investment in
direct financing
leases............... -- -- 983,813 983,813
Investment in joint
ventures............. -- -- 681,828 681,828
Accrued rental in-
come................. -- -- (2,068,192) (2,068,192)
Intangibles and other
assets............... -- (2,575,792) (49,509) (2,625,301)
Goodwill*............. -- 42,805,074 -- 42,805,074
Excess purchase
price................ 73,109,781 -- -- 73,109,781
----------- ----------- ----------- ------------
Total Allocation.... $81,440,256 $50,364,369 $42,435,558 $174,240,183
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-35
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess purchase
price paid for the Advisor to a related party of $73,109,781 was expensed at
June 30, 1999 because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations". Goodwill of $42,805,074 relating to the acquisition of the CNL
Financial Services Group is being amortized over 20 years. APF did not acquire
any intangibles as part of any of the acquisitions. The entries were as
follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC) -- Class A......... 8,600
Common Stock (CFA, CFS, CFC) -- Class B......... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of earn-
ings........................................... 73,109,781
Goodwill for CFC/CFS (Intangibles and other as-
sets).......................................... 42,805,074
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 8,804,625
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 39,031,764
Land and buildings on operating leases.......... 3,855,854
Net investment in direct financing leases....... 983,813
Investment in joint ventures.................... 681,828
Accrued rental income......................... 2,068,192
Intangibles and other assets.................. 49,509
Cash to pay APF Transaction costs............. 3,087,375
Cash consideration to Income Income Fund...... 464,000
APF Common Stock.............................. 21,333
APF APIC...................................... 38,862,850
(To record acquisition of Income Fund)
</TABLE>
(C) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor, and the elimination of
intercompany balances of $5,170,185 between CFC and CFS.
(D) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(E) Represents the elimination by the Income Fund of $47,290 in related
party payables recorded as receivables by the Advisor.
5.Adjustments to Pro Forma Statements of Earnings
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the six months ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if properties that had been operational when
they were acquired by APF from January 1, 1999
F-36
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
through July 31, 1999 had been acquired and leased on January 1,
1998. No pro forma adjustments were made for any properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates......................... $ (689,425)
Secured equipment lease fees............................. (67,967)
Advisory fees............................................ (126,788)
Reimbursement of administrative costs.................... (382,728)
Acquisition fees......................................... (4,452,252)
Underwriting fees........................................ (54,248)
Administrative, executive and guarantee fees............. (532,389)
Servicing fees........................................... (572,728)
Development fees......................................... (38,853)
Management fees.......................................... (1,681,870)
-----------
Total.................................................. $(8,599,248)
===========
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the six months ended June 30, 1999
of $1,213,268 are being deferred for pro forma purposes and are
being amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the six months
ended June 30, 1999 and the year ended December 31, 1998, which
were deferred for pro forma purposes as described in 5(I)(c). These
deferred loan origination fees are being amortized and recorded as
interest income over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs........................... $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,681,870)
Administrative executive and guarantee fees.............. (532,389)
Servicing fees........................................... (572,728)
Advisory fees............................................ (126,788)
-----------
$(2,913,775)
===========
</TABLE>
F-37
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents the elimination of $743,673 in fees between the Advisor
and the CNL Restaurant Financial Services Group resulting from
agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group
referred to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,070,127
</TABLE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $31,852 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the
leases had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(19,472)
Reimbursement of administrative costs....................... (34,189)
--------
$(53,661)
========
</TABLE>
(l) Represents the elimination of $34,189 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $23,242 in historical professional services
and administrative expenses (audit and legal fees, office
supplies, etc.) resulting from preparing quarterly and annual
financial and tax reports for one combined entity instead of
individual entities.
(n) Represents the elimination of $19,472 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $8,283 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1999 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January
1, 1998 and that these entities had operated under a REIT
structure as of January 1, 1998.
(p) Represents an increase in depreciation expense of $54,194 as a
result of adjusting the historical basis of the real estate wholly
owned by the Income Fund to fair value as a result of accounting
for the Acquisition of the Income Fund under the purchase
accounting method. The adjustment to the basis of the buildings is
being depreciated using the straight-line method over the
remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $12,142 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
F-38
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(r) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a proposal for a one-for-two reverse
stock split and a proposal to increase the number of authorized
common shares of APF on January 1, 1999.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1998, as if the
Acquisition was consummated as of January 1, 1998.
(a) Represents rental and earned income of $22,951,799 and depreciation
expense of $6,246,947 as if properties that had been operational
when they were acquired by APF from January 1, 1998 through July
31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any properties for the periods
prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<S> <C>
Origination fees from affiliates........................ $ (1,773,406)
Secured equipment lease fees............................ (54,998)
Advisory fees........................................... (305,030)
Reimbursement of administrative costs................... (408,762)
Acquisition fees........................................ (21,794,386)
Underwriting fees....................................... (388,491)
Administrative, executive and guarantee fees............ (1,233,043)
Servicing fees.......................................... (1,570,331)
Development fees........................................ (229,153)
Management fees......................................... (1,851,004)
------------
Total................................................. $(29,608,604)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these
entities on a combined basis, these loan origination fees are
required to be deferred and amortized into revenues over the term
of the loans originated in accordance with generally accepted
accounting principles. Total loan origination fees received by CNL
Financial Services, Inc. during the year ended December 31, 1998 of
$3,107,164 are being deferred for pro forma purposes and are being
amortized over the terms of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received
by CNL Financial Services Inc. from borrowers during the year ended
December 31, 1998, which were deferred for pro forma purposes as
described in 5(II)(c). These deferred loan origination fees are
being amortized and recorded as interest income over the terms of
the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income............................................... $207,144
</TABLE>
F-39
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of i) intercompany expenses paid by APF
to the Advisor, and ii) the capitalization of incremental costs
associated with the acquisition, development and leasing of
properties acquired during the period as if costs relating to
properties developed by APF were subject to capitalization during
the period under development.
<TABLE>
<S> <C>
General and administrative costs......................... $(4,241,719)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees.......................................... $(1,851,004)
Administrative executive and guarantee fees.............. (1,233,043)
Servicing fees........................................... (1,269,357)
Advisory fees............................................ (305,030)
-----------
$(4,658,434)
===========
</TABLE>
(g) Represents the elimination of $2,161,897 in fees between the
Advisor and the CNL Restaurant Financial Services Group resulting
from agreements between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred
to in footnote (4) above:
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,140,254
</TABLE>
(i) Represents the elimination of $6,898,434 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate
structure that exists within APF. APF expects to continue to
qualify as a REIT and does not expect to incur federal income
taxes.
(j) Represents $63,704 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the Income Fund as if the leases
had been acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the
Income Fund:
<TABLE>
<S> <C>
Management fees............................................. $(37,430)
Reimbursement of administrative costs....................... (40,630)
--------
$(78,060)
========
</TABLE>
(l) Represents the elimination of $40,630 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $54,369 in historical professional services
and administrative expenses (audit and legal fees, office supplies,
etc.) resulting from preparing quarterly and annual financial and
tax reports for one combined entity instead of individual entities.
(n) Represents the elimination of $37,430 in management fees by the
Income Fund to the Advisor.
(o) Represents additional state income taxes of $13,260 resulting from
assuming that acquisitions of properties that had been operational
when APF acquired them from January 1, 1998 through July 31, 1999
had been acquired on January 1, 1998 and assuming that the shares
issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as
of January 1, 1998.
F-40
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Represents an increase in depreciation expense of $108,388 as a
result of adjusting the historical basis of the real estate owned
indirectly by the Income Fund through joint venture or tenancy in
common arrangements with affiliates or unrelated third parties, to
fair value as a result by the Income Fund to fair value as a result
of accounting for the Acquisition of the Income Fund under the
purchase accounting method. The adjustment to the basis of the
buildings is being depreciated using the straight-line method over
the remaining useful lives of the properties.
(q) Represents a decrease to equity in earnings from income earned by
joint ventures as a result of an increase in depreciation expense
of $24,283 as a result of adjusting the historical basis of the
real estate owned by the Income Fund, indirectly through joint
venture or tenancy in common arrangements, to fair value as a
result of accounting for the Acquisition of the Income Fund under
the purchase accounting method. The adjustment to the basis of the
buildings owned indirectly by the Income Fund is being depreciated
using the straight-line method over the remaining useful lives of
the properties.
(r) Represents the decrease in depreciation expense of $340,898 as a
result of eliminating acquisition fees (see 4(II)(b)) between APF
and the Advisor which on a historical basis were capitalized as
part of the basis of the building.
(s) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1998 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the pro forma financial statements, it is assumed
that the stockholders approved a one-for-two reverse stock split
proposal and a proposal to increase the number of authorized common
shares of APF on January 1, 1998.
(t) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
6. Adjustments to Pro Forma Statement of Cash Flows
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the quarter ended June 30, 1999, as if the
Acquisition was consummated as of January 1, 1999.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(f) Represents the reversal of historical cash used for property
acquisitions from January 1, 1999 through June 30, 1999 for
properties that had been operational upon acquisition by APF since
it is assumed that these properties had been acquired on January 1,
1998.
(g) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
F-41
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC., AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
Non-Cash Investing Activities:
On January 1, 1999, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Cash Flows for the year ended December 31, 1998, as if
the Acquisition was consummated as of January 1, 1998.
(a) Represents pro forma adjustments to net income.
(b) Represents add back of pro forma depreciation expense to net
income.
(c) Represents add back of pro forma amortization of goodwill expenses
to net income.
(d) Represents deduction of equity in earnings from net income.
(e) Represents amounts borrowed under APF's credit facility from July
1, 1999 through July 31, 1999 to acquire properties that had been
operational upon acquisition by APF since it is assumed that these
properties had been acquired on January 1, 1998.
(f) Represents the use of cash by APF to pay the transaction costs
allocated to the acquisition of the Advisor and Restaurant
Financial Group.
(g) Represents the use of cash i) to pay for the cash consideration
proposed in the offer to acquire the Income Fund and ii) to pay the
transaction costs allocated to the acquisition of the Income Fund.
(h) Represents the elimination of acquisition fees paid to the Advisor
and capitalized on a historical basis as part of the cost of land
and building.
(i) Represents the adjustment for property acquisitions from January 1,
1999 through July 31, 1999 for properties that had been operational
upon acquisition by APF as if these properties had been acquired on
January 1, 1998.
(j) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the
pro forma period presented.
Non-Cash Investing Activities:
On January 1, 1998, APF issued shares of its common stock to acquire
the Advisor, CNL Restaurant Financial Services Group and the Income
Fund, as described in 4(A) and 4(B).
F-42
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund XIV, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XIV, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of sixteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
A-2
<PAGE>
Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
A-3
<PAGE>
Appendix B
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN MERGER is entered into as of the
4th day of June 1999, by and among by and among CNL American Properties Fund,
Inc., a Maryland corporation ("APF"), CNL APF Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), CNL APF GP corp., a Delaware
corporation (the "OP General Partner"), CNL Income Fund XIV, Ltd., a Florida
limited partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr.,
and CNL Realty Corporation, a Florida corporation (together with Messrs. Borne
and Seneff, the "General Partners"). APF, the Operating Partnership, the OP
General Partner, the Fund and the General Partners are referred to collectively
herein as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, pursuant to the terms of the Agreement and Plan of Merger dated
March 11, 1999 by and among the Parties (the "Merger Agreement"), the Fund will
be merged with and into the Operating Partnership, and the Operating
Partnership will be the surviving limited partnership in the Merger, upon the
terms and subject to the conditions of the Merger Agreement; and
WHEREAS, the Parties desire to amend the Merger Agreement in the manner set
forth below.
AGREEMENT:
1. AMENDMENTS TO MERGER AGREEMENT
The Merger Agreement is hereby amended as follows in accordance with the
provisions of Section 14.9 of the Merger Agreement:
1.1 The definition of "Cash/Notes Option" is hereby deleted in its
entirety.
1.2 Clause (B) of Section 4.1(a)(iii)(B) is hereby deleted in its entirety
and restated as follows:
"(B) Notes in accordance with Section 4.4 below."
1.3 Clause (i) of Section 4.2(ii) is hereby deleted in its entirety and
restated as follows:
"(ii) by one APF Common Share for every $10.00 of expenses incurred
by the Fund but paid or assumed by APF on behalf of the Fund (or, if
APF consummates the Reverse Split, for every $20.00 of expenses)."
1.4 Section 4.4 is hereby deleted in its entirety and amended and restated
as follows:
"Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote
against the Merger and affirmatively elect the note option, such
limited partners shall be entitled to receive, in lieu of the Share
Consideration, notes (the "Notes") in the aggregate amount equal to 97%
of the value (based on the Exchange Value as defined in the
Registration Statement) of the Share Consideration such Dissenting
Partners would have otherwise received had such partners not elected to
receive the Notes (the "Note Option"). The Notes will mature on the
fifth anniversary of the Closing Date and will bear interest at a fixed
rate equal to seven percent. The aggregate Share Consideration shall be
reduced on a one-for-basis for all APF Shares otherwise distributable
to Dissenting Partners had such Dissenting Partners not elected the
Note Option."
B-1
<PAGE>
1.5 The reference to "December 31, 1999" in the lead in of Section 10.2 is
hereby deleted and replaced with March 31, 2000.
1.6 The following subsection shall be added to Section 10.2
"(g) The aggregate face amount of the Notes to be issued to Dissenting
Limited Partners shall not have exceeded 15% of the value of the Share
Consideration based on the Exchange Value."
1.7 The reference to "December 31, 1999" in the lead in of Section 10.3 is
hereby deleted and replaced with March 31, 2000.
1.8 The reference to "December 31, 1999" in clause (c) of Section 11.2 is
hereby deleted and replaced with "March 31, 2000."
2. GENERAL
2.1 Except as specifically set forth in this First Amendment, the Merger
Agreement shall remain unmodified and in full force and effect.
2.2 This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will
constitute one and the same instrument.
2.3 The Section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
2.4 This First Amendment shall be governed by and construed in accordance
with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of
Florida or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Florida.
B-2
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as
of the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chairman and Chief Executive
Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP CORP.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XIV, LTD.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-3
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XIV, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-4
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-5
<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,313,041 fully paid and nonassessable APF Common
Shares (2,156,521 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $38,309,732, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,686,959 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<PAGE>
(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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<PAGE>
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,313,041 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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<PAGE>
ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
B-31
<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
B-32
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $431,304 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
B-33
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-34
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-35
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL APF GP Corp.
/s/ Robert A. Bourne
--------------------
By: Robert A. Bourne
Its: President
CNL INCOME FUND XIV, Ltd.
By: CNL Realty Corporation, as
General Partner
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
/s/ James M. Seneff, Jr.
------------------------
By: James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
--------------------
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
------------------------
James M. Seneff, Jr., as General
Partner
B-36
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XIV, Ltd.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620,109, Florida Statutes, this
Florida limited partnership, whose certificate was filed with the Florida
Department of State on September 25, 1992, adopts the following certificate of
amendment to its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
_____________________________________
James M. Seneff, Jr.
_____________________________________
Robert A. Bourne
CNL Realty Corporation
By:
___________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XIV, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XIV, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
D-1
<PAGE>
This opinion letter is limited to the matters expressly set forth in this
letter, and no other statement or opinions should be inferred beyond the
matters expressly stated.
Except as agreed by us in writing, our opinion is solely for the benefit of
the addressees shown on the first page hereof and the limited partners of the
Partnership and may be relied upon by such parties solely for the purposes for
which it is being furnished. Without our prior written consent, this opinion
letter may not be used, circulated, quoted or otherwise referred to for any
purpose except as stated herein.
Very truly yours,
Baker & Hostetler LLP
D-2
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND XV, LTD.
This supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XV, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this supplement are qualified by the more expanded treatment
of these matters appearing in the consent solicitation. Unless otherwise
indicated, the terms "we," "us," "our," and "ourselves" when used herein refer
to James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, the
general partners of your Income Fund. When we refer to APF, we are referring to
CNL American Properties Fund, Inc. and its subsidiaries, including CNL APF
Partners, L.P., a wholly owned limited partnership through which APF conducts
its business and which we call the Operating Partnership.
APF Share numbers in this consent solicitation reflect a one-for-two reverse
stock split approved by the APF stockholders on May 27, 1999 and effective on
June 3, 1999.
OVERVIEW
Pursuant to the consent solicitation and this supplement, you are being
asked to approve the Acquisition of your Income Fund by APF. Your Income Fund
is one of 16 limited partnerships, which we refer to collectively as the Income
Funds, that APF is seeking to acquire. Supplements have also been prepared for
each of the other Income Funds, copies of which may be obtained without charge
by each Limited Partner or his, her or its representative upon written request
to D.F. King & Co., 77 Water Street, New York, New York 10005.
There are material risks and potential disadvantages associated with the
Acquisition that you should consider in determining whether to vote "For" or
"Against" the Acquisition. These material risks include:
. We are uncertain about the value at which APF Shares will trade
following listing.
. We have material conflicts in light of our being both general
partners of the Income Funds and members of APF's Board of
Directors.
. As stockholders of APF, Messrs. Seneff's and Bourne's interests in
the completion of the Acquisition may conflict with yours as a
Limited Partner of the Income Fund and with their own as general
partners of your Income Fund.
. Unlike your Income Fund, APF will not be prohibited from incurring
indebtedness.
. The Acquisition is a taxable transaction.
. The Acquisition involves a fundamental change in your investment.
What is APF?
APF is a full-service real estate investment trust, formed in 1994, whose
primary business is the ownership of restaurant properties leased to operators
of national and regional restaurant chains on a triple-net lease basis. Unlike
your Income Fund, which is restricted, due to capital and other limitations, to
owning and leasing a static number of restaurant properties on a triple-net
basis, APF has the ability to offer a complete range of restaurant property
services to operators of national and regional restaurant chains, from triple-
net leasing and mortgage
S-1
<PAGE>
financing to site selection, construction management and build-to-suit
development. If APF acquires all of the Income Funds in the Acquisition, APF
expects to have total assets of approximately $1.5 billion at the time of the
consummation of the Acquisition and will be one of the largest triple-net lease
REITs in the United States.
How many APF Shares will I receive if my Income Fund is acquired by APF?
Your Income Fund will receive 1,866,951 APF Shares. You will receive your
proportion of such shares in accordance with the terms of your Income Fund's
partnership agreement. APF has assigned a value, which we refer to as the
exchange value, of $20.00 per share for the APF Shares. Because the APF Shares
are not listed on the NYSE at this time, the value at which an APF Share may
trade is not certain because there is no established trading market. Upon the
consummation of the Acquisition, the APF Shares will be listed for trading on
the NYSE. We do not know the value at which an APF Share will trade on the NYSE
upon listing. It is possible that the APF Shares will trade at prices
substantially below the exchange value. APF has, however, recently sold $750
million of APF Shares through three public offerings. In each offering, the
offering price per APF Share, after giving effect to the one-for-two stock
split, equaled the exchange value. The offering price was determined by APF
based upon the estimated costs of investing in restaurant properties and making
mortgage loans, the fees to be paid to CNL Fund Advisors, Inc. and its
affiliates, as well as fees to third parties and the expenses of the offerings.
At June 30, 1999, APF had invested all of the net offering proceeds to acquire
restaurant properties and to make mortgage loans, to pay fees and other
expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding units. Such an approval by your Income
Fund's Limited Partners will be binding on you even if you vote "Against" the
Acquisition.
Did you receive a fairness opinion in connection with APF's Acquisition of my
Income Fund?
Yes. Legg Mason Wood Walker, Incorporated, an independent financial advisor
and investment bank, headquartered in Baltimore, Maryland, rendered an opinion
that the Acquisition is fair, from a financial point of view, with respect to
(a) the APF Shares offered with respect to your Income Fund, (b) the aggregate
APF Shares offered with respect to the Income Funds, and (c) the method of
allocating the APF Shares among the Income Funds.
Do you, as the general partners of my Income Fund, recommend that I vote "For"
the proposed Acquisition?
Yes. We unanimously recommend that you vote "For" the proposed Acquisition.
We believe that the Acquisition is the best means to maximize the value of your
investment in your Income Fund, as opposed to liquidating your Income Fund's
portfolio or continuing unchanged the investment in your Income Fund.
How do I vote?
Just indicate on the enclosed consent form, which is printed on the blue
paper, how you want to vote, and sign and mail it in the enclosed postage-paid
return envelope as soon as possible, so that at the special meeting of Limited
Partners, your units may be voted "For" or "Against" APF's Acquisition of your
Income Fund. If you sign and send in your consent form and do not indicate how
you want to vote, your consent form will be counted as a vote "For" the
Acquisition. If you do not vote or you abstain from voting, it will count as a
vote "Against" the Acquisition.
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In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to the following limitations. If you vote "Against" the
Acquisition, but your Income Fund is nevertheless acquired by APF, you may
elect to receive consideration in the form of 7.0% callable notes due ,
2005 in an amount equal to 97% of your portion of the APF Share consideration,
based on the exchange value, that would otherwise have been paid to your Income
Fund. Please note that you may only receive the notes if you vote "Against" the
Acquisition, and you elect to receive the notes on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you vote "For" the Acquisition, or you vote "Against" the Acquisition and
do not affirmatively select the notes on your consent form. In addition, if
Limited Partners in your Income Fund elect to receive notes in an amount
greater than 15% of the estimated value of APF Shares, based on the exchange
value, to be paid to your Income Fund, then APF has the right to decline to
acquire your Income Fund. The notes will not be listed on any exchange or
automated quotation system, and a market for the notes will not likely develop.
What are the tax consequences of the Acquisition to me?
The Acquisition is a taxable transaction. While a significant percentage of
the Limited Partners in your Income Fund are tax-deferred or tax-exempt
entities, such as pension plans, 401(k) plans or IRAs, if you are an individual
subject to income taxation or a tax-paying entity and you receive APF Shares,
your tax obligation will generally be based on the difference between the value
of the APF Shares you receive and the tax basis of your units. If you elect to
receive notes, your tax will be based upon your allocable share of the gain
which will be recognized by your Income Fund; your Income Fund's gain will
generally equal the excess, if any, of the value of the APF Shares received by
your Income Fund over the tax basis of your Income Fund's net assets. Depending
on the type of real property gain, some of the gain may be subject to a 25%
rate of tax.
We urge you to consult with your tax advisor to evaluate the taxes that will be
incurred by you as a result of your participation in the Acquisition.
We have estimated, based on the exchange value, that your loss per average
$10,000 investment in your Income Fund will be $(70).
RISK FACTORS
As a result of APF's Acquisition of your Income Fund, you will assume the
risks associated with the assets of APF and the other Income Funds acquired by
APF. Although the majority of APF's assets and the assets of the other Income
Funds acquired by APF are substantially similar to those of your Income Fund,
the restaurant properties owned by APF and the other Income Funds that are
acquired by APF may be differently constructed, located in a different
geographic area or of a different restaurant chain than the restaurant
properties owned by your Income Fund. Because the market for real estate may
vary from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those to which you
are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Acquisition that are
applicable to your Income Fund.
Investment Risks
The exchange value was determined by APF, and the trading price of the APF
Shares may decrease substantially below the exchange value upon listing.
Your Income Fund will be receiving 1,866,951 APF Shares if your Income Fund
approves the Acquisition. There has been no prior market for the APF Shares,
and it is possible that the APF Shares will trade at prices
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substantially below the exchange value or the historical per share book value
of the assets of APF. The APF Shares have been approved for listing on the
NYSE, subject to official notice of issuance. Prior to listing, the existing
APF stockholders have not had an active trading market in which they could sell
their APF Shares. Additionally, any Limited Partners of the Funds who become
APF stockholders as a result of the Acquisition, will have transformed their
investment in non-tradable units into an investment in freely tradable APF
Shares. Consequently, some of these stockholders may choose to sell their APF
Shares upon listing at a time when demand for APF Shares may be relatively low.
The market price of the APF Shares may be volatile after the Acquisition, and
the APF Shares could trade at prices substantially less than the exchange value
as a result of increased selling activity following the issuance of the APF
Shares, the interest level of investors in purchasing the APF Shares after the
Acquisition and the amount of distributions to be paid by APF.
Your distributions may decrease.
In each of the years ended December 31, 1996, 1997 and 1998, your Income
Fund distributed $820, $850 and $800, respectively, to you per $10,000
investment. While historically, APF has made distributions equal to 7.625% per
APF Share, based on the exchange value, we cannot be sure that APF will be able
to maintain this level of distributions in the future. In the event that APF is
unable to maintain this level of distributions in the future, your
distributions per $10,000 investment may decrease substantially after the
Acquisition.
The general partners will receive benefits from the Acquisition and will have
conflicts of interest in the Acquisition.
The general partners have three material conflicts of interest in the
Acquisition of your Income Fund. First, we, James M. Seneff, Jr. and Robert A.
Bourne, who also sit on the Board of Directors of APF, and CNL Realty Corp., an
entity whose sole stockholders are Messrs. Seneff and Bourne, are the three
general partners of the Income Funds. As Board members of APF, Messrs. Seneff
and Bourne have a different interest in the completion of the Acquisition which
may conflict with your interest as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Second, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund. Third, while
we will not receive any APF Shares as a result of APF's Acquisition of your
Income Fund, we, may be required to pay all or a substantial portion of the
Acquisition costs allocated to your Income Fund.
If an independent representative had been retained on behalf of you and the
other Limited Partners in structuring and negotiating the Acquisition, the
terms of the Acquisition may have been more favorable to you and the other
Limited Partners.
We, as the general partners of your Income Fund, have not retained an
independent representative to act on your behalf or on behalf of the other
Limited Partners, in structuring and negotiating the terms and conditions,
including the consideration to be received, of the Acquisition. If an
independent representative had been retained for the Income Funds, either
collectively or on an individual basis, the fees and expenses of the
Acquisition would have been higher. No group of Limited Partners was empowered
to negotiate the terms and conditions of the Acquisition or to determine what
procedures should be used to protect the rights and interests of the Limited
Partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the Limited Partners. We and
APF have been the parties responsible for structuring all the terms and
conditions of the Acquisition. We engaged legal counsel to assist with the
preparation of the documentation for the Acquisition, including the consent
solicitation, and such legal counsel did not serve, or purport to serve, as
legal counsel for the Income Funds or Limited Partners. If an independent
representative had been retained for the Income Funds, the terms of the
Acquisition may have been different and possibly more favorable to the Limited
Partners. In particular, had separate representation for each of the Income
Funds been arranged by us, issues unique to the value of each of the specific
Income Funds might have been highlighted or received greater attention,
resulting in adjustments to the value assigned to the assets of such Income
Funds and increasing the number of APF Shares or notes that would be allocable
to such Income Fund if acquired in the Acquisition.
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The Acquisition will result in a fundamental change in the nature of your
investment.
The Acquisition of your Income Fund involves a fundamental change in the
nature of your investment. Your investment will change from constituting an
interest in your Income Fund, which has a fixed portfolio of restaurant
properties in which you participate in the profits from the operation of its
restaurant properties, to holding common stock of APF, an operating company,
that will own an interest in 1,243 restaurant properties, assuming only your
Income Fund and the CNL Restaurant Businesses were acquired as of June 30,
1999. The risks inherent in investing in an operating company such as APF
include that APF may invest in new restaurant properties that are not as
profitable as APF anticipated, it may incur substantial indebtedness to make
future acquisitions of restaurant properties that it may be unable to repay and
it may make mortgage loans to prospective operators of national and regional
restaurant chains that may not have the ability to repay.
Also, any investment in APF may not outperform your investment in your
Income Fund. Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of your Income Fund's assets, to an investment in an entity in
which you may realize the value of your investment only through the sale of
your APF Shares, not from liquidation proceeds from restaurant properties.
Continuation of your Income Fund would, on the other hand, permit you
eventually to receive liquidation proceeds, if any, from the sale of the Income
Fund's restaurant properties, and your share of these sale proceeds could be
higher than the amount realized from the sale of your APF Shares or from the
combination of cash paid to and payments on any notes if you elect to receive
notes.
You may not receive the potential appreciation of your Income Fund's restaurant
property portfolio if your Income Fund is acquired.
Your Income Fund's partnership agreement provides that unless earlier
terminated pursuant to its terms, your Income Fund will be terminated,
dissolved, and its assets liquidated on December 31, 2031. At the time of your
Income Fund's formation, we contemplated that its investment program would
terminate and its investments would be liquidated some time between 2001 and
2006. If your Income Fund is acquired by APF in the Acquisition, your Income
Fund will be liquidated prior to the originally contemplated timeframe. Due to
the lack of certainty with respect to the potential appreciation of APF Shares,
an investment in APF Shares may not outperform the potential appreciation of
your investment in your Income Fund if your Income Fund had remained in
existence at least until the contemplated liquidation date.
Real Estate/Business Risks
If APF's borrowers default on mortgage loans, APF's income could be adversely
affected.
APF will be subject to risks inherent in the business of lending, such as
the risk of default by or bankruptcy of the borrower. Upon a default by a
borrower, APF may not be able to sell the property securing a mortgage loan at
a price that would enable it to recover the balance of a defaulted mortgage
loan. In addition, the mortgage loans could be subject to regulation by
federal, state and local authorities which could interfere with APF's
administration of the mortgage loans and any collections upon a borrower's
default. APF will also be subject to interest rate risk that is associated with
the business of making mortgage loans. Since APF's primary source of financing
its mortgage loans will be through variable rate loans, any increase in
interest rates will also increase APF's borrowing costs. In addition, any
interest rate increases after a loan's origination could also adversely affect
the value of the loans when securitized.
APF may not be able to access the securitization markets.
The CNL Restaurant Financial Services Group previously "securitized" one
portfolio of mortgage loans by contributing them to a trust that subsequently
issued trust certificates representing beneficial ownership interests in the
pool of mortgage loans. The CNL Restaurant Financial Services Group ultimately
received the net proceeds paid to the trust from the sale of the trust
certificates. APF now operates these lending and securitization operations. We
cannot be sure that APF will be able to integrate successfully the lending and
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securitization operations into its business. In addition, APF's ability to
access the securitization markets for the mortgage loans on favorable terms
could be adversely affected by a variety of factors, including adverse market
conditions and adverse performance of its loan portfolio or servicing
responsibilities. If APF is unable to access the securitization market, it
would have to retain as assets those mortgage loans it would otherwise
securitize, thereby remaining exposed to the related credit and repayment risks
on such mortgage loans. Under such circumstances APF would also have to seek a
different source for funding its operations than securitizations.
APF's gains on any completed securitizations may be overstated if prepayments
or defaults are greater than anticipated.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default, and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default, and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
APF's increased leverage increases APF's risk of default which could, in turn,
adversely affect APF's results of operations and stockholders distributions.
In addition to the issuance of APF Shares or the sale of units of the
Operating Partnership, APF has funded and intends to continue to Fund
acquisitions and the development of new restaurant properties through short-
term borrowings and by financing or refinancing its indebtedness on such
properties on a longer-term basis when market conditions are appropriate. As of
June 30, 1999, and assuming the acquisition of the CNL Restaurant Businesses,
APF's debt service ratio was 3.31x and its ratio of debt-to-total assets was
35.91%. If only your Income Fund was acquired as of that date, APF's debt
service ratio would have been 3.43x and its ratio of debt-to-total assets would
have been 34.88%. As a general policy, APF's Board of Directors has allowed APF
to borrow funds only when the ratio of debt-to-total assets of APF is 45% or
less. APF's organizational documents, however, do not contain any limitation on
the amount or percentage of indebtedness that APF may incur in the future.
Accordingly, APF's Board of Directors could modify the current policy at any
time after the Acquisition. If this policy were changed, APF could become more
highly leveraged, resulting in an increase in the amounts of debt repayment.
This, in turn, could increase APF's risk of default on its obligations and
adversely affect APF's results of operations and its ability to make
distributions to its stockholders.
APF's ability to incur additional secured debt may dilute the value of the
notes held by former Limited Partners of the Income Funds.
APF may increase its level of secured debt. Payments on any notes issued by
APF in connection with the Acquisition would be subordinated to any secured
debt incurred by APF. Also, any secured debt would have a priority claim of
repayment over the notes in the event that APF defaulted under its obligations.
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APF's plan to grow through the acquisition and development of new restaurant
properties could be adversely affected by trends in the real estate and
financing businesses.
APF's growth strategy is substantially based on the acquisition and
development of additional restaurant properties. We do not know that APF will
do so successfully because APF may have difficulty finding new restaurant
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional restaurant properties is
subject to many risks. For instance, if an additional restaurant property is in
a market in which APF has not invested before, APF will have relatively little
experience in and may be unfamiliar with that new market.
The inability of a tenant or borrower to make lease and mortgage payments could
have an adverse effect on APF.
APF's business depends on the tenants' and borrowers' ability to pay their
obligations to APF with respect to APF's real estate leases and mortgage loans.
APF typically does not require that a third party guarantee the obligations of
the tenant or the borrower. The ability of the tenants or borrowers to pay
their obligations to APF in a timely manner will depend on a number of factors,
including the successful operation of their businesses. Various factors, many
of which are beyond the control of a restaurant chain, may adversely affect the
economic viability of the restaurant chain, including but not limited to:
. national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by APF's
customers;
. changes or weaknesses in specific industry segments;
. perceptions by prospective customers of the safety, convenience,
services and attractiveness of the restaurant chain;
. changes in demographics, consumer tastes and traffic patterns;
. the ability to obtain and retain capable management;
. the inability of a particular restaurant chain's computer system, or
that of its franchisor or vendors, to adequately address year 2000
issues;
. increases in operating expenses; and
. increases in minimum wages, taxes or mandatory employee benefits.
APF has tenants of two significant restaurant chains that have filed for
bankruptcy protection.
The fact that APF has tenants of two significant restaurant chains, Boston
Market and Long John Silver's, that have filed for bankruptcy protection may
adversely affect APF's total rental, earned and interest income. Because all of
APF's properties are leased on a triple-net basis, if a tenant has defaulted on
its lease obligations or has declared bankruptcy, it would reduce APF's rental,
earned and interest income until APF could lease those affected properties to a
new tenant or tenants. As of June 30, 1999, your Income Fund had no tenants of
Boston Market restaurant properties and seven Long John Silver's restaurant
properties of which three Long John Silver's restaurant properties have ceased
to pay lease payments to your Income Fund. The aggregate lost rental, interest
and earned income of the leases of these properties for the six months ended
June 30, 1999 was $152,736, which constitutes 8.58% of total rental, interest
and earned income, including lost rental, interest and earned income, for such
period.
Assuming that your Income Fund is acquired by APF, you, as an APF
stockholder or noteholder, may be subject to the adverse consequences
associated with having significant tenants under bankruptcy protection. As of
June 30, 1999, and assuming that all the Income Funds are acquired by APF, APF
would have had 24 restaurant properties not generating rental income. The
aggregate lost rental, interest and earned income of the
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leases of these properties, whether due to bankruptcy or otherwise, for the six
months ended June 30, 1999 would have been equal to $1,175,483, which
constitutes 1.33% of total rental, interest and earned income, including lost
rental, interest and earned income, for such period.
Tax Risks
APF's failure to qualify as a REIT for tax purposes would result in APF's
taxation as a corporation and the reduction of funding available for
stockholder distribution.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to you, as an APF stockholder, would be reduced substantially
for each of the years involved.
If APF cannot meet its REIT distribution requirements, it may have to borrow
funds or liquidate assets to maintain its REIT status.
Subject to adjustments that are unique to REITs, a REIT generally must
distribute 95% of its taxable income. In the event that APF does not have
sufficient cash, this distribution requirement may limit APF's ability to
acquire additional restaurant properties and to make mortgage loans. Also, for
the purposes of determining taxable income, APF may be required to include
interest payments, rent and other items it has not yet received and exclude
payments attributable to expenses that are deductible in a different taxable
year. As a result, APF could have taxable income in excess of cash available
for distribution. If this occurred, APF would have to borrow funds or liquidate
some of its assets in order to maintain its status as a REIT.
Changes in the tax law could adversely affect APF's REIT status.
APF's treatment as a REIT for federal income tax purposes is based on the
tax laws that are currently in effect. We are unable to predict any future
changes in the tax laws that would adversely affect APF's status as a REIT. In
the event that there is a change in the tax laws that prevents APF from
qualifying as a REIT or that requires REITs generally to pay corporate level
federal income taxes, APF may not be able to make the same level of
distributions to its stockholders. In addition, such change may limit APF's
ability to invest in additional restaurant properties and to make additional
mortgage loans.
CONSIDERATION PAID TO THE INCOME FUND
The proposed number of APF Shares to be paid to your Income Fund was
determined by APF in accordance with its own valuation methodologies regarding
each Income Fund. We, as the general partners of each Income Fund, determined
the fairness of the value of the APF Shares to be paid to your Income Fund
based in part on the appraisal of the restaurant properties of your Income Fund
by Valuation Associates. In addition, we engaged Legg Mason to provide us with
an opinion that the APF Share consideration to be received by each Income Fund,
individually, is fair from a financial point of view to each Income Fund.
The following table sets forth the consideration, based on the exchange
value, to be paid to your Income Fund in the Acquisition. The APF Shares
payable to your Income Fund will not change if APF acquires fewer than all of
the Income Funds in the Acquisition. This data assumes that none of the Limited
Partners of your Income Fund have elected to receive the notes. You should note
that the APF shares may trade at prices substantially below the exchange value
upon listing on the NYSE.
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<TABLE>
<CAPTION>
Estimated Value
Original Limited Original Limited Estimated of APF Shares
Partner Partner Investments Value of per Average
Investments less less Distributions of Number of APF Estimated APF Shares $10,000
Distributions of Net Sales Proceeds per Shares Value of APF Estimated after Original
Net $10,000 Offered to Shares Payable Acquisition Acquisition Limited Partner
Sales Proceeds(1) Original Investment(1) Income Fund to Income Fund Expenses Expenses Investment
- ----------------- ---------------------- ------------- -------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 1,866,951 $37,339,020 $412,000 $36,927,020 $9,232
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
If your Income Fund approves the Acquisition and you have voted "Against"
the Acquisition, but you do not wish to own APF Shares, you can elect to
receive your portion of the consideration in 7.0% callable notes, due , 2005.
The payment received by you and other Limited Partners who elect to receive
notes will be equal to 97% of the value of your portion of the APF Share
consideration, based on the exchange value, that would otherwise have been paid
to your Income Fund. The notes will bear interest at 7.0% and will mature on
, 2005. APF may redeem the notes at any time prior to their maturity at a
price equal to the sum of the outstanding principal balance plus accrued
interest.
EXPENSES OF THE ACQUISITION
If your Income Fund approves the Acquisition, the portion of the Acquisition
expenses attributable to your Income Fund will be paid by your Income Fund, as
detailed below. The number of APF Shares paid to your Income Fund would reflect
a reduction for your Income Fund's expenses of the Acquisition. Acquisition
expenses are expected to range from 1.1% to 1.4% of the estimated value of the
APF Shares payable to each Income Fund.
If the Acquisition of your Income Fund is not approved, we will bear a
percentage of all Acquisition expenses equal to the total number of abstentions
and "Against" votes cast by the Limited Partners of your Income Fund, divided
by the total number of abstentions and votes cast by you and the other Limited
Partners of your Income Fund. In such event, your Income Fund will bear the
remaining Acquisition expenses.
The following table sets forth the estimated Acquisition expenses of
acquiring your Income Fund:
Pre-closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1).................................................... $ 30,247
Appraisals and Valuation(2)...................................... 8,080
Fairness Opinions(3)............................................. 30,000
Solicitation Fees(4)............................................. 14,819
Printing and Mailing(5).......................................... 83,113
Accounting and Other Fees(6)..................................... 63,964
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Subtotal....................................................... 230,223
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Closing Transaction Costs
Title, Transfer Tax and Recording Fees(7)........................ 89,690
Legal Closing Fees(8)............................................ 44,302
Partnership Liquidation Costs(9)................................. 47,785
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Subtotal....................................................... 181,777
--------
Total............................................................ $412,000
========
</TABLE>
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(1) Aggregate legal fees to be incurred by all of the Income Funds in
connection with the Acquisition is estimated to be $423,998. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
the value of the APF Share consideration payable to your Income Fund, based
on the exchange value, to the total value of the APF Share consideration
payable to all of the Income Funds, based on the exchange value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Income
Funds in connection with the Acquisition were $105,420. Your Income Fund's
pro-rata portion of these fees was determined based on the number of
restaurant properties in your Income Fund.
(3) Each Income Fund received a fairness opinion from Legg Mason and incurred a
fee of $30,000.
(4) Aggregate solicitation fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $250,000. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(5) Aggregate printing and mailing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $1,399,998. Your Income
Fund's pro-rata portion of these fees was determined based on the number of
Limited Partners in your Income Fund.
(6) Aggregate accounting and other fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $841,245. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Income Funds in connection with the Acquisition is estimated to be
$1,313,596. Your Income Fund's pro-rata portion of these fees was
determined based on the ratio of the value of the APF Share consideration
payable to your Income Fund, based on the exchange value, to the total
value of the APF Share consideration payable to all of the Income Funds,
based on the exchange value.
(8) Aggregate legal closing fees to be incurred by the Income Funds in
connection with the Acquisition is estimated to be $648,842. Your Income
Fund's pro-rata portion of these fees was determined based on the ratio of
your Income Fund's total assets as of June 30, 1999 to the total assets of
all of the Income Funds as of June 30, 1999.
(9) Aggregate partnership liquidation costs to be incurred by all of the Income
Funds in connection with the Acquisition is estimated to be $698,901. Your
Income Fund's pro-rata portion of these costs was determined based on the
ratio of the value of the APF Share consideration payable to your Income
Fund, based on the exchange value, to the total value of the APF Share
consideration payable to all of the Income Funds, based on the exchange
value.
The solicitation fees related to the Acquisition will be allocated among the
Income Funds, us and APF depending upon whether the Acquisition is consummated.
For purposes of the Acquisition, the term "Solicitation Fees" includes costs
such as telephone calls, broker-dealer facts sheets, legal and other fees
related to the solicitation of comments, as well as reimbursement of costs
incurred by brokers and banks in forwarding the consent solicitation to you and
the other Limited Partners.
If APF acquires all of the Income Funds, all of the solicitation fees will
be payable by APF. If APF acquires less than all of the Income Funds, all of
the solicitation fees will be payable by APF or the Income Funds that are
acquired in proportion to their respective exchange values. If none of the
Income Funds are acquired by APF, all of the solicitation fees will be payable
by us.
REQUIRED VOTE
Limited Partner Approval Required by the Partnership Agreement
Article 12 of your Income Fund's partnership agreement provides that the
vote of Limited Partners representing greater than 50% of the outstanding units
is required to approve a "Liquidating Sale," which is defined by the
partnership agreement to include a transaction or series of transactions
resulting in the transfer of 80% or more in value of the Income Fund's
restaurant properties acquired within two years of the initial date of the
prospectus (February 23, 1994). Because the Acquisition of your Income Fund is
a "Liquidating Sale" within the meaning of the partnership agreement, it may
not be consummated without the approval of Limited Partners representing
greater than 50% of the outstanding units.
S-10
<PAGE>
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
.
Amendment to Roll-Up Prohibition. Article 21 of the partnership
agreement currently provides that your Income Fund may not participate
in any transaction involving (1) the acquisition, merger, conversion or
consolidation, either directly or indirectly, of your Income Fund, and
(2) the issuance of securities of any other partnership, real estate
investment trust, corporation, trust or other entity that would be
created or would survive after the successful completion of such
transaction.
If the Limited Partners holding greater than 50% of the outstanding units
approve this amendment to your Income Fund's partnership agreement, Article 21
will be deleted in its entirety.
Partnership Agreement Amendment Procedures
Pursuant to Article 13 of your Income Fund's partnership agreement, we may
propose amendments to the partnership agreement. Article 13 of the partnership
agreement requires that we furnish you with a verbatim statement of the
proposed amendment, which is attached to this supplement as Appendix C, and to
include an opinion of our counsel regarding whether the proposed amendment
would change your Income Fund to a general partnership, change our liability or
your liability, or allowing you to take part in the control or management of
your Income Fund. The form of opinion of Baker & Hostetler LLP is attached to
this supplement as Appendix D.
Consequence of Failure to Approve the Acquisition or the Amendments
If the Limited Partners of your Income Fund representing greater than 50% of
the outstanding units do not vote "For" the Acquisition and the proposed
amendment to the partnership agreement, the Acquisition may not be consummated
under the terms of the partnership agreement. In such event, we plan to
continue to operate your Income Fund as a going concern and to eventually
dispose of your Income Fund's restaurant properties approximately 7 to 12 years
after they were acquired or as soon thereafter if, in our opinion, market
conditions permit, as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We, as general partners of the Income Funds, have scheduled a special
meeting of the Limited Partners of your Income Fund to discuss the solicitation
materials, which include the consent solicitation, this supplement and the
other materials distributed to you, and the terms of APF's Acquisition of your
Income Fund, prior to voting on the Acquisition. The special meeting will be
held at 10:00 a.m., Eastern time, on , 1999, at
. We and members of APF's management
intend to solicit actively your support for the Acquisition and would like to
use the special meeting to answer questions about the Acquisition and the
solicitation materials and to explain in person our reasons for recommending
that you vote "For" the Acquisition.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the Limited Partner consent constitute the
solicitation materials being distributed to you and the other Limited Partners
to obtain your votes "For" or "Against" the Acquisition of your Income Fund by
APF. Please note that we refer, collectively, to the power of attorney and
Limited Partner consent as the consent form.
S-11
<PAGE>
In order for APF to acquire your Income Fund, the Limited Partners holding
greater than 50% of the outstanding units of your Income Fund must approve the
Acquisition. Your Income Fund will be acquired by a merger with the Operating
Partnership, in the manner described in the consent solicitation. A copy of the
Agreement and Plan of Merger dated March 11, 1999, as amended on June 4, 1999
by and between APF and your Income Fund is attached hereto as Appendix B. We
encourage you to read it.
If you are not planning to attend the special meeting of the Limited
Partners of your Income Fund and voting in person, you should complete and
return the consent form before the expiration of the solicitation period. The
solicitation period is the time period during which you may vote "For" or
"Against" the Acquisition of your Income Fund. The solicitation period will
commence upon delivery of the solicitation materials to you on or about
, 1999 and will continue until the later of (a) , 1999 a date not less
than 60 calendar days from the initial delivery of the solicitation materials,
or (b) such later date as we may select and as to which we give you notice. At
our discretion, we may elect to extend the solicitation period. Under no
circumstances will the solicitation period be extended beyond March 31, 2000.
Any consent form received by Corporate Election Services prior to 5:00 p.m.,
Eastern time, on the last day of the solicitation period will be effective
provided that such consent form has been properly completed and signed. If you
fail to return a signed consent form by the end of the solicitation period,
your units will be counted as voting "Against" the Acquisition of your Income
Fund and you will receive APF Shares if your Income Fund is acquired.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and related matters. The exact matters which a
vote in favor of the Acquisition will be deemed to approve are described above
under "Required Vote." If you have interests in more than one Income Fund, you
will receive multiple consent forms which will provide for separate votes for
each Income Fund in which you own an interest. If you return a signed consent
form but fail to indicate whether you are voting "For" or "Against" any matter,
you will be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. Your partnership agreement also provides that we are to be reimbursed for
our expenses for services performed for your Income Fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
APF operates as an internally-advised REIT. If your Income Fund is acquired,
it will share in the overall cost of managing the consolidated portfolio of
restaurant properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of your Income Fund will receive distributions in
proportion with your ownership of APF Shares. This cost participation and
dividend payment are in lieu of the payments to us discussed above.
S-12
<PAGE>
During the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1999, the aggregate amounts accrued or actually paid by your
Income Fund to us are shown below under "Historical Distributions Paid to the
General Partners and Affiliates" and the estimated amounts of compensation that
would have been paid had the Acquisition been in effect for the periods
presented, are shown below under "Pro Forma Distributions to Be Paid to the
General Partners following the Acquisition":
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
-------------------------- June 30,
1996 1997 1998 1999
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Historical Distributions Paid to
the General Partners and
Affiliates:
General Partner Distributions... -- -- -- --
Accounting and Administrative
Services....................... $ 87,265 $ 78,051 $ 92,573 $47,602
Broker/Dealer Commissions
Property Management Fees........ 35,126 35,321 33,990 16,144
Due Diligence and Marketing
Support Fees................... -- -- -- --
Acquisition Fees................ -- -- -- --
Asset Management Fees........... -- -- -- --
Real Estate Disposition
Fees(1)........................ -- -- -- --
-------- -------- -------- -------
Total historical.............. $122,391 $113,372 $126,563 $63,746
Pro Forma Distributions to Be Paid
to the General Partners following
the Acquisition:
Cash Distributions on APF
Shares(2)...................... -- -- -- --
Salary Compensation............. -- -- -- --
-------- -------- -------- -------
Total pro forma............... -- -- -- --
======== ======== ======== =======
</TABLE>
- --------
(1) Payment of real estate disposition fees is subordinated to minimum returns
and the return of original capital to the Limited Partners. To date, no
such fees have been paid since the required minimum returns have not been
made to the Limited Partners.
(2) Represents APF Shares received in the Acquisition.
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR INCOME FUND
The information below should be read in conjunction with the information
provided in this supplement under the caption "Financial Statements."
The following table sets forth the distributions paid to the Limited
Partners of your Income Fund per $10,000 original investment for the periods
indicated below:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1999
------------------------ --------------------
1994 1995 1996 1997 1998 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $406 $725 $820 $850 $654 $297 $239
Distributions from Return of
Capital(1)..................... 3 -- -- -- 146 103 113
---- ---- ---- ---- ---- ---- ----
Total......................... $409 $725 $820 $850 $800 $400 $352
==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from non-cash items. This
amount is not required to be presented as a return of capital except for
purposes of this table, and the Income Fund has not treated this amount as
a return of capital for any other purpose.
Cash distributions for the years ended December 31, 1997 include $250,000
earned in 1997, but declared payable in the first quarter of 1998.
S-13
<PAGE>
The pro forma distributions for APF exclude the anticipated increase in
revenues that is expected as a result of APF's acquisitions of the CNL
Restaurant Businesses on September 1, 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the six months ended June
30, 1999 is not necessarily indicative of the distributions you will receive as
a stockholder of APF after the Acquisition. To review the pro forma financial
information in greater detail with respect to APF after giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
FAIRNESS
General
We believe the Acquisition to be fair to, and in the best interests of your
Income Fund. After careful evaluation, we have concluded that the Acquisition
is the best way to maximize the value of your investment. We recommend that you
and the other Limited Partners approve the Acquisition and receive APF Shares.
Based upon our analysis of the Acquisition, we believe that:
.the terms of the Acquisition are fair to you and the other Limited
Partners; and
. after comparing the potential benefits and detriments of the
Acquisition with those of several alternatives, the Acquisition is
more economically attractive to you and the other Limited Partners
than such alternatives.
Our beliefs are based upon our analysis of the terms of the Acquisition, an
assessment of its potential economic impact upon you and the other Limited
Partners, a consideration of the combinations that may result from the various
options available to you and the other Limited Partners, a comparison of the
potential benefits and detriments of the Acquisition and the alternatives to
the Acquisition and a review of the financial condition and performance of APF
and your Income Fund and the terms of critical agreements, such as your Income
Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of the outstanding units of your Income Fund and is
subject to the closing conditions. Those closing conditions are that the APF
Shares are listed on the NYSE, that the APF stockholders have approved the
increase in the number of APF Shares authorized to be issued and that Merrill
Lynch has issued a new fairness opinion if fewer than all of the Income Funds
are acquired. Second, if your Income Fund is acquired, all Limited Partners of
your Income Fund who vote "Against" the Acquisition will be given the option of
receiving APF Shares or notes.
Although we believe the terms of the Acquisition are fair to you and the
other Limited Partners, we have conflicts of interest with respect to the
Acquisition. These conflicts include, among others:
. that we will receive APF Shares, assuming APF acquires all of the Income
Funds, upon completion of the Acquisition;
. that Messrs. Seneff and Bourne are stockholders of APF and, as such,
their interests in the completion of the Acquisition may conflict with
yours as a Limited Partner of the Income Fund and with their own as
general partners of your Income Fund; and
. that we will be relieved from our material ongoing liabilities with
respect to Income Fund if it is acquired by APF.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying our belief
that the terms of the Acquisition are fair as a whole to you and the other
Limited Partners of your Income Fund and maximize the value of your investment.
S-14
<PAGE>
1. Consideration Offered. We will be offered the same form of consideration
in the Acquisition as the Limited Partners with respect to our capital interest
in the Income Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the notes, constitute fair value. We compared the estimated values
of the consideration which would have been received by you and the other
Limited Partners in alternative transactions and concluded that the Acquisition
is fair based on such comparison. In addition, we believe the Acquisition is
the best way to maximize the return on your investment because of your ability
to participate in the potential appreciation of APF Shares. Since your Income
Fund is restricted to owning and leasing a static number of restaurant
properties due to the limitations contained in your Income Fund's partnership
agreement and limited capital resources, your investments have less of an
opportunity to appreciate. Because APF is a growth-oriented operating company,
you will have the opportunity, as an APF stockholder, to participate in APF's
future growth.
2. Independent Appraisals and Fairness Opinions. Our belief as to the
fairness of the Acquisition as a whole and to the Limited Partners of your
Income Fund and our statements above regarding the material terms underlying
our belief as to fairness are partially based upon the appraisal of your Income
Fund's restaurant properties prepared by Valuation Associates and upon the
fairness opinion provided by Legg Mason. A copy of the fairness opinion is
attached hereto as Appendix A. We encourage you to read it. We attributed
significant weight to the appraisal of Valuation Associates and the fairness
opinion of Legg Mason, which we believe support our conclusion that the
Acquisition is fair to the Limited Partners. We do not know of any factors that
would materially alter the conclusions made in the appraisal of Valuation
Associates or the fairness opinion of Legg Mason, including developments or
trends that have materially affected or are reasonably likely to materially
affect such conclusions. We believe that the engagement of Valuation Associates
to provide the appraisal and of Legg Mason to provide the fairness opinion
assisted us in the fulfillment of our fiduciary duties to your Income Fund and
the Limited Partners, notwithstanding that: (1) each of Valuation Associates
and Legg Mason received fees for its services, (2) Legg Mason has previously
provided investment banking services to the Income Funds and to Commercial Net
Lease Realty, Inc., which at the time was an affiliate of CNL Group, Inc., and
(3) Valuation Associates has previously performed valuation appraisals for APF.
We note that because the Acquisition of any one Income Fund is not a condition
of the Acquisition of any other Income Fund, the fairness opinions analyze each
Income Fund separately, not in combination with other Income Funds. However,
based on the reasons stated in this section of the supplement and the opinion
of Legg Mason that the APF Share consideration payable to each Income Fund is
fair from a financial point of view, we believe the Acquisition is fair
regardless of the number of Income Funds that are acquired in the Acquisition.
In rendering its opinion with respect to the fairness, from a financial
point of view, with respect to (a) the APF Shares offered with respect to your
Income Fund, (b) the aggregate APF Shares offered with respect to the Income
Funds, and (c) the method of allocating the APF Shares among the Income Funds,
Legg Mason did not address or render any opinion with respect to other aspects
of the Acquisition, including:
. the value or fairness of the notes;
. the prices at which the APF Shares may trade following the Acquisition
or the trading value of the APF Shares to be offered compared with the
current fair market value of the Income Funds' portfolios or assets if
liquidated in real estate markets;
. the tax consequences of any aspect of the Acquisition;
. the fairness of the amounts or allocation of Acquisition costs or the
amounts of Acquisition costs allocated to the Limited Partners; or
. any other matters with respect to any specific individual partner or
class of partners.
In addition, Legg Mason was not requested to, and did not, solicit the
interest of any other party in acquiring interests in the Income Funds or their
assets. Also, Legg Mason's opinion also does not compare the relative merits of
the Acquisition with those of any other transaction or business strategy that
was or might have been considered by us as alternatives to the Acquisition.
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the notes.
S-15
<PAGE>
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund if liquidated
and as a ongoing concern. On the basis of these calculations, we believe that
the ultimate value of the APF Shares, based on the exchange value, will exceed
the going concern value and liquidation value of your Income Fund.
4. Cash Available for Distribution Before and After the Acquisition. We
believe the Acquisition will be accomplished without materially decreasing the
aggregate cash available from operations otherwise payable to you and the other
Limited Partners. The effect of the Acquisition and the cash available for
distribution will vary, however, from Income Fund to Income Fund. In addition
to the receipt of cash available for distribution, you and the other Limited
Partners will be able to benefit from the potential growth of APF as an
operating company and will also receive investment liquidity through the public
market in APF Shares.
5. Comparative Valuation Analysis. In assessing the fairness of the
Acquisition, we relied on the appraisals prepared by Valuation Associates in
connection with its engagement by us. Based on such information and other
historical data of the Income Funds, we prepared a comparative valuation
analysis, which supported our determination that the Acquisition is in the best
interest of the Limited Partners of each of the Income Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Weighted
Original Original Average Trading
Limited Limited Partner Value of APF Estimated Prices of
Partner Investments less Shares Paid Estimated Liquidation Units
Investments Distributions of per Going Concern Value per per Average
any Net Sales average $10,000 Value per Average $10,000
Distributions Proceeds per Limited Partner Average $10,000 $10,000 Original
of Net Sales $10,000 Original Original Original Original Limited Partner
Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment(5)
------------- ---------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CNL Income Fund XV,
Ltd. ................. 40,000,000 10,000 9,232 9,182 8,295 8,530
</TABLE>
- --------
(1) The Income Fund has had no distributions of net sales proceeds.
(2) Values are based on the exchange value established by APF. Upon listing the
APF Shares on the NYSE, the actual values at which the APF Shares will
trade on the NYSE may be substantially below the exchange value.
(3) Represents the estimated value of an original $10,000 investment in your
Income Fund, if your Income Fund continues unchanged, subject to the
assumptions made by Valuation Associates in its appraisal.
(4) Represents the amount that we estimate would have been distributed to you
with respect to an original $10,000 investment in the Income Fund if your
Income Fund had sold its assets on December 31, 1998, subject to the
assumptions made by Valuation Associates in its appraisal.
(5) Based on the weighted average trading prices of your Income Fund's units,
per original $10,000 investment, in the secondary markets from July 1, 1998
to June 30, 1999. A substantial majority of the transfer prices in this
column reflect purchases by your Income Fund as part of its distribution
reinvestment program, and do not necessarily reflect the prices in a
secondary market.
We believe that the comparative valuation analysis, when considered together
with the anticipated effect of the Acquisition and with all the other
differences between continued ownership of units as compared with the receipt
of APF Shares, supports our recommendation in favor of the Acquisition.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have a contractual
obligation pursuant to your Income Fund's partnership agreement as well as a
legal obligation under state law to assess whether the terms of the Acquisition
are fair and equitable to the Limited Partners of your Income Fund without
regard to whether the Acquisition is fair and equitable to any of the other
participants, including the Limited Partners in other Income Funds. James M.
Seneff, Jr. and Robert A. Bourne act as the individual general partners of all
of the Income Funds and also as members of the Board of Directors of APF. While
Messrs. Seneff and Bourne have sought faithfully to discharge their obligations
to your Income Fund, there is an inherent conflict of
S-16
<PAGE>
interest in serving, directly or indirectly, in a similar capacity with respect
to your Income Fund and also on APF's Board of Directors. Additionally, as
stockholders of APF, Messrs. Seneff's and Bourne's interests in the completion
of the Acquisition may conflict with yours as a Limited Partner of the Income
Fund and with their own as general partners of your Income Fund.
Benefits to General Partners
As a result of the Acquisition assuming only your Income Fund is acquired,
we are expected to receive two material benefits. These benefits include:
. James M. Seneff, Jr. and Robert A. Bourne, as your individual general
partners, will also continue to serve as directors of APF with Mr.
Seneff serving as Chairman of APF and Mr. Bourne serving as Vice
Chairman. Furthermore, they will be entitled to receive performance-
based incentives, including stock options, under APF's 1999
Performance Incentive Plan or any other such plan approved by the
stockholders. The benefits that may be realized by Messrs. Seneff and
Bourne are likely to exceed the benefits that they would expect to
derive from the Income Funds if the Acquisition does not occur.
. As general partners of your Income Fund, we are legally liable for all
of your Income Fund's liabilities to the extent that your Income Fund
is unable to satisfy such liabilities. Because the partnership
agreement for your Income Fund prohibits the Income Fund from
incurring indebtedness, the only liabilities the Income Fund has are
liabilities with respect to its ongoing business operations. In the
event that your Income Fund is acquired by APF, we would be relieved
of our legal obligation to satisfy the liabilities of the acquired
Income Fund.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
Acquisition to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the Acquisition to you.
Material Tax Differences between the Ownership of Units and APF Shares
Because your Income Fund is a partnership for federal income tax purposes,
it is not subject to taxation. Instead, as a Limited Partner, you are required
to take into account your share of the income or loss of your Income Fund,
regardless of whether any cash is distributed to you. If your Income Fund is
acquired by APF, and you have voted "For" the Acquisition, you will receive APF
Shares. If you have voted "Against" the Acquisition but your Income Fund is
acquired by APF, you may elect to receive notes.
If your Income Fund is acquired by APF and you receive APF Shares, your
ownership of APF Shares will affect the character and amount of income
reportable by you in the future. Currently, as the owner of units, you must
take into account your distributive share of all income, loss and separately
stated partnership items, regardless of the amount of any distributions of cash
to you. Your Income Fund supplies that information to you annually on a
Schedule K-1. The character of the income that you recognize depends upon the
assets and activities of your Income Fund and may, in some circumstances, be
treated as income which may be offset by any losses you may have from passive
activities.
In contrast to your treatment as a Limited Partner, if your Income Fund is
acquired by APF and you receive APF Shares, as a stockholder of APF you will be
taxed based on the amount of distributions you receive from APF. Each year APF
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of APF's earnings and profits.
Because the Acquisition is a taxable transaction, APF's tax basis in the
acquired restaurant properties will be higher than your Income Fund's tax basis
had been in the same properties. At the same time, however, APF may be required
to utilize a slower method of depreciation
S-17
<PAGE>
with respect to certain restaurant properties than that used by your Income
Fund. As a result, APF's tax depreciation from the acquired restaurant
properties will differ from your Income Fund's tax depreciation. Accordingly,
under some circumstances, even if APF were to make the same level of
distributions as your Income Fund, a larger portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of APF does not depend on its character to APF. The income
will generally be ordinary dividend income to you and will be classified as
portfolio income under the passive loss rules, except with respect to capital
gains dividends, discussed below. Furthermore, if APF incurs a taxable loss,
the loss will not be passed through to you.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, if
your Income Fund is acquired by APF the assets and any liabilities of your
Income Fund will be transferred to APF in return for APF Shares and/or notes.
Your Income Fund will then immediately liquidate and distribute such property
to you. The IRS requires that you recognize a share of the income or loss,
subject to the limits described below, recognized by your Income Fund,
including gain recognized as a result of the transfer of restaurant properties
pursuant to the Acquisition. The estimated taxable gain or loss, as of June 30,
1999, based on the exchange value, for an average $10,000 original Limited
Partner investment in your Income Fund, is set forth in the table below for
those Limited Partners subject to federal income taxation. The information in
the table assumes that none of the Limited Partners in the Income Fund elected
to receive notes.
<TABLE>
<CAPTION>
Estimated Gain/(Loss)
per Average $10,000
Original Limited
Partner Investment
---------------------
<S> <C>
CNL Income Fund XV, Ltd. ................................. $(70)
</TABLE>
Under section 351(a) of the Internal Revenue Code of 1986, as amended, no
gain or loss is recognized if (1) property is transferred to a corporation by
one or more individuals or entities in exchange for the stock of that
corporation, and (2) immediately after the exchange, such individuals or
entities are in control of the corporation. For purposes of section 351(a),
control is defined as the ownership of stock possessing at least 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock of
the corporation. APF has represented to Shaw Pittman, APF's tax counsel, that,
following the Acquisition, the Limited Partners of the Income Funds will not
own stock possessing at least 80 percent of the total combined voting power of
all classes of APF stock entitled to vote and at least 80 percent of the total
number of shares of all other classes of APF stock. Based upon this
representation, Shaw Pittman has opined that the Acquisition will not result in
the acquisition of control of APF by the Limited Partners for purposes of
section 351(a). Accordingly, the transfer of assets will result in recognition
of gain or loss by each Income Fund that is acquired by APF.
If your Income Fund is acquired by APF and no Limited Partners elect to
receive the notes, your Income Fund will receive solely APF Shares in exchange
for your Income Fund's assets. As a result, your Income Fund will recognize an
amount of gain equal to the difference between:
. the sum of (a) the fair market value of the APF Shares received by your
Income Fund and (b) the amount of your Income Fund's liabilities, if
any, assumed by the Operating Partnership, and
. the adjusted tax basis of the assets transferred by your Income Fund to
the Operating Partnership.
If your Income Fund is acquired by APF and you or another Limited Partner in
your Income Fund elect the notes option, your Income Fund will receive APF
Shares and/or notes in exchange for your Income Fund's assets. Because the
principal portion of the notes will not be due until , 2005, the
acquisition of your Income Fund's assets, in part, in exchange for notes will
be reported under the installment sales method and a
S-18
<PAGE>
portion of your Income Fund's gain may be deferred under the "installment sale"
rules. Pursuant to this method, and assuming that none of the principal amount
of the notes is collected in the year of the Acquisition, the amount of gain
recognized by your Income Fund in the year of the Acquisition will be equal to
the value of the APF Shares received by your Income Fund multiplied by the
ratio that the gross profit realized by your Income Fund in the Acquisition
bears to the total contract price for your Income Fund's assets. To the extent
your Income Fund realizes depreciation recapture income under section 1245 or
section 1250 of the Code, the recapture income will also be recognized by your
Income Fund in the year of the Acquisition.
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price for your Income Fund's
assets over the adjusted tax basis of those assets. The contract price will
equal the selling price reduced by certain qualified indebtedness encumbering
your Income Fund's assets, if any, that is assumed or taken subject to by the
Operating Partnership. The exact amount of the gain to be recognized by your
Income Fund in the year of the Acquisition will also vary depending upon the
decisions of the Limited Partners to receive APF Shares or notes.
In general, gains or losses realized with respect to transfers of non-dealer
real estate and equipment in the Acquisition are likely to be treated as
realized from the sale of a "section 1231 asset," which is real property or a
depreciable assets used in a trade or business and held for more than one year.
Your share of gains or losses from the sale of section 1231 assets of your
Income Fund would be combined with any other section 1231 gains and losses that
you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive Notes rather than APF Shares. Even
though a Limited Partner's election of the notes may decrease the amount of
gain your Income Fund recognizes, the electing Limited Partner still will be
required to take into account his, her or its share of your Income Fund's gain
as determined under the partnership agreement of your Income Fund. Therefore,
Limited Partners who elect the notes may recognize gain in the year of the
Acquisition despite the fact that they will not receive cash with which to pay
the tax on the gain. Such Limited Partners will adjust the basis of the Notes
as described below, and the resulting increase in basis will decrease the
amount of the gain recognized over the term of the notes by the Limited
Partners electing to receive notes.
Tax Consequences of the Liquidation and Termination of Your Income Fund. If
your Income Fund is acquired by APF, your Income Fund will be deemed to have
liquidated and distributed APF Shares or notes, as the case may be, to you. The
taxable year of your Income Fund will end at this time, and you must report, in
your taxable year that includes the date of the Acquisition, your share of all
income, gain, loss, deduction and credit for your Income Fund through the date
of the Acquisition including gain or loss resulting from the Acquisition. If
your taxable year is not the calendar year, you could be required to recognize
as income in a single taxable year your share of your Income Fund's income
attributable to more than one of its taxable years.
The APF Shares or notes will be distributed among you and the other Limited
Partners in a manner that we, as the general partners of your Income Fund,
determine to be proportionate based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to
S-19
<PAGE>
the difference between the fair market value of the APF Shares that you receive
and your adjusted tax basis in your units. Your basis in the APF Shares will
then equal the fair market value of the APF Shares on the closing date of the
Acquisition, and your holding period for the APF Shares for purposes of
determining capital gain or loss will begin on the closing date of the
Acquisition.
If you receive notes in the Acquisition, your basis in the notes distributed
to you will equal your adjusted basis in your units. Your holding period for
the notes for purposes of determining capital gain or loss from the disposition
of the notes will include your holding period for your units.
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not a social club, voluntary employee's
beneficiary association, supplemental unemployment benefit trust, or qualified
group legal services plan as described in sections 501(c)(7), (9), (17) or (20)
of the Code. If you are included in one of the four classes of exempt
organizations noted in the previous sentence, you may recognize and be taxed on
gain or loss on the Acquisition.
Tax Consequences of the Acquisition to APF. APF will not recognize gain or
loss as a result of the Acquisition. APF will have a holding period in the
restaurant properties that begins on the closing date. The basis of the
restaurant properties received by APF from the Income Funds will equal the fair
market value of the APF Shares, plus the issue price of the notes issued in the
Acquisition, plus the amount of any liabilities of the Income Funds assumed by
APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060
of the Code. As a result, APF's basis in each acquired restaurant property may
differ from the Income Fund's basis therein, and the restaurant properties may
be subject to different depreciable periods and methods as a result of the
Acquisition. These factors could result in an overall change, following the
Acquisition, in the depreciation deductions attributable to the restaurant
properties acquired from the Income Funds following the Acquisition.
S-20
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
----------- ----------- ----------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $27,900,894 $3,056,620(a) $30,957,514 $ 0 $ 0 $ 0 $ 0
Fees............. 0 0 0 9,454,036 2,963,154 11,511 (9,812,516)(b),(c)
Interest and
Other Income..... 4,249,461 0 4,249,461 87,570 249,258 11,539,080 144,014 (d)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Revenue... $32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591 (9,668,502)
Expenses:
General and
Administrative... 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524 (774,311)(e)
Management and
Advisory Fees.... 1,681,870 0 1,681,870 0 0 1,231,905 (2,913,775)(f)
Fees to Related
Parties.......... 0 0 0 88,949 689,425 0 (743,673)(g)
Interest
Expense.......... 0 0 0 92,707 0 10,294,499 0
State Taxes...... 464,966 0 464,966 0 0 0 0
Depreciation--
Other............ 0 0 0 77,130 39,032 0 0
Depreciation--
Property......... 3,701,974 967,179(a) 4,669,153 0 0 0 0
Amortization..... 9,700 0 9,700 36 0 0 1,073,165 (h)
Transaction
Costs............ 483,005 0 483,005 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Total Expenses.. 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928 (3,358,594)
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,564,432 $2,089,441 $25,653,873 $3,877,654 $ 42,804 $ (239,337) $(6,309,908)
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 0 31,241 0 0 0 0
Gain (Loss) on
Sale of
Properties....... (201,843) 0 (201,843) 0 0 0 0
Provision For
Losses on
Properties....... (540,522) 0 (540,522) 0 0 0 0
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337) (6,309,908)
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 (1,595,036) (16,906) 86,202 1,525,740(i)
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net Earnings
(Losses)......... $22,853,308 $2,089,441 $24,942,749 $2,282,618 $ 25,898 $ (153,135) $(4,784,168)
=========== ========== =========== ========== ========== =========== ===========
<CAPTION>
Historical
CNL Income
Combined Fund XV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and Earned
Income........... $30,957,514 $ 1,608,193 $ 23,780 (j) $32,589,487
Fees............. 2,616,185 0 (45,627)(k) 2,570,558
Interest and
Other Income..... 16,269,383 20,114 0 16,289,497
------------ ------------ ------------------ ------------
Total Revenue... 49,843,082 $1,628,307 (21,847) 51,449,542
Expenses:
General and
Administrative... 9,579,902 113,623 ( 55,888)(l),(m) 9,637,637
Management and
Advisory Fees.... 0 16,144 (16,144)(n) 0
Fees to Related
Parties.......... 34,701 0 0 34,701
Interest
Expense.......... 10,387,206 0 0 10,387,206
State Taxes...... 464,966 30,305 7,171 (o) 502,442
Depreciation--
Other............ 116,162 0 0 116,162
Depreciation--
Property......... 4,669,153 149,677 32,464 (p) 4,851,294
Amortization..... 1,082,901 870 0 1,083,771
Transaction
Costs............ 483,005 107,297 0 590,302
------------ ------------ ------------------ ------------
Total Expenses.. 26,817,996 417,916 (32,397) 27,203,515
Operating
Earnings (Losses)
Before Equity in
Earnings of Joint
Ventures/Minority
Interest, Gain
(Loss) on Sale of
Properties and
Provision for
Losses on
Properties....... $23,025,086 $ 1,210,391 $ 10,550 $24,246,027
Equity in
Earnings of Joint
Ventures/Minority
Interest......... 31,241 123,928 (7,123)(q) 148,046
Gain (Loss) on
Sale of
Properties....... (201,843) 0 0 (201,843)
Provision For
Losses on
Properties....... (540,522) (132,446) 0 (672,968)
------------ ------------ ------------------ ------------
Net Earnings
(Losses) Before
Benefit/(Provision)
for Federal
Income Taxes..... 22,313,962 1,201,873 3,427 23,519,262
Benefit/(Provision)
for Federal
Income Taxes..... 0 0 0 0
------------ ------------ ------------------ ------------
Net Earnings
(Losses)......... $22,313,962 $ 1,201,873 $ 3,427 $23,519,262
============ ============ ================== ============
</TABLE>
S-21
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA OF APF--(Continued)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL Combining
Historical Pro Forma Historical Financial Financial Pro Forma
APF Adjustments Subtotal Advisor Services, Inc. Corp. Adjustments
------------ ----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 578 3 581 n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Earnings per
share/unit...... $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Book value per
share/unit...... $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Dividends per
share/unit...... $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a
============ ========== ============ ========== ========== ============ ===========
Ratio of
Earnings to
Fixed Charges... 18.16x n/a n/a n/a n/a n/a n/a
============ ========== ============ ========== ========== ============ ===========
Cash
distributions
declared:....... $ 28,476,150 $ 0 $ 28,476,150 $ n/a $ n/a $ n/a $ 4,689,252(s)
============ ========== ============ ========== ========== ============ ===========
Weighted average
shares
outstanding
during period... 37,347,883 0 37,347,883 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Shares
outstanding..... 37,348,464 0 37,348,464 n/a n/a n/a 6,150,000
============ ========== ============ ========== ========== ============ ===========
Balance sheet
data:
Real estate
assets, net..... $691,443,127 $3,369,856(t) $694,812,983 $ 0 $ 0 $ 0 $ 0
Mortgages/notes
receivable...... $ 63,351,507 $ 0 $ 63,351,507 $ 0 $ 0 $290,522,671 $ 0
Receivables/due
from related
parties......... $ 649,972 $ 0 $ 649,972 $8,668,738 $5,417,084 $ 1,125,933 $(6,614,629)(v)
Investment in
joint ventures.. $ 1,081,046 $ 0 $ 1,081,046 $ 0 $ 0 $ 0 $ 0
Total assets.... $822,225,342 $3,369,856(t) $825,595,198 $9,407,247 $6,369,606 $304,738,561 $24,613,528 (u1),(v)
Total
liabilities..... $167,023,516 $3,369,856(t) $170,393,372 $1,076,772 $ 829,856 $300,143,224 $(6,957,486)(v),(w)
Total equity.... $655,201,826 $ 0 $655,201,826 $8,330,475 $5,539,750 $ 4,595,337 $31,571,014 (u1),(w)
<CAPTION>
Historical
CNL Income
Combined Fund XV, Pro Forma Adjusted
APF Ltd. Adjustments Pro Forma
-------------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Other data:
Total properties
owned at end of
period.......... 581 50 n/a 631
============== =========== ==================== =================
Earnings per
share/unit...... $ n/a $ 0.30 $ n/a $ 0.52
============== =========== ==================== =================
Book value per
share/unit...... $ n/a $ 8.77 $ n/a $ 16.29
============== =========== ==================== =================
Dividends per
share/unit...... $ n/a $ 0.40 $ n/a $ 0.76
============== =========== ==================== =================
Ratio of
Earnings to
Fixed Charges... n/a n/a n/a 2.92x
============== =========== ==================== =================
Cash
distributions
declared:....... $ 33,165,402 $ 1,600,000 $ (192,194)(s) $ 34,573,208
============== =========== ==================== =================
Weighted average
shares
outstanding
during period... 43,497,883 n/a 1,846,351 45,344,234(r)
============== =========== ==================== =================
Shares
outstanding..... 43,498,464 n/a 1,846,351 45,344,815
============== =========== ==================== =================
Balance sheet
data:
Real estate
assets, net..... $ 694,812,983 $30,439,959 $ 2,997,007 (u2) $ 728,249,949
Mortgages/notes
receivable...... $ 353,874,178 $ 0 $ 0 $ 353,874,178
Receivables/due
from related
parties......... $ 9,247,098 $ 43,835 $ (36,701)(x) $ 9,254,232
Investment in
joint ventures.. $ 1,081,046 $ 2,726,054 $ 422,228 (u2) $ 4,229,328
Total assets.... $1,170,724,140 $36,053,109 $(1,558,878)(u2),(x) $1,205,218,371
Total
liabilities..... $ 465,485,738 $ 985,336 $ (136,701)(x) $ 466,434,373
Total equity.... $ 705,238,402 $35,067,773 $(1,522,177)(u2) $ 738,783,998
</TABLE>
S-22
<PAGE>
- --------
(a) Represents rental and earned income of $3,056,620 and depreciation
expense of $967,179 as if restaurant properties that had been
operational when they were acquired by APF from January 1, 1999 through
July 31, 1999 had been acquired and leased on January 1, 1998. No pro
forma adjustments were made for any restaurant properties for the
periods prior to their construction completion and availability for
occupancy.
(b) Represents the elimination of intercompany fees between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income
Fund:
<TABLE>
<CAPTION>
<S> <C>
Origination fees from affiliates........................... $ (689,425)
Secured equipment lease fees............................... (67,967)
Advisory fees.............................................. (126,788)
Reimbursement of administrative costs...................... (382,728)
Acquisition fees........................................... (4,452,252)
Underwriting fees.......................................... (54,248)
Administrative, executive and guarantee fees............... (532,389)
Servicing fees............................................. (572,728)
Development fees........................................... (38,853)
Management fees............................................ (1,681,870)
------------
Total..................................................... $(8,599,248)
============
</TABLE>
(c) CNL Financial Services, Inc. receives loan origination fees from
borrowers in conjunction with originating loans on behalf of CNL
Financial Corp. On a historical basis, CNL Financial Services, Inc.
records all of the loan origination fees received as revenue. For
purposes of presenting pro forma financial statements of these entities
on a combined basis, these loan origination fees are required to be
deferred and amortized into revenues over the term of the loans
originated in accordance with generally accepted accounting principles.
Total loan origination fees received by CNL Financial Services, Inc.
during the six months ended June 30, 1999 of $1,213,268 are being
deferred for pro forma purposes and are being amortized over the terms
of the underlying loans (15 years).
(d) Represents the amortization of the loan origination fees received by
CNL Financial Services Inc. from borrowers during the six months ended
June 30, 1999 and the year ended December 31, 1998, which were deferred
for pro forma purposes as described in 5(I)(c). These deferred loan
origination fees are being amortized and recorded as interest income
over the terms of the underlying loans (15 years).
<TABLE>
<S> <C>
Interest income................................................. $144,014
</TABLE>
(e) Represents the elimination of i) intercompany expenses paid by APF to
the Advisor, and ii) the capitalization of incremental costs associated
with the acquisition, development and leasing of properties acquired
during the period as if costs relating to properties developed by APF
were subject to capitalization during the period under development.
<TABLE>
<S> <C>
General and administrative costs.............................. $(774,311)
</TABLE>
(f) Represents the elimination of advisory fees between APF, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Management fees............................................ $(1,681,870)
Administrative executive and guarantee fees................ (532,389)
Servicing fees............................................. (572,728)
Advisory fees.............................................. (126,788)
------------
$(2,913,775)
============
</TABLE>
(g) Represents the elimination of $743,673 in fees between the Advisor and
the CNL Restaurant Financial Services Group resulting from agreements
between these entities.
(h) Represents the amortization of the goodwill resulting from the
acquisition of the CNL Restaurant Financial Services Group referred to
in footnote (u) below:
<TABLE>
<S> <C>
Amortization of goodwill ..................................... $1,073,165
</TABLE>
S-23
<PAGE>
(i) Represents the elimination of $1,525,740 in provisions for federal
income taxes as a result of the merger of the Advisor and the CNL
Restaurant Financial Services Group into the REIT corporate structure
that exists within APF. APF expects to continue to qualify as a REIT
and does not expect to incur federal income taxes.
(j) Represents $23,780 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Income Fund as if the leases had been
acquired on January 1, 1998.
(k) Represents the elimination of fees between the Advisor and the Income
Fund:
<TABLE>
<S> <C>
Management fees............................................... $(16,144)
Reimbursement of administrative costs......................... (29,483)
---------
$(45,627)
=========
</TABLE>
(l) Represents the elimination of $29,483 in administrative costs
reimbursed by the Income Fund to the Advisor.
(m) Represents savings of $26,405 in historical professional services and
administrative expenses (audit and legal fees, office supplies, etc.)
resulting from preparing quarterly and annual financial and tax reports
for one combined entity instead of individual entities.
(n) Represents the elimination of $16,144 in management fees by the Income
Fund to the Advisor.
(o) Represents additional state income taxes of $7,171 resulting from
assuming that acquisitions of restaurant properties that had been
operational when APF acquired them from January 1, 1999 through July
31, 1999 had been acquired on January 1, 1998 and assuming that the
shares issued in conjunction with acquiring the Advisor, CNL Financial
Services Group and the Income Fund had been issued as of January 1,
1998 and that these entities had operated under a REIT structure as of
January 1, 1998.
(p) Represents an increase in depreciation expense of $32,464 as a result
of adjusting the historical basis of the real estate wholly owned by
the Income Fund to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings is being depreciated using
the straight-line method over the remaining useful lives of the
restaurant properties.
(q) Represents a decrease to equity in earnings from income earned by joint
ventures as a result of an increase in depreciation expense of $7,123
as a result of adjusting the historical basis of the real estate owned
by the Income Fund, indirectly through joint venture or tenancy in
common arrangements, to fair value as a result of accounting for the
Acquisition of the Income Fund under the purchase accounting method.
The adjustment to the basis of the buildings owned indirectly by the
Income Fund is being depreciated using the straight-line method over
the remaining useful lives of the restaurant properties.
(r) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1998 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved a proposal for a one-for-two reverse stock split and a
proposal to increase the number of authorized common shares of APF on
January 1, 1998.
(s) Represents the adjustment to historical distribution assuming the
additional shares had been issued and outstanding as of January 1,
1998. The pro forma distributions were based on APF's historical
monthly distribution rate of $.12708 that was in effect during the pro
forma period presented.
(t) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma restaurant properties acquired from July
1, 1999 through July 31, 1999 as if these properties had been acquired
on June 30, 1999. Based on historical results through July 31, 1999,
all interest costs related to the borrowings under the credit facility
were eligible for capitalization, resulting in no pro forma adjustments
to interest expense.
S-24
<PAGE>
(u) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL Financial
Advisor Services Group Income Fund Total
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of
Consideration
Received............... $81,636,756 $50,485,889 $36,726,951 $168,849,596
=========== =========== =========== ============
Share Consideration..... $76,000,000 $47,000,000 $33,545,596 $156,545,596
Cash Consideration...... -- -- 412,000 412,000
APF Transaction Costs... 5,636,756 3,485,889 2,769,355 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price.. $81,636,756 $50,485,889 $36,726,951 $168,849,596
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets --
Historical............. $ 8,330,475 $10,135,087 $35,067,773 $ 53,533,335
Purchase Price
Adjustments:
Land and buildings on
operating leases....... -- -- 2,387,773 2,387,773
Net investment in direct
financing leases....... -- -- 609,235 609,235
Investment in joint
ventures............... -- -- 422,228 422,228
Accrued rental income... -- -- (1,740,806) (1,740,806)
Intangibles and other
assets................. -- (2,575,792) (19,252) (2,595,044)
Goodwill*............... -- 42,926,594 -- 42,926,594
Excess purchase price... 73,306,281 -- -- 73,306,281
----------- ----------- ----------- ------------
Total Allocation...... $81,636,756 $50,485,889 $36,726,951 $168,849,596
=========== =========== =========== ============
</TABLE>
*Goodwill represents the portion of the purchase price which is assumed
to relate to the ongoing value of the debt business.
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisitions of
the Advisor, CNL Financial Services Group and the Income Fund. The
excess purchase price paid for the Advisor to a related party of
$73,306,281 was expensed at June 30, 1999 because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations." Goodwill of $42,926,594
relating to the acquisition of the CNL Financial Services Group is being
amortized over 20 years. APF did not acquire any intangibles as part of
any of the acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A............ 8,600
Common Stock (CFA, CFS, CFC)--Class B............. 4,825
Additional Paid-in Capital (CFA, CFS, CFC)........ 12,568,974
Retained Earnings................................. 5,883,163
Accumulated distributions in excess of earnings... 73,306,281
Goodwill for CFC/CFS (Intangibles and other
assets)........................................ 42,926,594
CFC/CFS Organizational Costs/Other Assets........ 2,575,792
Cash to pay APF transaction costs................ 9,122,645
APF Common Stock................................. 61,500
APF Capital in Excess of Par Value............... 122,938,500
(To record acquisition of CFA, CFS and CFC).......
2.Partners' Capital................................ 35,067,773
Land and buildings on operating leases............ 2,387,773
Net investment in direct financing leases......... 609,235
Investment in joint ventures...................... 422,228
Accrued rental income............................ 1,740,806
Intangibles and other assets..................... 19,252
Cash to pay APF Transaction costs................ 2,769,355
Cash consideration to Income Funds............... 412,000
APF Common Stock................................. 18,464
APF Capital in Excess of Par Value............... 33,527,132
(To record acquisition of Income Fund)
</TABLE>
S-25
<PAGE>
(v) Represents the elimination by APF of $1,444,444 in related party
payables recorded as receivables by the Advisor.
(w) Represents the elimination of federal income taxes payable of $342,857
from liabilities assumed in the acquisition since the Merger Agreement
requires that the Advisor and CNL Restaurant Financial Services Group
have no accumulated or current earnings and profits for federal income
tax purposes at the time of the acquisition.
(x) Represents the elimination by the Income Fund of $36,701 in related
party payables recorded as receivables by the Advisor.
To review the pro forma financial information of APF in the event that APF
acquires the CNL Restaurant Businesses and all of the Income Funds, see the
section entitled "Unaudited Pro Forma Financial Information" in the consent
solicitation starting on page F-422 through F-459.
S-26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XV, LTD.
The following table sets forth selected financial information for the Income
Fund, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CNL Income Fund
XV, Ltd." in this supplement.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,752,235 $ 1,652,348 $ 3,471,040 $ 3,908,014 $ 4,068,610 $ 3,914,985 $ 1,319,692
Net income (2).......... 1,201,873 1,399,972 2,642,497 3,434,905 3,585,059 3,372,468 1,185,918
Cash distributions
declared............... 1,600,000 1,800,000 3,400,000 3,200,000 3,280,000 2,900,001 1,185,946
Net income per unit
(2).................... 0.30 0.35 0.65 0.85 0.89 0.83 0.41
Cash distributions
declared per
Unit (3)............... 0.40 0.45 0.85 0.80 0.82 0.73 0.41
GAAP book value per
unit................... 8.77 8.96 8.87 9.06 9.00 8.92 12.16
Weighted average number
of Limited Partner
units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 2,893,690
<CAPTION>
June 30, December 31,
----------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $36,053,109 $36,699,888 $36,359,054 $37,045,723 $36,936,678 $36,516,732 $37,058,475
Total partners'
capital................ 35,067,773 35,823,375 35,465,900 36,223,403 35,988,498 35,683,439 35,210,972
</TABLE>
- --------
(1) Revenues include equity in earnings of the joint venture and adjustments to
accrued rental income due to Long John Silver's Inc. filing for bankruptcy
and rejecting four of the Income Fund's leases.
(2) Net income for the six months ended June 30, 1999 and for the year ended
December 31, 1998, includes $132,446 and $280,907, respectively from
provision for loss on land and buildings. Net income for the year ended
December 31, 1995, includes $71,023 from loss on sale of land.
(3) Distributions for the six months ended June 30, 1998 and the years ended
December 31, 1998 and 1996 include a special distribution to the Limited
Partners of $200,000, $200,000 and $80,000, respectively, which represented
cumulative excess operating reserves.
S-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CNL INCOME FUND XV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 2, 1993, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases with the lessee responsible
for all repairs and maintenance, property taxes, insurance and utilities. As of
June 30, 1999, the Income Fund owned 50 restaurant properties, including
interests in six restaurant properties owned by a joint venture in which the
Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common.
Capital Resources
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's primary source of capital for the six months ended June
30, 1999 and 1998 was cash from operations, including cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses. Cash from operations was $1,468,759 and
$1,710,905 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, was primarily a result of
changes in income and expenses as described in "Results of Operations" below
and changes in the Income Fund's working capital.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties are invested in money market accounts or other short-term, highly
liquid investments such as demand deposits at commercial banks, certificates of
deposit, and money market accounts with less than a 30-day maturity date,
pending the Income Fund's use of such funds to pay Income Fund expenses or to
make distributions to the partners. At June 30, 1999, the Income Fund had
$1,083,203 invested in such short-term investments, as compared to $1,214,444
at December 31, 1998. The funds remaining at June 30, 1999, after payment of
distributions and other liabilities, will be used meet the Income Fund's
working capital and other needs.
On May 11, 1999, four Limited Partners in several of the Income Funds served
a lawsuit against us and APF in connection with the Acquisition. On July 8,
1999, the plaintiffs amended the complaint to add three additional Limited
Partners as plaintiffs. Additionally, on June 22, 1999, a Limited Partner in
several Income Funds served a lawsuit against us, APF, CNL Group, Inc. and the
CNL Restaurant Businesses in connection with the Acquisition. We and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund's primary source of capital is cash from operations, which
includes cash received from tenants, distributions from joint ventures and
interest received, less cash paid for expenses. Cash from operations was
$3,216,728, $3,306,595 and $3,434,682 for the years ended December 31, 1998,
1997 and 1996, respectively. The decrease in cash from operations during 1998,
as compared to 1997, and the decrease during 1997, as compared to 1996, is
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital.
In January 1996, the Income Fund invested in a Golden Corral restaurant
property located in Clinton, North Carolina, with certain of our affiliates as
tenants-in-common. In connection therewith, the Income Fund and its affiliates
entered into an agreement whereby each co-venturer will share in the profits
and losses of the
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<PAGE>
restaurant property in proportion to its applicable percentage interest. As of
December 31, 1998, the Income Fund owned a 16% interest in this restaurant
property.
In September 1996, Wood-Ridge Real Estate Joint Venture in which the Income
Fund owns a 50% interest, sold its two restaurant properties to the tenant for
$5,020,878 and received net sales proceeds of $5,001,180, resulting in a gain
to the joint venture of approximately $261,100 for financial reporting
purposes. These restaurant properties were originally acquired by Wood-Ridge
Real Estate Joint Venture in September 1994 and had a combined total cost of
approximately $4,302,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the joint venture sold these restaurant
properties for approximately $698,700 in excess of their original purchase
price. In October 1996, Wood-Ridge Real Estate Joint Venture reinvested
$4,404,046 of the net sales proceeds in five restaurant properties. In January
1997, the joint venture reinvested $502,598 of the remaining net sales proceeds
in an additional restaurant property. As of December 31, 1998, the Income Fund
had received approximately $52,000, representing its pro-rata share of the
uninvested net sales proceeds.
In June 1998, the Income Fund invested in a Bennigan's restaurant property
located in Fort Myers, Florida, with one of our affiliates as tenants-in-
common. In connection therewith, the Income Fund and its affiliate entered into
an agreement whereby each co-venturer will share in the profits and losses of
the restaurant property in proportion to its applicable percentage interest. As
of December 31, 1998, the Income Fund owned a 15% interest in this restaurant
property.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowings so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. Certain of our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Cash reserves and rental income from the Income Fund's restaurant properties
and net sales proceeds from the sale of restaurant properties, pending
reinvestment in additional restaurant properties, are invested in money market
accounts or other short-term, highly liquid investments such as demand deposit
accounts at commercial banks, CDs and money market accounts with less than a
30-day maturity date, pending the Income Fund's use of such funds to pay Income
Fund expenses or make distributions to partners. At December 31, 1998, the
Income Fund had $1,214,444 invested in such short-term investments as compared
to $1,614,708 at December 31, 1997. The decrease in cash and cash equivalents
during 1998, is primarily due to the fact that in June 1998 the Income Fund
invested in a Bennigan's restaurant property as tenants-in-common with one of
our affiliates and due to the fact that the Income Fund declared and paid a
special distribution of cumulative excess operating reserves to the Limited
Partners of $200,000 during 1998. As of December 31, 1998, the average interest
rate earned on the rental income deposited in demand deposit accounts at
commercial banks was approximately three percent annually. The funds remaining
at December 31, 1998, after payment of distributions and other liabilities,
will be used to meet the Income Fund's working capital and other needs.
Short-Term Liquidity
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
The Income Fund's short-term liquidity requirements consist primarily of the
operating expenses of the Income Fund.
S-29
<PAGE>
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Income Fund generally distributes cash from operations remaining after
the payment of operating expenses of the Income Fund, to the extent that we
determine that such funds are available for distribution. Based on current and
anticipated future cash from operations, and for the six months ended June 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to Limited Partners of $1,600,000 and $1,800,000 for the six
months ended June 30, 1999 and 1998, respectively, or $800,000 for each of the
quarters ended June 30, 1999 and 1998. This represents distributions of $0.40
and $0.45 per unit for the six months ended June 30, 1999 and 1998,
respectively, or $0.20 for each of the quarters ended June 30, 1999 and 1998.
No distributions were made to us for the quarters and six months ended June 30,
1999 and 1998. No amounts distributed to the Limited Partners for the six
months ended June 30, 1999 and 1998 are required to be or have been treated by
the Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
Total liabilities of the Income Fund, including distributions payable,
increased to $985,336 at June 30, 1999, from $893,154 at December 31, 1998,
primarily as a result of the Income Fund accruing transaction costs relating to
the Acquisition. We believe that the Income Fund has sufficient cash on hand to
meet its current working capital needs.
In June 1999, the Income Fund entered into an agreement with an unrelated
third party to sell the Long John Silver's restaurant property in Gastonia,
North Carolina. At June 30, 1999, the Income Fund established a provision for
loss on building and related to the anticipated sale of this restaurant
property. As of August 6, 1999, the sale had not occurred.
The Years Ended December 31, 1998, 1997 and 1996
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs. We have the right to cause the Income Fund to
maintain additional reserves if, in our discretion, we determine such reserves
are required to meet the Income Fund's working capital needs.
Based on cash from operations and for the years ended December 31, 1998 and
1996, cumulative operating reserves, the Income Fund declared distributions to
the Limited Partners of $3,400,000 $3,200,000 and $3,280,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. This represents
distributions of $0.85, $0.80 and $0.82 per unit for the years ended December
31, 1998, 1997 and 1996, respectively. No amounts distributed or to be
distributions to the Limited Partners for the years ended December 31, 1998,
1997 or 1996 are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distributions to the Limited Partners
on a quarterly basis.
During 1998, 1997 and 1996, the affiliates incurred on behalf of the Income
Fund $98,978, $78,821 and $86,714, respectively, for certain operating
expenses. As of December 31, 1998 and 1997, the Income Fund
S-30
<PAGE>
owned $23,337 and $4,311, respectively, to related parties for such amounts,
accounting and administrative services and management fees. As of March 11,
1999, the Income Fund reimbursed the affiliates all such amounts. Other
liabilities, including distributions payable, increased to $869,817 at December
31, 1998, from $818,009 at December 31, 1997, primarily as a result of an
increase in rents paid in advance at December 31, 1998. We believe that the
Income and has sufficient cash on hand to meet its current working capital
needs.
Long-Term Liquidity
The Income Fund has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
During each of the six months ended June 30, 1999 and 1998, the Income Fund
owned and leased 42 wholly owned restaurant properties to operators of fast-
food and family-style restaurant chains. During the six months ended June 30,
1999 and 1998, the Income Fund earned $1,608,193 and $1,492,417, respectively,
in rental income from operating leases, net of adjustments to accrued rental
income and earned income from direct financing leases from these restaurant
properties, $803,985 and $597,477 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively. Rental and earned income was lower during
the quarter and six months ended June 30, 1998, as compared to the quarter and
six months ended June 30, 1999, primarily due to the fact that in June 1998,
Long John Silver's, Inc. filed for bankruptcy and rejected the leases relating
to four of the eight restaurant properties. As a result, during the quarter and
six months ended June 30, 1998, the Income Fund wrote off accrued rental
income, or non-cash accounting adjustment relating to the straight-lining of
future scheduled rent increases over the lease term in accordance with
generally accepted accounting principles, relating to these restaurant
properties. No amounts were written off during the quarter and six months ended
June 30, 1999. The effect from the write-off of accrued rental income was
partially offset by the fact that the Income Fund recorded rental and earned
income during the quarter and six months ended June 30, 1998, prior to the
tenant vacating the restaurant properties in June 1998. The Income Fund has
continued receiving rental payments relating to the four leases not rejected by
the tenant. In May 1999, the Income Fund re-leased one of the restaurant
properties with rental payments beginning in July 1999. The Income Fund will
not recognize rental and earned income from the three remaining restaurant
properties with rejected leases until new tenants for these restaurant
properties are located or until the restaurant properties are sold and the
proceeds from such sales are reinvested in additional restaurant properties. We
are currently seeking either new tenants or purchasers for the three remaining
restaurant properties with rejected leases. While Long John Silver's, Inc. has
not rejected or affirmed the remaining four leases, there can be no assurance
that some or all of the leases will not be rejected in the future. The lost
revenues resulting from the four leases that were rejected, as described above,
and the lost revenues that would result in the event the remaining four leases
are rejected could have an adverse effect on the results of operations of the
Income Fund if the Income Fund is unable to re-lease these restaurant
properties in a timely manner.
During the six months ended June 30, 1999 and 1998, the Income Fund earned
$20,114 and $39,637, respectively, in interest and other income, $9,010 and
$19,451 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. The decrease in interest and other income during the quarter and
six months ended June 30, 1999, as compared to the quarter and six months ended
June 30, 1998, was primarily attributable to a decrease in cash and cash
equivalents related to the fact that, in June 1998, Long John Silver's, Inc.
filed for bankruptcy and rejected the leases relating to four of the eight
restaurant properties they lease. As a result, this tenant ceased making rental
payments on the four rejected leases, as described above.
For the quarter and six months ended June 30, 1999 and 1998, the Income Fund
also owned and leased six restaurant properties indirectly through one joint
venture arrangement and two restaurant properties as tenants-in-common with our
affiliates. In connection with these joint venture arrangements, during the six
months
S-31
<PAGE>
ended June 30, 1999 and 1998, the Income Fund earned $123,928 and $120,294,
respectively, $62,027 and $60,549 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively.
Operating expenses, including depreciation and amortization expense, were
$417,916 and $252,376 for the six months ended June 30, 1999 and 1998,
respectively, $222,744 and $124,967 of which was incurred during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was partially attributable to the
fact that the Income Fund accrued insurance and real estate taxes as a result
of Long John Silver's, Inc. filing for bankruptcy and rejecting the leases
relating to four restaurant properties in June 1998. In addition, the increase
in operating expenses was partially attributable to an increase in depreciation
expense due to the fact that during the year ended December 31, 1998 the Income
Fund reclassified these assets from net investment in direct financing leases
to land and buildings on operating leases. In May 1999, the Income Fund re-
leased one of the restaurant properties with a rejected lease. The Income Fund
will continue to incur certain expenses, such as real estate taxes, insurance
and maintenance relating to the restaurant properties with rejected leases
until replacement tenants or purchasers are located. The Income Fund is
currently seeking either replacement tenants or purchasers for these restaurant
properties. In addition, the Income Fund will incur certain expenses such as
real estate taxes, insurance and maintenance relating to one or more of the
four restaurant properties still leased by Long John Silver's, Inc. if one or
more of the leases are rejected.
The increase in operating expenses for the quarter and six months ended June
30, 1999 was also partially due to the fact that the Income Fund incurred
$74,477 and $107,297 in transaction costs for the quarter and six months ended
June 30, 1999, respectively, related to our retaining financial and legal
advisors to assist us in evaluating and negotiating the Acquisition with APF.
If the Limited Partners reject the Acquisition, the Income Fund will bear the
portion of the transaction costs based upon the percentage of "For" votes and
we will bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
At June 30, 1999, the Income Fund recorded a provision for loss on building
in the amount of $132,446 for financial reporting purposes relating to a Long
John Silver's restaurant property in Gastonia, North Carolina, the lease for
which was rejected by the tenant in June 1998, as described above. The tenant
of this restaurant property filed for bankruptcy and ceased payment of rents
under the terms of its lease agreement. The impairment represents the
difference between the carrying value of the restaurant property at June 30,
1999 and the estimated net sales proceeds from the sale of the restaurant
property based on a purchase and pending sales contract with an unrelated third
party.
The Years Ended December 31, 1998, 1997 and 1996
The Income Fund owned and leased 42 wholly-owned restaurant properties
during 1996, 1997, and 1998. In addition, during 1996, the Income Fund was a
co-venturer in one joint venture that owned and leased seven restaurant
properties, including two restaurant properties in Wood-Ridge Real Estate Joint
Venture, which were sold in September 1996, and the Income Fund owned and
leased one restaurant property with affiliates, as tenants-in-common. During
1997, the Income Fund was a co-venturer in one joint venture that owned and
leased six restaurant properties and owned and leased one restaurant property
with affiliates as tenants-in-common. During 1998, the Income Fund owned and
leased one additional restaurant property with an affiliate as tenants-in-
common. As of December 31, 1998, the Income Fund owned, either directly or
through joint venture arrangements, 50 restaurant properties, which are
generally subject to long-term, triple-net leases. The leases of the restaurant
properties provide for minimum base annual rental payments, payable in monthly
installments, ranging from approximately $22,500 to $190,600. The majority of
the leases provide for percentage rent based on sales in excess of a specified
amount. In addition, the majority of the leases provide that, commencing in
specified lease years, generally from the sixth or the ninth lease year, the
annual base rent required under the terms of the lease will increase.
During the years ended December 31, 1998, 1997 and 1996, the Income Fund
earned $3,130,205, $3,586,791, and $3,596,466, respectively, in rental income
from operating leases, or net of adjustments to
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<PAGE>
accrued rental income, and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1998, as compared to 1997, is primarily due to a
decrease in rental and earned income of approximately $197,700 due to the fact
that, in June 1998, Long John Silver's, Inc., filed for bankruptcy and rejected
the leases relating to four of the eight restaurant properties leased by Long
John Silver's, Inc. As a result, this tenant ceased making rental payments on
the four rejected leases. The Income Fund has continued receiving rental
payments relating to the leases not rejected by the tenant. In conjunction with
the four rejected leases, during the year ended December 31, 1998, the Income
Fund wrote off approximately $250,600 of accrued rental income, or non-cash
accounting adjustment relating to the straight-lining of future scheduled rent
increases over the lease term in accordance with generally accepted accounting
principles. We are currently seeking either new tenants or purchasers for these
restaurant properties. The Income Fund will not recognize rental and earned
income from these restaurant properties until new tenants for these restaurant
properties are located or until the restaurant properties are sold and the
proceeds from such sales are reinvested in additional restaurant properties.
While Long John Silver's, Inc. has not rejected or affirmed the remaining four
leases, there can be no assurance that some or all of the leases will not be
rejected in the future. The lost revenues resulting from the four leases that
were rejected, as described above, and the possible rejection of the remaining
four leases could have an adverse effect on the results of operations of the
Income Fund if the Income Fund is unable to re-lease these restaurant
properties in a timely manner.
During the years ended December 31, 1998, 1997 and 1996, the Income Fund
also earned $41,463, $25,791, and $23,318, respectively, in contingent rental
income. Contingent rental income for the year ended December 31, 1998, as
compared to 1997, increased primarily as a result of increased gross sales of
certain restaurant properties that are subject to leases requiring payment of
contingent rental income.
In addition, for the years ended December 31, 1998, 1997 and 1996, the
Income Fund earned $236,553, $239,249 and $392,862, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The decrease in net income earned by joint ventures during 1997, as
compared to 1996, is primarily attributable to the fact that in September 1996,
Wood-Ridge Real Estate Joint Venture, in which the Income Fund owns a 50%
interest, recognized a gain of approximately $261,100 for financial reporting
purposes as a result of the sale of its restaurant properties in September
1996, as described above in "Capital Resources." The joint venture reinvested
the majority of the net sales proceeds in five restaurant properties in October
1996 and one restaurant property in January 1997; therefore, the sale of the
two restaurant properties did not have a material adverse effect on operations.
During the year ended December 31, 1998, five lessees of the Income Fund,
Flagstar Enterprises, Inc., Checkers Drive-In Restaurants, Inc., Long John
Silver's, Inc., Foodmaker, Inc. and Golden Corral Corporation, each contributed
more than 10% of the Income Fund's total rental income, including the Income
Fund's share of rental income from six restaurant properties owned by a joint
venture and two restaurant properties owned with affiliates as tenants-in-
common. As of December 31, 1998, Flagstar Enterprises, Inc. was the lessee
under leases relating to eight restaurants, Checkers Drive-In Restaurants, Inc.
was the lessee under leases relating to 14 restaurants, Long John Silver's,
Inc. was the lessee under leases relating to four restaurants, excluding the
four leases rejected by the tenant as described above, Foodmaker, Inc. was the
lessee under leases relating to four restaurants and Golden Corral Corporation
was lessee under leases relating to five restaurants. It is anticipated that,
based on the minimum rental payments required by the leases, Flagstar
Enterprises, Inc., Checkers Drive-In Restaurants, Foodmaker, Inc., and Golden
Corral Corporation each will continue to contribute more than 10% of the Income
Fund's total rental income in 1999. In addition, during the year ended December
31, 1998, five restaurant chains, Hardee's, Checkers Drive-In Restaurants, Long
John Silver's, Golden Corral and Jack in the Box, each accounted for more than
10% of the Income Fund's total rental income, including the Income Fund's share
of rental income from six restaurant properties owned by a joint venture and
two restaurant properties owned with affiliates as tenants-in-common. In 1999,
it is anticipated that Hardee's, Checker's Drive-In Restaurants, Golden Corral
and Jack in the Box each will continue to account for more than 10% of the
total rental income to which the Income Fund is entitled under the terms of the
leases.
S-33
<PAGE>
Any failure of these lessees or restaurant chains could materially affect the
Income Fund's income if the Income Fund is not able to re-lease the restaurant
properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$547,636, $473,109, and $483,551 for the years ended December 31, 1998, 1997
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is partially attributable to the fact that the Income Fund
accrued insurance and real estate taxes as a result of Long John Silver's, Inc.
filing for bankruptcy and rejecting the leases relating to four restaurant
properties in June 1998. In addition, the increase in operating expenses during
the year ended December 31, 1998, is partially attributable to an increase in
depreciation expense due to the fact that during the year ended December 31,
1998, the Income Fund reclassified these assets from net investment in direct
financing leases to land and buildings on operating leases. The Income Fund
will continue to incur certain expenses, such as real estate taxes, insurance
and maintenance relating to these restaurant properties with rejected leases
until replacement tenants or purchasers are located. The Income Fund is
currently seeking either replacement tenants or purchasers for these restaurant
properties.
The increase in operating expenses for 1998, is also partially due to the
fact that the Income Fund incurred $23,196 in transaction costs related to the
our retaining financial and legal advisors to assist us in evaluating and
negotiating the proposed Acquisition. The decrease in operating expenses during
1997, as compared to 1996, is primarily attributable to a decrease in
accounting and administrative expenses associated with operating the Income
Fund and its restaurant properties.
During the year ended December 31, 1998, the Income Fund established an
allowance for loss on land and buildings of $280,907 for financial reporting
purposes relating to two of the four Long John Silver's restaurant properties
whose leases were rejected by the tenant, as described above. The loss
represents the difference between the carrying value of the restaurant
properties at December 31, 1998 and the current estimated net realizable value
for these restaurant properties. No such allowance was established during the
years ended December 31, 1997 and 1996.
The Income Fund's leases as of December 31, 1998, are triple-net leases and
contain provisions that the we believe mitigate the adverse effect of
inflation. Such provisions include clauses requiring the payment of percentage
rent based on certain restaurant sales above a specified level and/or automatic
increases in base rent at specified times during the term of the lease.
Management expects that increases in restaurant sales volumes due to inflation
and real sales growth should result in an increase in rental income over time.
Continued inflation also may cause capital appreciation of the Income Fund's
restaurant properties. Inflation and changing prices, however, also may have an
adverse impact on the sales of the restaurants and on potential capital
appreciation of the restaurant properties.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to
the failure of entire systems.
Information and Non-Information Technology Systems
The Income Fund does not have any information or non-information technology
systems. We and our affiliates provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Income Fund. The information technology system of our
affiliates consists of a network of personal computers and servers built using
hardware and software from mainstream suppliers. The non-information technology
systems of our affiliates are primarily facility related and include building
S-34
<PAGE>
security systems, elevators, fire suppressions, HVAC, electrical systems and
other utilities. Our affiliates have no internally generated programmed
software coding to correct, because substantially all of the software utilized
by us and our affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Income Fund's
restaurant properties is the responsibility of the tenants of such properties
in accordance with the terms of the Income Fund's leases.
The Y2K Team
In early 1998, we and our affiliates formed a Year 2000 committee (the "Y2K
Team") for the purpose of identifying, understanding and addressing the various
issues associated with the year 2000 problem. The Y2K Team consists of us and
members from our affiliates, including representatives from senior management,
information systems, telecommunications, legal, office management, accounting
and property management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the Income Fund's systems could have
a potential year 2000 problem.
The information system of our affiliates is comprised of hardware and
software applications from mainstream suppliers. Accordingly, the Y2K Team has
contacted and is evaluating documentation from the respective vendors and
manufacturers to verify the year 2000 compliance of their products. The Y2K
Team has also requested and is evaluating documentation from the non-
information technology systems providers of our affiliates.
In addition, the Y2K Team has requested and is evaluating documentation from
other companies with which the Income Fund has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Income Fund's transfer
agent, and financial institutions. The Income Fund depends on its transfer
agent to maintain and track investor information and its financial institutions
for availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year
2000 compliant. Although the Y2K Team continues to receive positive responses
from the companies with which the Income Fund has third party relationships
regarding their year 2000 compliance, we cannot be assured that the third
parties have adequately considered the impact of the year 2000.
In addition, the Y2K Team is in the process of requesting documentation from
the Income Fund's tenants and expects to complete this process by September 30,
1999. The Y2K Team expects to begin the process of evaluating the responses on
or about October 1, 1999 and to complete this process by October 31, 1999. The
Income Fund has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and implemented upgrades for certain hardware
equipment. In addition, the Y2K Team has identified certain software
applications which will require upgrades to become year 2000 compliant. We
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems and non-information technology systems
used in the business activities and operations of the Income Fund, to be
completed by September 30, 1999, although, we cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
S-35
<PAGE>
The cost for these upgrades and other remedial measures is the
responsibility of us and our affiliates. We do not expect that the Income Fund
will incur any costs in connection with year 2000 remedial measures.
Assessing the Risks to the Income Fund of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Income Fund
We believe that the reasonably likely worst case scenario with regard to the
information and non-information technology systems used by the Income Fund is
the failure of one or more of these systems as a result of year 2000 problems.
Because the Income Fund's major source of income is rental payments under long-
term triple-net leases, any failure of information or non-information
technology systems used by the Income Fund is not expected to have a material
impact on the results of operations of the Income Fund. Even if such systems
failed, the payment of rent under the Income Fund's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of us and our affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Income Fund or if the progress of
the Y2K Team in remediating year 2000 problems with such systems deviates from
the anticipated timeline, the Y2K Team will develop a contingency plan if
deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Income Fund Records
We believe that the reasonably likely worst case scenario with regard to the
Income Fund's transfer agent is that the transfer agent will fail to achieve
year 2000 compliance of its systems and will not be able to accurately maintain
the records of the Income Fund. This could result in the inability of the
Income Fund to accurately identify its Limited Partners for purposes of
distributions, delivery of disclosure materials and transfers of units. The Y2K
Team has received certification from the Income Fund's transfer agent of its
year 2000 compliance. Despite the positive response from the transfer agent, we
cannot be assured that the transfer agent has addressed all possible year 2000
issues.
The Y2K Team has developed a contingency plan pursuant to which we and our
affiliates would maintain the records of the Income Fund manually, in the event
that the systems of the transfer agent are not year 2000 compliant. We and our
affiliates would have to allocate resources to internally perform the functions
of the transfer agent. We do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Income Fund.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
We believe that the reasonably likely worst case scenario with regard to its
financial institutions is that some or all of its funds on deposit with such
financial institutions may be temporarily unavailable. The Y2K Team has
received responses from 93% of the Income Fund's financial institutions
indicating that their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. Despite the positive
responses from the financial institutions, we cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss
of short-term liquidity could affect the Income Fund's ability to pay its
expenses on a current basis. We do not anticipate that a loss of short-term
liquidity would have a material impact on the results of operations of the
Income Fund.
Based upon the responses received from the Income Fund's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
S-36
<PAGE>
Risks of Late Payment or Non-Payment of Rent by Tenants
We believe that the reasonably likely worst case scenario with regard to its
tenants is that some of the tenants may make rental payments late as the result
of the failure of the tenants to achieve year 2000 compliance of their systems
used in the payment of rent, the failure of the tenants' financial institutions
to achieve year 2000 compliance, or the temporary disruption of the tenants'
businesses. The Y2K Team is in the process of requesting responses from the
Income Fund's tenants indicating the extent to which their systems are
currently year 2000 compliant or are expected to be year 2000 compliant prior
to the year 2000. We cannot be assured that the tenants have addressed all
possible year 2000 issues. The late payment of rent by one or more tenants
would affect the results of operations of the Income Fund in the short-term.
We are also aware of predictions that the year 2000 problem, if uncorrected,
may result in a global economic crisis. We are not able to determine if such
predictions are true. A widespread disruption of the economy could affect the
ability of the Income Fund's tenants to pay rent and, accordingly, could have a
material impact on the results of operations of the Income Fund.
Because payment of rent is under the control of the Income Fund's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, we will assess the
remedies available to the Income Fund under its lease agreements.
S-37
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....... F-1
Condensed Statements of Income for the Quarters and Six Months Ended June
30, 1999, and 1998...................................................... F-2
Condensed Statements of Partners' Capital for the Six Months Ended
June 30, 1999 and for the Year Ended December 31, 1998.................. F-3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998................................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Six Months
Ended June 30, 1999 and 1998............................................ F-5
Report of Independent Certified Public Accountants....................... F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-9
Statements of Partners' Capital for the Years Ended December 31, 1998,
1997 and 1996........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1998, 1997
and 1996................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-21
Unaudited Pro Forma Balance Sheet as of June 30, 1999.................... F-22
Unaudited Pro Forma Statement of Earnings for the Six Months Ended June
30, 1999................................................................ F-24
Unaudited Pro Forma Statement of Earnings for the Year Ended December 31,
1998.................................................................... F-26
Unaudited Pro Forma Statement of Cash Flows for the Six Months Ended June
30, 1999................................................................ F-28
Unaudited Pro Forma Statement of Cash Flows for the Year Ended December
31, 1998................................................................ F-30
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-32
</TABLE>
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,230,329 and
$1,080,652, respectively and allowance for loss on
land and building of $413,353 and $280,907,
respectively......................................... $22,891,786 $23,173,909
Net investment in direct financing leases............. 7,548,173 7,589,694
Investment in joint ventures.......................... 2,726,054 2,743,450
Cash and cash equivalents............................. 1,083,203 1,214,444
Receivables, less allowance for doubtful accounts of
$849 in 1999 and 1998................................ 43,835 62,465
Prepaid expenses...................................... 19,252 9,627
Organization costs, less accumulated amortization of
$10,000 and $9,549, respectively..................... -- 451
Accrued rental income................................. 1,740,806 1,565,014
----------- -----------
$36,053,109 $36,359,054
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 81,072 $ 592
Accrued and escrowed real estate taxes payable........ 29,799 16,019
Distributions payable................................. 800,000 800,000
Due to related party.................................. 36,701 23,337
Rents paid in advance and deposits.................... 37,764 53,206
----------- -----------
Total liabilities................................... 985,336 893,154
Commitments and Contingencies (Note 3)................
Partners' capital..................................... 35,067,773 35,465,900
----------- -----------
$36,053,109 $36,359,054
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 594,419 $ 618,834 $1,188,465 $1,250,545
Adjustments to accrued rental
income........................ -- (265,192) -- (265,192)
Earned income from direct
financing leases.............. 209,566 243,835 419,728 507,064
Interest and other income...... 9,010 19,451 20,114 39,637
--------- --------- ---------- ----------
812,995 616,928 1,628,307 1,532,054
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 34,365 35,368 74,682 66,963
Professional services.......... 13,617 8,708 22,221 13,509
Management fees to related
party......................... 8,093 8,525 16,144 17,295
Real estate taxes.............. 8,030 2,646 16,720 2,646
State and other taxes.......... 9,114 7,620 30,305 27,763
Depreciation and amortization.. 75,048 62,100 150,547 124,200
Transaction costs.............. 74,477 -- 107,297 --
--------- --------- ---------- ----------
222,744 124,967 417,916 252,376
--------- --------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures and Provision
for Loss on Building............ 590,251 491,961 1,210,391 1,279,678
Equity in Earnings of Joint
Ventures........................ 62,027 60,549 123,928 120,294
Provision for Loss on Building... (132,446) -- (132,446) --
--------- --------- ---------- ----------
Net Income....................... $ 519,832 $ 552,510 $1,201,873 $1,399,972
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 5,996 $ 5,525 $ 12,817 $ 14,000
Limited partners............... 513,836 546,985 1,189,056 1,385,972
--------- --------- ---------- ----------
$ 519,832 $ 552,510 $1,201,873 $1,399,972
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.13 $ 0.14 $ 0.30 $ 0.35
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
General partners:
Beginning balance.............................. $ 145,629 $ 117,411
Net income..................................... 12,817 28,218
----------- -----------
158,446 145,629
----------- -----------
Limited partners:
Beginning balance.............................. 35,320,271 36,105,992
Net income..................................... 1,189,056 2,614,279
Distributions ($0.40 and $0.85 per limited
partner unit, respectively)................... (1,600,000) (3,400,000)
----------- -----------
34,909,327 35,320,271
----------- -----------
Total partners' capital.......................... $35,067,773 $35,465,900
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities......... $ 1,468,759 $ 1,710,905
----------- -----------
Cash Flows from Investing Activities:
Investment in joint venture....................... -- (207,986)
----------- -----------
Net Cash used in investing activities........... -- (207,986)
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (1,600,000) (1,800,000)
----------- -----------
Net cash used in financing activities........... (1,600,000) (1,800,000)
----------- -----------
Net Decrease in Cash and Cash Equivalents........... (131,241) (297,081)
Cash and Cash Equivalents at Beginning of Period.... 1,214,444 1,614,708
----------- -----------
Cash and Cash Equivalents at End of Period.......... $ 1,083,203 $ 1,317,627
=========== ===========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
Period........................................... $ 800,000 $ 800,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and six months ended June 30, 1999, may not
be indicative of the results that may be expected for the year ending December
31, 1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XV, Ltd. (the "Partnership") for the year ended December 31, 1998.
2. Land and Building on Operating Leases
At June 30, 1999, the Partnership recorded a provision for loss on building
in the amount of $132,446 for financial reporting purposes relating the Long
John Silver's property in Gastonia, North Carolina. The tenant of this property
filed for bankruptcy and ceased payment of rents under the terms of its lease
agreement. The allowance represents the difference between the carrying value
of the property at June 30, 1999 and the estimated net sales proceeds from the
sale of the property based on a purchase and sales contract with an unrelated
third party (see Note 4).
3. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
As consideration for the Merger, APF has agreed to issue 1,866,951 shares of
its common stock, par value $0.01 per share (the "APF Shares") which, for the
purposes of valuing the merger consideration, have been valued by APF at $20.00
per APF Share, the price paid by APF investors (after an adjustment for a one
for two reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a nationally
recognized real estate appraisal firm, to appraise the Partnership's restaurant
property portfolio. Based on Valuation Associates' appraisal, the Partnership's
property portfolio and other assets were valued on a going concern basis
(meaning the Partnership continues unchanged) at $36,726,950 as of December 31,
1998. Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that
the APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for trading
on the New York Stock Exchange concurrently with the consummation of the
Merger, and therefore, would be freely tradable at the option of the former
limited partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess of 50%
of the Partnership's outstanding limited partnership interests must approve the
Merger prior to consummation of the transaction. If the limited partners at the
special meeting approve the Merger, APF will own the properties and other
assets of the Partnership. The general partners intend to recommend that the
limited partners of the Partnership approve the Merger. In connection with
their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of
F-5
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
the transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds
served a lawsuit against the general partners and APF in connection with the
proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to add
three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims.
In June 1999, the Partnership entered into an agreement with an unrelated
third party to sell the Long John Silver's property in Gastonia, North
Carolina. At June 30, 1999, the Partnership established a provision for loss on
building related to the anticipated sale of this property (see Note 2). As of
August 6, 1999, the sale had not occurred.
F-6
<PAGE>
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XV, Ltd.
In our opinion, the accompanying balance sheets and the related statements
of income, of partners' capital and of cash flows present fairly, in all
material respects, the financial position of CNL Income Fund XV, Ltd. (a
Florida Limited partnership) at December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 27, 1999, except for
the second paragraph of
Note 10, for which the date
is March 11, 1999 and Note
11 for which the date is
June 3, 1999
F-7
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $23,173,909 $22,145,138
Net investment in direct financing leases.............. 7,589,694 9,264,307
Investment in joint ventures........................... 2,743,450 2,561,816
Cash and cash equivalents.............................. 1,214,444 1,614,708
Receivables, less allowance for doubtful accounts of
$849 in 1998.......................................... 62,465 26,888
Prepaid expenses....................................... 9,627 7,633
Organization costs, less accumulated amortization of
$9,549 and $7,548..................................... 451 2,452
Accrued rental income.................................. 1,565,014 1,422,781
----------- -----------
$36,359,054 $37,045,723
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 592 $ 6,991
Accrued and escrowed real estate taxes payable......... 16,019 6,158
Distributions payable.................................. 800,000 800,000
Due to related parties................................. 23,337 4,311
Rents paid in advance.................................. 53,206 4,860
----------- -----------
Total liabilities.................................... 893,154 822,320
Partners' capital...................................... 35,465,900 36,223,403
----------- -----------
$36,359,054 $37,045,723
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-8
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,443,550 $2,527,261 $2,527,261
Adjustments to accrued rental income....... (250,631) -- --
Earned income from direct financing
leases.................................... 937,286 1,059,530 1,069,205
Contingent rental income................... 41,463 25,791 23,318
Interest and other income.................. 62,819 56,183 55,964
---------- ---------- ----------
3,234,487 3,668,765 3,675,748
---------- ---------- ----------
Expenses:
General operating and administrative....... 137,794 135,714 149,388
Professional services...................... 26,208 24,526 19,881
Management fees to related parties......... 33,990 35,321 35,126
Real estate taxes.......................... 16,797 -- --
State and other taxes...................... 27,763 29,200 30,924
Depreciation and amortization.............. 281,888 248,348 248,232
Transaction costs.......................... 23,196 -- --
---------- ---------- ----------
547,636 473,109 483,551
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Provision for Loss on Land and
Buildings................................... 2,686,851 3,195,656 3,192,197
Equity in Earnings of Joint Ventures......... 236,553 239,249 392,862
Provision for Loss on Land and Buildings..... (280,907) -- --
---------- ---------- ----------
Net Income................................... $2,642,497 $3,434,905 $3,585,059
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 28,218 $ 34,349 $ 35,851
Limited partners........................... 2,614,279 3,400,556 3,549,208
---------- ---------- ----------
$2,642,497 $3,434,905 $3,585,059
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.65 $ 0.85 $ 0.89
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-9
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $1,000 $ 46,211 $40,000,000 $ (4,085,947) $ 4,512,175 $(4,790,000) $35,683,439
Distributions to
limited partners
($0.82 per limited
partner unit)......... -- -- -- (3,280,000) -- -- (3,280,000)
Net income............. -- 35,851 -- -- 3,549,208 -- 3,585,059
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 82,062 40,000,000 (7,365,947) 8,061,383 (4,790,000) 35,988,498
Distributions to
limited partners
($0.80 per limited
partner unit)......... -- -- -- (3,200,000) -- -- (3,200,000)
Net income............. -- 34,349 -- -- 3,400,556 -- 3,434,905
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... 1,000 116,411 40,000,000 (10,565,947) 11,461,939 (4,790,000) 36,223,403
Distributions to
limited partners
($0.85 per limited
partner unit)......... -- -- -- (3,400,000) -- -- (3,400,000)
Net income............. -- 28,218 -- -- 2,614,279 -- 2,642,497
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1998................... $1,000 $144,629 $40,000,000 $(13,965,947) $14,076,218 $(4,790,000) $35,465,900
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-10
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,143,119 $ 3,228,741 $ 3,378,973
Distributions from joint ventures...... 271,075 249,318 259,407
Cash paid for expenses................. (252,042) (218,106) (246,748)
Interest received...................... 54,576 46,642 43,050
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,216,728 3,306,595 3,434,682
----------- ----------- -----------
Cash Flows from Investing Activities:
Investment in joint ventures........... (216,992) -- (129,939)
Return of capital from joint venture... -- 51,950 --
----------- ----------- -----------
Net cash provided by (used in)
investing activities................. (216,992) 51,950 (129,939)
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,400,000) (3,280,000) (3,200,000)
----------- ----------- -----------
Net cash used in financing
activities........................... (3,400,000) (3,280,000) (3,200,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (400,264) 78,545 104,743
Cash and Cash Equivalents at Beginning
of Year................................ 1,614,708 1,536,163 1,431,420
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,214,444 $ 1,614,708 $ 1,536,163
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,642,497 $ 3,434,905 $ 3,585,059
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation.......................... 279,051 245,563 245,563
Amortization.......................... 2,837 2,785 2,669
Equity in earnings of joint ventures,
net of distributions................. 34,522 10,069 (133,455)
Provision for loss on land and
buildings............................ 280,907 -- --
Decrease (increase) in receivables.... (33,427) 3,288 58,013
Decrease in net investment in direct
financing leases..................... 85,884 87,508 77,834
Increase in prepaid expenses.......... (1,994) (584) (4,234)
Increase in accrued rental income..... (142,233) (431,079) (431,654)
Increase in accounts payable and
accrued expenses..................... 3,462 1,515 1,972
Increase (decrease) in due to related
parties.............................. 16,876 2,956 (6,880)
Increase (decrease) in rents paid in
advance.............................. 48,346 (50,331) 39,795
----------- ----------- -----------
Total adjustments.................... 574,231 (128,310) (150,377)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,216,728 $ 3,306,595 $ 3,434,682
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31............................ $ 800,000 $ 800,000 $ 880,000
=========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-11
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business--CNL Income Fund XV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over the
lease terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. Whenever a tenant defaults under the terms of its lease, or events
or changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that change
could occur in the near term which could adversely affect the general partners'
best estimate of net cash flows expected to be generated from its properties
and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables, and to
F-12
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
decrease rental or other income or increase bad debt expense for the current
period, although the Partnership continues to pursue collection of such
amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures--The Partnership accounts for its interests in
Wood-Ridge Real Estate Joint Venture and properties in Clinton, North Carolina
and Fort Myers, Florida, held as tenants-in-common with affiliates, using the
equity method since the Partnership shares control with affiliates which have
the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs were amortized over five years using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases and some of the leases are classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are operating
leases. Substantially all leases are for 15 to 20 years and provide for
minimum and contingent rentals. In addition, generally the tenant pays all
property taxes and
F-13
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, property
damage, fire and extended coverage. The lease options generally allow tenants
to renew the leases for two to five successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow the
tenant to purchase the property at fair market value after a specified portion
of the lease has elapsed.
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land.................... $15,579,852 $15,579,852
Buildings............... 8,955,616 7,366,887
----------- -----------
24,535,468 22,946,739
Less accumulated
depreciation........... (1,080,652) (801,601)
----------- -----------
23,454,816 22,145,138
Less allowance for loss
on land and buildings.. (280,907) --
----------- -----------
$23,173,909 $22,145,138
=========== ===========
</TABLE>
During the year ended December 31, 1998, the Partnership established an
allowance for loss on land and buildings of $280,907 for financial reporting
purposes relating to two of the four Long John Silver's properties whose leases
were rejected by the tenant as a result of the tenant filing for bankruptcy.
The loss represents the difference between the carrying value of the properties
at December 31, 1998 and the current estimated net realizable value for these
properties.
Generally, the leases provide for escalating guaranteed minimum rents
throughout the lease term. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the years
ended December 31, 1998, 1997 and 1996, the Partnership recognized $142,233
(net of $250,631 in write-offs), $431,079, and $431,654, respectively, of such
rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 2,079,263
2000.......................................................... 2,205,272
2001.......................................................... 2,208,745
2002.......................................................... 2,239,958
2003.......................................................... 2,255,872
Thereafter.................................................... 24,476,132
-----------
$35,465,242
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant, the
above table only presents future minimum lease payments due during the initial
lease terms. In addition, this table does not include any amounts for future
contingent rentals which may be received on the leases based on a percentage of
the tenant's gross sales.
F-14
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
4. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Minimum lease payments receivable............ $ 15,275,632 $ 19,905,444
Estimated residual values.................... 2,460,656 2,873,859
Less unearned income......................... (10,146,594) (13,514,996)
------------ ------------
Net investment in direct financing leases.... $ 7,589,694 $ 9,264,307
============ ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 922,497
2000.......................................................... 925,241
2001.......................................................... 930,728
2002.......................................................... 953,085
2003.......................................................... 958,440
Thereafter.................................................... 10,585,641
-----------
$15,275,632
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
During the year ended December 31, 1998, four of the eight leases with Long
John Silver's, Inc. were rejected in connection with the tenant filing for
bankruptcy. As a result, the Partnership reclassified these assets from net
investment in direct financing leases to land and buildings on operating
leases. In accordance with the Statement of Financial Accounting Standards #13,
"Accounting for Leases," the Partnership recorded the reclassified assets at
the lower of original cost, present fair value, or present carrying amount. No
losses on the termination of direct financing leases were recorded for
financial reporting purposes.
5. Investment in Joint Ventures:
The Partnership has a 50 percent interest in the profits and losses of Wood-
Ridge Real Estate Joint Venture. The remaining interest in this joint venture
is held by an affiliate of the Partnership which has the same general partners.
The Partnership also has a 16 percent interest in a Property in Clinton, North
Carolina, with affiliates of the Partnership that has the same general
partners, as tenants-in-common. The Partnership accounts for its investment in
this property using the equity method since the Partnership shares control with
affiliates, and amounts relating to its investment are included in investment
in joint ventures.
In January 1997, Wood-Ridge Real Estate Joint Venture reinvested $502,598,
of the net sales proceeds from the sale of two properties during 1996 in one
property. As of December 31, 1998, the Partnership had received approximately
$52,000, representing its pro-rata share of the uninvested net sales proceeds.
As of December 31, 1998, the Partnership owned a 50 percent interest in the
profits and losses of the joint venture.
F-15
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
In June 1998, the Partnership acquired a property in Fort Myers, Florida,
with an affiliate of the general partners as tenants-in-common. In connection
therewith, the Partnership contributed an amount to acquire a 15 percent
interest in such property. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with
affiliates, and amounts relating to its investment are included in investment
in joint ventures.
Wood-Ridge Real Estate Joint Venture owns and leases six properties to
operators of national fast-food or family-style restaurants. The Partnership
and affiliates, as tenants-in-common in two separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food or family-style restaurants.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,063,237 $5,563,722
Net investment in direct financing lease......... 826,780 --
Cash............................................. 87,245 10,890
Receivables...................................... 1,677 5,923
Accrued rental income............................ 96,768 74,001
Other assets..................................... 857 1,078
Liabilities...................................... 69,285 18,195
Partners' capital................................ 7,007,279 5,637,419
Revenues......................................... 705,002 650,354
Net income....................................... 579,480 522,611
</TABLE>
The Partnership recognized income totalling $236,553, $239,249 and $392,862
for the years ended December 31, 1998, 1997 and 1996, respectively, from these
entities.
6. Allocations and Distributions:
Generally, all net income and losses of the Partnership, excluding gains and
losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners shall be subordinated to receipt by the
limited partners of an aggregate, eight percent, cumulative, noncompounded
annual return on their invested capital contributions (the "Limited Partners'
8% Return").
Generally, net sales proceeds from the sales of properties not in
liquidation of the Partnership, to the extent distributed, will be distributed
first to the limited partners in an amount sufficient to provide them with
their Limited Partners' 8% Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent previously
subordinated and unpaid, a one percent interest in all prior distributions of
net cash flow and a return of their capital contributions. Any remaining sales
proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners. Any gain from a sale of a property not in
liquidation of the Partnership is, in general, allocated in the same manner as
net sales proceeds are distributable. Any loss from the sale of a property is,
in general, allocated first, on a pro rata basis, to
F-16
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
partners with positive balances in their capital accounts, and thereafter, 95
percent to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be
used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves that
may be deemed necessary for any anticipated or unforeseen liabilities or
obligations of the Partnership, iii) third, to pay all of the Partnership's
liabilities, if any, to the general and limited partners, iv) fourth, after
allocations of net income, gains and/or losses, to distribute to the partners
with positive capital accounts balances, in proportion to such balances, up to
amounts sufficient to reduce such positive balances to zero, and v) thereafter,
any funds remaining shall then be distributed 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1998, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,400,000, $3,200,000 and
$3,280,000, respectively. No distributions have been made to the general
partners to date.
7. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $2,642,497 $3,434,905 $3,585,059
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes.... (126,518) (160,007) (160,007)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 85,884 87,508 77,834
Allowance for loss on land and
buildings........................... 280,907 -- --
Equity in earnings of joint ventures
for tax reporting purposes in excess
of (less than) equity in earnings of
joint ventures for financial
reporting purposes.................. 33,872 23,823 (158,836)
Accrued rental income................ (142,233) (431,079) (431,654)
Rents paid in advance................ 48,346 (50,331) 39,795
Capitalization of transaction costs
for tax reporting purposes.......... 23,196 -- --
Other................................ 1,686 (670) 2,127
---------- ---------- ----------
Net income for federal income tax
purposes............................ $2,847,637 $2,904,149 $2,954,318
========== ========== ==========
</TABLE>
F-17
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
8. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, serves
as treasurer, director and vice chairman of the board of CNL Fund Advisors,
Inc. During the years ended December 31, 1998, 1997, and 1996, CNL Fund
Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain
services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay the Affiliate a management fee of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the Partnership's
allocable share of gross revenues from joint ventures. The management fee,
which will not exceed fees which are competitive for similar services in the
same geographic area, may or may not be taken, in whole or in part as to any
year, in the sole discretion of the Affiliate. All or any portion of the
management fee not taken as to any fiscal year shall be deferred without
interest and may be taken in such other fiscal year as the Affiliate shall
determine. The Partnership incurred management fees of $33,990, $35,321 and
$35,126 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties based
on the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 8% Preferred Return, plus
their invested capital contributions. No deferred, subordinated real estate
disposition fees have been incurred since inception.
During the years ended December 31, 1998, 1997 and 1996, the Affiliate of
the general partners provided accounting and administrative services to the
Partnership on a day-to-day basis. The Partnership incurred $92,573, $78,051
and $87,265 for the years ended December 31, 1998, 1997 and 1996, respectively,
for such services.
The due to related parties at December 31, 1998 and 1997, totalled $23,337
and $4,311, respectively.
F-18
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
9. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees or affiliated groups of lessees, each representing more than
ten percent of the Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from joint ventures) for
each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In Restaurants, Inc. .......... $719,308 $716,905 $723,558
Golden Corral Corporation..................... 595,343 582,600 531,775
Flagstar Enterprises, Inc. (and Quincy's
Restaurants, Inc. for the years ended
December 31, 1997
and 1996).................................... 541,527 635,413 638,042
Long John Silver's, Inc....................... 510,187 710,325 714,804
Foodmaker, Inc................................ 417,426 417,426 417,426
</TABLE>
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from joint ventures) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In Restaurants................. $719,308 $716,905 $723,558
Golden Corral Family Steakhouse Restaurants... 595,343 582,600 531,775
Long John Silver's............................ 573,104 773,265 777,743
Hardee's...................................... 541,527 543,889 546,037
Jack in the Box............................... 417,426 417,426 417,426
</TABLE>
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any one of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership if the
Partnership is not able to re-lease the properties in a timely manner.
In June 1998, the tenant of eight of the Long John Silver's Properties filed
for bankruptcy and rejected the leases relating to four Properties. The rental
income relating to these Properties will terminate until new tenants or buyers
for the Properties are located. While Long John Silver's, Inc. has not rejected
or affirmed the remaining four leases, there can be no assurance that some of
all of the leases will not be rejected in the future. The lost revenues
resulting from the four leases that were rejected, as described above, and the
possible rejection of the remaining four leases could have an adverse effect on
the results of operations of the Partnership if the Partnership is unable to
re-lease these Properties in a timely manner.
10. Subsequent Events:
In January 1999, a Boston Market tenant rejected its lease and ceased making
rental payments related to this lease.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary
F-19
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
of APF (the "Merger"). As consideration for the Merger, APF has agreed to issue
3,733,901 shares of its common stock, par value $0.01 per share (the "APF
Shares") which, for the purposes of valuing the merger consideration, have been
valued by APF at $10.00 per APF Share, the price paid by APF investors in APF's
most recent public offering. In order to assist the general partners in
evaluating the proposed merger consideration, the general partners retained
Valuation Associates, a nationally recognized real estate appraisal firm, to
appraise the Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other assets
were valued on a going concern basis (meaning the Partnership continues
unchanged) at $36,726,950 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners
that is expected to be held in the third quarter of 1999, limited partners
holding in excess of 50% of the Partnership's outstanding limited partnership
interests must approve the Merger prior to consummation of the transaction. The
general partners intend to recommend that the limited partners of the
Partnership approve the Merger. In connection with their recommendation, the
general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such transaction
costs based upon the percentage of "Against" votes and abstentions.
11. Reverse Stock Split:
On June 3, 1999 a one-for-two reverse stock split approved by the
stockholders of APF became effective. This resulted in the consideration
referred to in Note 10 being adjusted to 1,866,951 shares valued at $20.00 per
APF share.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the acquisition of properties, the acquisition of CNL Fund
Advisors, Inc. (the "Advisor" or "CFA") and the CNL Restaurant Financial
Services Group, and the acquisition of the Income Fund (the acquisition of the
Income Fund is referred to as the "Acquisition"), and is based on estimates and
assumptions set forth below in the notes to such information which included pro
forma adjustments. This unaudited pro forma financial information has been
prepared utilizing the historical financial statements of APF, the historical
combined financial information of the Income Fund, the Advisor and CNL
Restaurant Financial Services Group (shown separately as CNL Financial
Services, Inc. ("CFS") and CNL Financial Corporation ("CFC") and should be read
in conjunction with the selected historical financial data and accompanying
notes of APF, Income Fund, Advisor and CNL Restaurant Financial Services Group.
The pro forma balance sheet assumes that the Acquisition occurred on June 30,
1999, and the pro forma consolidated statements of earnings and statements of
cash flows assume that the acquisition of properties by APF from January 1,
1998 through July 31, 1999, the acquisition of the Advisor, the CNL Restaurant
Financial Services Group and the Acquisition occurred on January 1, 1998.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL
Historical Pro Forma Historical Financial
APF Adjustments Subtotal Advisor Services, Inc.
------------ ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $569,567,003 $ 3,369,856(A) $572,936,859 $ 0 $ 0
Net Investment in Direct
Financing Leases....... 132,179,949 0 132,179,949 0 0
Mortgages and Notes
Receivable............. 63,351,507 0 63,351,507 0 0
Other Investments....... 16,197,812 0 16,197,812 0 0
Investment In Joint
Ventures............... 1,081,046 0 1,081,046 0 0
Cash and Cash
Equivalents............ 18,764,033 0(A) 18,764,033 333,295 639,036
Restricted
Cash/Certificates of
Deposit................ 2,006,690 0 2,006,690 0 0
Receivables (net
allowances)/
Due from Related
Party.................. 649,972 0 649,972 8,668,738 5,417,084
Accrued Rental Income... 5,875,698 0 5,875,698 0 0
Other Assets............ 12,551,632 0 12,551,632 405,214 313,486
Goodwill................ 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Assets........... $822,225,342 $3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,105,725 $ 0 $ 2,105,725 $ 673,437 $ 311,969
Accrued Construction
Costs Payable.......... 9,745,014 0 9,745,014 0 0
Distributions Payable... 0 0 0 0 0
Due to Related Parties.. 1,444,444 0 1,444,444 0 500,981
Income Tax Payable...... 0 0 0 51,466 16,906
Line of Credit/Notes
payable................ 149,000,000 3,369,856(A) 152,369,856 351,869 0
Deferred Income......... 2,466,355 0 2,466,355 0 0
Rents Paid in Advance... 1,617,367 0 1,617,367 0 0
Minority Interest....... 644,611 0 644,611 0 0
Common Stock............ 373,484 0 373,484 0 0
Common Stock--Class A... 0 0 0 6,400 2,000
Common Stock--Class B... 0 0 0 3,600 724
Additional Paid-in-
capital................ 669,997,715 0 669,997,715 3,328,376 5,303,503
Accumulated
distributions in excess
of net earnings........ (15,169,373) 0 (15,169,373) 4,992,099 233,523
Partners' Capital....... 0 0 0 0 0
------------ ----------- ------------ ---------- ----------
Total Liabilities and
Equity................ $822,225,342 $ 3,369,856 $825,595,198 $9,407,247 $6,369,606
============ =========== ============ ========== ==========
Wtd. Avg. Shares
Outstanding............ 37,347,883
============
Shares Outstanding...... 37,348,464
============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET--(Continued)
As of June 30, 1999
<TABLE>
<CAPTION>
Historical Historical
CNL Combining CNL Income
Financial Pro Forma Combined Fund XV, Pro Forma Adjusted
Corp. Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------ -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and Building on
operating leases (net
depreciation).......... $ 0 $ 0 $ 572,936,859 $22,891,786 $ 2,387,773 (B2) $ 598,216,418
Net Investment in Direct
Financing Leases....... 0 0 132,179,949 7,548,173 609,235 (B2) 140,337,357
Mortgages and Notes
Receivable............. 290,522,671 0 353,874,178 0 0 353,874,178
Other Investments....... 6,361,082 0 22,558,894 0 0 22,558,894
Investment In Joint
Ventures............... 0 0 1,081,046 2,726,054 422,228 (B2) 4,229,328
Cash and Cash
Equivalents............ 1,767,517 (9,122,645)(B1) 12,381,236 1,083,203 (2,769,355)(B2) 10,283,084
(412,000)(B2)
Restricted
Cash/Certificates of
Deposit................ 2,482,041 0 4,488,731 0 0 4,488,731
Receivables (net
allowances)
/Due from Related
Party.................. 1,125,933 (6,614,629)(C) 9,247,098 43,835 (36,701)(E) 9,254,232
Accrued Rental Income... 0 0 5,875,698 1,740,806 (1,740,806)(B2) 5,875,698
Other Assets............ 2,479,317 (2,575,792)(B1) 13,173,857 19,252 (19,252)(B2) 13,173,857
Goodwill................ 0 42,926,594 (B1) 42,926,594 0 0 42,926,594
------------ ------------ -------------- ----------- ------------ --------------
Total Assets........... $304,738,561 $ 24,613,528 $1,170,724,140 $36,053,109 $ (1,558,878) $1,205,218,371
============ ============ ============== =========== ============ ==============
LIABILITIES AND EQUITY:
Accounts Payable and
Accrued Liabilities.... $ 2,013,172 $ 0 $ 5,104,303 $ 110,871 $ 0 $ 5,215,174
Accrued Construction
Costs Payable.......... 0 0 9,745,014 0 0 9,745,014
Distributions Payable... 0 0 0 800,000 0 800,000
Due to Related Parties.. 30,170,185 (6,614,629)(C) 25,500,981 36,701 (36,701)(E) 25,500,981
Income Tax Payable...... 274,485 (342,857)(D) 0 0 0 0
Line of Credit/Notes
payable................ 267,685,382 0 420,407,107 0 0 420,407,107
Deferred Income......... 0 0 2,466,355 0 0 2,466,355
Rents Paid in Advance... 0 0 1,617,367 37,764 0 1,655,131
Minority Interest....... 0 0 644,611 0 0 644,611
Common Stock............ 0 61,500 (B1) 434,984 0 18,464 (B2) 453,448
Common Stock--Class A... 200 (8,600)(B1) 0 0 0 0
Common Stock--Class B... 501 (4,825)(B1) 0 0 0 0
Additional Paid-in-
capital................ 3,937,095 122,938,500 (B1) 792,936,215 0 33,527,132 (B2) 826,463,347
(12,568,974)(B1)
Accumulated
distributions in excess
of net earnings........ 657,541 (5,883,163)(B1) (88,132,797) 0 0 (88,132,797)
(73,306,281)(B1)
342,857 (D)
Partners' Capital....... 0 0 0 35,067,773 (35,067,773)(B2) 0
------------ ------------ -------------- ----------- ------------ --------------
Total Liabilities and
Equity................ $304,738,561 $ 24,613,528 $1,170,724,140 $36,053,109 $ (1,558,878) $1,205,218,371
============ ============ ============== =========== ============ ==============
Wtd. Avg. Shares
Outstanding............ 45,344,234
==============
Shares Outstanding...... 45,344,815
==============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition CNL Historical
Historical Pro Forma Historical Financial CNL Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------ ------------ ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 27,900,894 $ 3,056,620(a) $ 30,957,514 $ 0 $ 0 $ 0
Fees................... 0 0 0 9,454,036 2,963,154 11,511
Interest and Other
Income................ 4,249,461 0 4,249,461 87,570 249,258 11,539,080
------------ ----------- ------------ ----------- ---------- -----------
Total Revenue.......... 32,150,355 3,056,620 35,206,975 9,541,606 3,212,412 11,550,591
Expenses:
General and
Administrative........ 2,244,408 0 2,244,408 5,405,130 2,441,151 263,524
Management and Advisory
Fees.................. 1,681,870 0 1,681,870 0 0 1,231,905
Fees Paid to Related
Parties............... 0 0 0 88,949 689,425 0
Interest Expense....... 0 0 0 92,707 0 10,294,499
State Taxes............ 464,966 0 464,966 0 0 0
Depreciation--Other.... 0 0 0 77,130 39,032 0
Depreciation--
Property.............. 3,701,974 967,179(a) 4,669,153 0 0 0
Amortization........... 9,700 0 9,700 36 0 0
Transaction Costs...... 483,005 0 483,005 0 0 0
------------ ----------- ------------ ----------- ---------- -----------
Total Expenses......... 8,585,923 967,179 9,553,102 5,663,952 3,169,608 11,789,928
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $ 23,564,432 $ 2,089,441 $ 25,653,873 $ 3,877,654 $ 42,804 $ (239,337)
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 31,241 0 31,241 0 0 0
Gain (Loss) on Sale of
Properties............ (201,843) 0 (201,843) 0 0 0
Provision for Losses on
Properties............ (540,522) 0 (540,522) 0 0 0
------------ ----------- ------------ ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 22,853,308 2,089,441 24,942,749 3,877,654 42,804 (239,337)
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (1,595,036) (16,906) 86,202
------------ ----------- ------------ ----------- ---------- -----------
Net Earnings (Losses)... $ 22,853,308 $ 2,089,441 $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
============ =========== ============ =========== ========== ===========
Earnings Per
Share/Unit............. $ 0.61 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.54 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Dividends Per
Share/Unit............. $ 0.76 $ n/a $ n/a $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 18.16x n/a n/a n/a n/a n/a
============ =========== ============ =========== ========== ===========
Cash Distributions
Declared............... $ 28,476,150 $ 0(s) $ 28,476,150 $ n/a $ n/a $ n/a
============ =========== ============ =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 37,347,883 0 37,347,883 n/a n/a n/a
============ =========== ============ =========== ========== ===========
Shares Outstanding...... 37,348,464 0 37,348,464 n/a n/a n/a
============ =========== ============ =========== ========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Combined Income Fund Pro Forma Adjusted
Adjustments APF XV, Ltd. Adjustments Pro Forma
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $30,957,514 $ 1,608,193 $ 23,780 (j) $ 32,589,487
Fees................... (9,812,516)(b),(c) 2,616,185 0 (45,627)(k) 2,570,558
Interest and Other
Income................ 144,014 (d) 16,269,383 20,114 0 16,289,497
----------- ----------- ----------- --------- ------------
Total Revenue.......... $(9,668,502) $49,843,082 $ 1,628,307 $ (21,847) $ 51,449,542
Expenses:
General and
Administrative ....... (774,311)(e) 9,579,902 113,623 (55,888)(l),(m) 9,637,637
Management and Advisory
Fees.................. (2,913,775)(f) 0 16,144 (16,144)(n) 0
Fees Paid to Related
Parties............... (743,673)(g) 34,701 0 0 34,701
Interest Expense....... 0 10,387,206 0 0 10,387,206
State Taxes............ 0 464,966 30,305 7,171 (o) 502,442
Depreciation--Other.... 0 116,162 0 0 116,162
Depreciation--
Property.............. 0 4,669,153 149,677 32,464 (p) 4,851,294
Amortization........... 1,073,165 (h) 1,082,901 870 0 1,083,771
Transaction Costs...... 0 483,005 107,297 0 590,302
----------- ----------- ----------- --------- ------------
Total Expenses......... (3,358,594) 26,817,996 417,916 (32,397) 27,203,515
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties
and Provision for
Losses on Properties... $(6,309,908) $23,025,086 $ 1,210,391 $ 10,550 $ 24,246,027
Equity in Earnings of
Joint
Ventures/Minority
Interest.............. 0 31,241 123,928 (7,123)(q) 148,046
Gain (Loss) on Sale of
Properties............ 0 (201,843) 0 0 (201,843)
Provision for Losses on
Properties............ 0 (540,522) (132,446) 0 (672,968)
----------- ----------- ----------- --------- ------------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income
Taxes................. (6,309,908) 22,313,962 1,201,873 3,427 23,519,262
Benefit/(Provision) for
Federal Income
Taxes................. 1,525,740 (i) 0 0 0 0
----------- ----------- ----------- --------- ------------
Net Earnings (Losses)... $(4,784,168) $22,313,962 $ 1,201,873 $ 3,427 $ 23,519,262
=========== =========== =========== ========= ============
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.30 $ n/a $ 0.52
=========== =========== =========== ========= ============
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.77 $ n/a $ 16.29
=========== =========== =========== ========= ============
Dividends Per
Share/Unit............. $ n/a $ n/a $ .40 $ n/a $ 0.76
=========== =========== =========== ========= ============
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 2.92x
=========== =========== =========== ========= ============
Cash Distributions
Declared............... $ 4,689,252 (s) $33,165,402 $ 1,600,000 $(192,194)(s) $ 34,573,208
=========== =========== =========== ========= ============
Wtd. Avg. Shares
Outstanding............ 6,150,000 43,497,883 n/a 1,846,351 45,344,234(r)
=========== =========== =========== ========= ============
Shares Outstanding...... 6,150,000 43,498,464 n/a 1,846,351 45,344,815
=========== =========== =========== ========= ============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
----------- ------------ ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $33,129,661 $ 22,951,799(a) $56,081,460 $ 0 $ 0 $ 0
Fees................... 0 0 0 28,904,063 6,619,064 418,904
Interest and Other
Income................ 9,057,376 0 9,057,376 145,016 574,078 22,238,311
----------- ------------ ----------- ----------- ---------- -----------
Total Revenue.......... $42,187,037 $ 22,951,799 $65,138,836 $29,049,079 $7,193,142 $22,657,215
Expenses:
General and
Administrative........ 2,798,481 0 2,798,481 9,843,409 6,114,276 1,425,109
Management and Advisory
Fees.................. 1,851,004 0 1,851,004 0 0 2,807,430
Fees to Related
Parties............... 0 0 0 1,247,278 1,773,406 0
Interest Expense....... 0 0 0 148,415 0 21,350,174
State Taxes............ 548,320 0 548,320 19,126 0 0
Depreciation--Other.... 0 0 0 119,923 79,234 0
Depreciation--
Property.............. 4,042,290 6,246,947(a) 10,289,237 0 0 0
Amortization........... 11,808 0 11,808 57,077 0 95,116
Transaction Costs...... 157,054 0 157,054 0 0 0
----------- ------------ ----------- ----------- ---------- -----------
Total Expenses......... 9,408,957 6,246,947 15,655,904 11,435,228 7,966,916 25,677,829
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties .. $32,778,080 $ 16,704,852 $49,482,932 $17,613,851 $ (773,774) $(3,020,614)
Equity in Earnings of
Joint Venture/Minority
Interest.............. (14,138) 0 (14,138) 0 0 0
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0 0
Gain on
Securitization........ 0 0 0 0 0 3,694,351
Provision for Losses on
Properties............ (611,534) 0 (611,534) 0 0 0
----------- ------------ ----------- ----------- ---------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... 32,152,408 16,704,852 48,857,260 17,613,851 (773,774) 673,737
Benefit/(Provision) for
Federal Income Taxes.. 0 0 0 (6,957,472) 305,641 (246,603)
----------- ------------ ----------- ----------- ---------- -----------
Net Earnings (Losses)... $32,152,408 $ 16,704,852 $48,857,260 $10,656,379 $ (468,133) $ 427,134
=========== ============ =========== =========== ========== ===========
Earnings Per
Share/Unit............. $ 1.21 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Book Value Per
Share/Unit............. $ 17.70 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Dividends Per
Share/Unit............. $ 1.52 $ n/a $ n/a $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Ratio of Earnings to
Fixed Charges.......... 79.97x n/a n/a n/a n/a n/a
=========== ============ =========== =========== ========== ===========
Cash Distributions
Declared............... $39,449,149 $ 11,555,317(t) $51,004,466 $ n/a $ n/a $ n/a
=========== ============ =========== =========== ========== ===========
Wtd. Avg. Shares
Outstanding............ 26,648,219 7,577,456 34,225,675 n/a n/a n/a
=========== ============ =========== =========== ========== ===========
Shares Outstanding...... 37,337,927 0 37,337,927 n/a n/a n/a
=========== ============ =========== =========== ========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF EARNINGS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund XV, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and Earned
Income................ $ 0 $56,081,460 $3,171,668 $ 47,560 (j) $59,300,688
Fees................... (32,715,768)(b),(c) 3,226,263 0 (66,435)(k) 3,159,828
Interest and Other
Income................ 207,144 (d) 32,221,925 62,819 0 32,284,744
------------ ----------- ---------- --------- -----------
Total Revenue.......... $(32,508,624) $91,529,648 $3,234,487 $ (18,875) $94,745,260
Expenses:
General and
Administrative........ (4,241,719)(e) 15,939,556 180,799 (73,333)(l),(m) 16,047,022
Management and Advisory
Fees.................. (4,658,434)(f) 0 33,990 (33,990)(n) 0
Fees to Related
Parties............... (2,161,897)(g) 858,787 0 0 858,787
Interest Expense....... 0 21,498,589 0 0 21,498,589
State Taxes............ 0 567,446 27,763 11,479 (o) 606,688
Depreciation--Other.... 0 199,157 0 0 199,157
Depreciation--
Property.............. (340,898)(r) 9,948,339 279,051 64,927 (p) 10,292,317
Amortization........... 2,146,330 (h) 2,310,331 2,837 0 2,313,168
Transaction Costs...... 0 157,054 23,196 0 180,250
------------ ----------- ---------- --------- -----------
Total Expenses......... (9,256,618) 51,479,259 547,636 (30,917) 51,995,978
Operating Earnings
(Losses) Before Equity
in Earnings of Joint
Ventures/Minority
Interests, Gain (Loss)
on Sale of Properties,
Gain on Securitization
and Provision for
Losses on Properties... $(23,252,006) $40,050,389 $2,686,851 $ 12,042 $42,749,282
Equity in Earnings of
Joint Venture/Minority
Interest.............. 0 (14,138) 236,553 (14,246)(q) 208,169
Gain (Loss) on Sale of
Properties............ 0 0 0 0 0
Gain on
Securitization........ 0 3,694,351 0 0 3,694,351
Provision for Losses on
Properties............ 0 (611,534) (280,907) 0 (892,441)
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)
Before
Benefit/(Provision) for
Federal Income Taxes... (23,252,006) 43,119,068 2,642,497 (2,204) 45,759,361
Benefit/(Provision) for
Federal Income Taxes.. 6,898,434 (i) 0 0 0 0
------------ ----------- ---------- --------- -----------
Net Earnings (Losses)... $(16,353,572) $43,119,068 $2,642,497 $ (2,204) $45,759,361
============ =========== ========== ========= ===========
Earnings Per
Share/Unit............. $ n/a $ n/a $ 0.66 $ n/a $ 1.08
============ =========== ========== ========= ===========
Book Value Per
Share/Unit............. $ n/a $ n/a $ 8.87 $ n/a $ 16.44
============ =========== ========== ========= ===========
Dividends Per
Share/Unit............. $ n/a $ n/a $ 0.80 $ n/a $ 1.50
============ =========== ========== ========= ===========
Ratio of Earnings to
Fixed Charges.......... n/a n/a n/a n/a 3.07x
============ =========== ========== ========= ===========
Cash Distributions
Declared............... $ 9,378,504 (t) $60,382,970 $3,200,000 $(384,389)(t) $63,198,581
============ =========== ========== ========= ===========
Wtd. Avg. Shares
Outstanding............ 6,150,000 40,375,675 n/a 1,846,351 42,222,026 (s)
============ =========== ========== ========= ===========
Shares Outstanding...... 6,150,000 43,487,927 n/a 1,846,351 45,334,278
============ =========== ========== ========= ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Property Historical
Acquisition Historical CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------ ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $ 22,853,308 $ 2,089,441 (a) $ 24,942,749 $ 2,282,618 $ 25,898 $ (153,135)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation........... 3,701,974 967,179 (b) 4,669,153 77,130 28,372 0
Amortization expense... 9,700 0 9,700 36 0 900,017
Minority interest in
income of consolidated
joint venture......... 17,610 0 17,610 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... 25,120 0 25,120 0 0 0
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 201,843 0 201,843 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases................ 540,522 0 540,522 0 0 (96,475)
Gain on
securitization........ 0 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 0
Decrease (increase) in
other receivables..... (229,916) 0 (229,916) (1,904,704) 0 (67,340)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 0 0 0 0 (183,569)
Investment in notes
receivable............ 0 0 0 0 0 (88,701,265)
Collections on notes
receivable............ 0 0 0 0 0 9,662,971
Increase in restricted
cash.................. 0 0 0 0 0 (2,031,259)
Decrease in due from
related party......... 0 0 0 0 (193,244) 81,412
Decrease (increase) in
prepaid expenses...... (320,425) 0 (320,425) 0 0 0
Decrease in net
investment in direct
financing leases...... 721,624 0 721,624 0 0 0
Increase in accrued
rental income......... (1,915,785) 0 (1,915,785) 0 0 0
Decrease (increase) in
intangibles and other
assets................ 0 0 0 (36,946) 0 (51,848)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 135,281 0 135,281 (691,686) (201,744) 94,671
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 575,868 0 575,868 (8,810) 18,669 0
Decrease in accrued
interest.............. 0 0 0 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 663,096 0 663,096 0 3,623 0
Increase (decrease) in
deferred rental
income................ 1,276,472 0 1,276,472 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Total adjustments...... 5,402,984 967,179 6,370,163 (2,564,980) (344,324) (80,450,671)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) operating
activities............ 28,256,292 3,056,620 31,312,912 (282,362) (318,426) (80,603,806)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 3,673,907 0 3,673,907 22,157 0 0
Additions to land and
buildings on operating
leases................ (170,153,724) 121,715,562 (f) (48,438,162) 0 (20,873) 0
Investment in direct
financing leases...... (44,186,644) 0 (44,186,644) 0 0 0
Investment in joint
venture............... (117,663) 0 (117,663) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 182,607
Investment in mortgage
notes receivable...... (2,596,244) 0 (2,596,244) 0 0 0
Collections on mortgage
note receivable....... 224,373 0 224,373 0 0 0
Investment in notes
receivable............ (22,358,869) 0 (22,358,869) 0 0 0
Collection on notes
receivable............ 626,959 0 626,959 0 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (3,198,326) 0 (3,198,326) 0 0 0
Investment in
certificates of
deposit............... 0 0 0 0 0 0
Other.................. 0 0 0 0 0 0
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) investing
activities............ (238,086,231) 121,715,562 (116,370,669) 22,157 (20,873) 182,607
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 210,736 0 210,736 0 20,570 0
Contributions from
limited partners...... 0 0 0 0 0 0
Contributions from
holder of minority
interest.............. 366,289 0 366,289 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (1,258,062) 0 (1,258,062) 0 0 0
Payment of stock
issuance costs........ (735,785) 0 (735,785) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 151,437,245 0 151,437,245 0 0 94,272,038
Payment on line of
credit/notes payable.. (12,580,289) 0 (12,580,289) 0 (4,808) (14,428,254)
Retirement of shares of
common stock.......... 0 0 0 0 0 0
Distributions to
holders of minority
interest.............. (21,105) 0 (21,105) 0 0 0
Distributions to
stockholders/limited
partners.............. (28,476,150) 0 (28,476,150) (119,808) 0 0
Other.................. (3,548,744) 0 (3,548,744) 0 0 (181,146)
------------- ------------ ------------- ----------- --------- ------------
Net cash provided by
(used in) financing
activities............ 105,394,135 0 105,394,135 (119,808) 15,762 79,662,638
Net increase (decrease)
in cash................ (104,435,804) 124,772,182 20,336,378 (380,013) (323,537) (758,561)
Cash at beginning of
year................... 123,199,837 (110,319,080) 12,880,757 713,308 962,573 2,526,078
------------- ------------ ------------- ----------- --------- ------------
Cash at end of year..... $ 18,764,033 $ 14,453,102 $ 33,217,135 $ 333,295 $ 639,036 $ 1,767,517
============= ============ ============= =========== ========= ============
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Historical
Combining CNL
Pro Forma Income Fund Pro Forma Adjusted
Adjustments Combined APF XV, Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income (loss)....... $(4,784,168)(a) $ 22,313,962 $1,201,873 $ 3,427 (a) $ 23,519,262
Adjustments to reconcile
net income to net cash
provided by
operating activities:
Depreciation........... 0 4,774,655 149,677 32,464 (b) 4,956,796
Amortization expense... 1,073,165 (c) 1,982,918 870 0 1,983,788
Minority interest in
income of consolidated
joint venture......... 0 17,610 0 0 17,610
Equity in earnings of
joint ventures, net of
distributions......... 0 25,120 16,977 7,123 (d) 49,220
Loss (gain) on sale of
land, buildings, and
net investment in
direct financing
leases................ 0 201,843 0 0 201,843
Provision for loss on
land, buildings, and
direct financing
leases................ 0 444,047 132,446 0 576,493
Gain on
securitization........ 0 0 0 0 0
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0
Decrease (increase) in
other receivables..... 0 (2,201,960) 18,630 0 (2,183,330)
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0
Decrease (increase) in
accrued interest on
mortgage note
receivable............ 0 (183,569) 0 0 (183,569)
Investment in notes
receivable............ 0 (88,701,265) 0 0 (88,701,265)
Collections on notes
receivable............ 0 9,662,971 0 0 9,662,971
Increase in restricted
cash.................. 0 (2,031,259) 0 0 (2,031,259)
Decrease in due from
related party......... 0 (111,832) 0 0 (111,832)
Decrease (increase) in
prepaid expenses...... 0 (320,425) (9,625) 0 (330,050)
Decrease in net
investment in direct
financing leases...... 0 721,624 41,521 0 763,145
Increase in accrued
rental income......... 0 (1,915,785) (175,792) 0 (2,091,577)
Decrease (increase) in
intangibles and other
assets................ 0 (88,794) 0 0 (88,794)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 0 (663,478) 94,260 0 (569,218)
Increase (decrease) in
due to related
parties, excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 585,727 13,364 0 599,091
Decrease in accrued
interest.............. 0 (57,986) 0 0 (57,986)
Increase in rents paid
in advance and
deposits.............. 0 666,719 (15,442) 0 651,277
Increase (decrease) in
deferred rental
income................ 0 1,276,472 0 0 1,276,472
------------ ------------- ---------- ----------- -------------
Total adjustments...... 1,073,165 (75,916,647) 266,886 39,587 (75,610,174)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) operating
activities............ (3,711,003) (53,602,685) 1,468,759 43,014 (52,090,912)
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 3,696,064 0 0 3,696,064
Additions to land and
buildings on operating
leases................ 4,452,252 (e) (44,006,783) 0 (44,006,783)
Investment in direct
financing leases...... 0 (44,186,644) 0 0 (44,186,644)
Investment in joint
venture............... 0 (117,663) 0 0 (117,663)
Acquisition of
businesses............ 0 0 0 0
Purchase of other
investments........... 0 0 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0
Proceeds from retained
interest and
securities, excluding
investment income..... 0 182,607 0 0 182,607
Investment in mortgage
notes receivable...... 0 (2,596,244) 0 0 (2,596,244)
Collections on mortgage
note receivable....... 0 224,373 0 0 224,373
Investment in notes
receivable............ 0 (22,358,869) 0 0 (22,358,869)
Collection on notes
receivable............ 0 626,959 0 0 626,959
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (3,198,326) 0 0 (3,198,326)
Investment in
certificates of
deposit............... 0 0 0 0 0
Other.................. 0 0 0 0 0
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) investing
activities............ 4,452,252 (111,734,526) 0 0 (111,734,526)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 231,306 0 0 231,306
Contributions from
limited partners...... 0 0 0 0 0
Contributions from
holder of minority
interest.............. 0 366,289 0 0 366,289
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (1,258,062) 0 0 (1,258,062)
Payment of stock
issuance costs........ 0 (735,785) 0 0 (735,785)
Proceeds from borrowing
on line of
credit/notes payable.. 0 245,709,283 0 0 245,709,283
Payment on line of
credit/notes payable.. 0 (27,013,351) 0 0 (27,013,351)
Retirement of shares of
common stock.......... 0 0 0 0 0
Distributions to
holders of minority
interest.............. 0 (21,105) 0 0 (21,105)
Distributions to
stockholders/limited
partners.............. (4,689,252)(g) (33,285,210) (1,600,000) 192,194 (g) (34,693,016)
Other.................. 0 (3,729,890) 0 0 (3,729,890)
------------ ------------- ---------- ----------- -------------
Net cash provided by
(used in) financing
activities............ (4,689,252) 180,263,475 (1,600,000) 192,194 178,855,669
Net increase (decrease)
in cash................ (3,948,003) 14,926,264 (131,241) 235,208 15,030,231
Cash at beginning of
year.................... (11,254,903) 5,827,813 1,214,444 (2,719,997) 4,322,260
------------ ------------- ---------- ----------- -------------
Cash at end of year..... $(15,202,906) $ 20,754,077 $1,083,203 $(2,484,789) $ 19,352,491
============ ============= ========== =========== =============
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Property Historical Historical
Acquisition CNL CNL
Historical Pro Forma Historical Financial Financial
APF Adjustments Subtotal Advisor Services, Inc. Corp.
------------- ------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $ 32,152,408 $ 16,704,852 (a) $ 48,857,260 $10,656,379 $ (468,133) $ 427,134
Adjustments to reconcile
net income(loss) to net
cash provided by (used
in) operating
activities:
Depreciation........... 4,042,290 6,246,947 (b) 10,289,237 119,923 79,234 0
Amortization expense... 11,808 0 11,808 56,003 0 2,246,273
Minority interest in
income of consolidated
joint venture......... 30,156 0 30,156 0 0 0
Equity in earnings of
joint ventures, net of
distributions......... (15,440) 0 (15,440) 0 0 0
Loss (gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 611,534 0 611,534 0 0 398,042
Gain on
securitization........ 0 0 0 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 0 0 0 0 265,871,668
Decrease (increase) in
other receivables..... 899,572 0 899,572 (3,896,090) 0 453,105
Increase in accrued
interest income
included in notes
receivable............ 0 0 0 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0 0
Investment in notes
receivable............ 0 0 0 0 0 (288,590,674)
Collections on notes
receivable............ 0 0 0 0 0 23,539,641
Decrease in restricted
cash.................. 0 0 0 0 0 2,504,091
Decrease (increase) in
due from related
party................. 0 0 0 0 89,839 (1,043,527)
Increase in prepaid
expenses.............. 0 0 0 0 7,246 0
Decrease in net
investment in direct
financing leases...... 1,971,634 0 1,971,634 0 0 0
Increase in accrued
rental income......... (2,187,652) 0 (2,187,652) 0 0 0
Increase in intangibles
and other assets...... (29,477) 0 (29,477) (44,716) (20,635) (59,523)
Increase (decrease) in
accounts payable,
accrued expenses and
other liabilities..... 467,972 0 467,972 156,317 325,898 (103,507)
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 31,255 0 31,255 0 (164,619) 0
Increase in accrued
interest.............. 0 0 0 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 436,843 0 436,843 0 0 0
Decrease in deferred
rental income......... 693,372 0 693,372 0 0 0
------------- ------------- ------------- ----------- ---------- -------------
Total adjustments...... 6,963,867 6,246,947 13,210,814 (3,608,563) 316,963 1,610,591
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided
by(used in) operating
activities............ 39,116,275 22,951,799 62,068,074 7,047,816 (151,170) 2,037,725
Cash Flows from
Investing Activities:
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 2,385,941 0 2,385,941 0 0 0
Additions to land and
buildings on operating
leases................ (200,101,667) (3,369,856)(e) (325,187,085) (381,671) (236,372) 0
(121,715,562)(i)
Investment in direct
financing leases...... (47,115,435) 0 (47,115,435) 0 0 0
Investment in joint
venture............... (974,696) 0 (974,696) 0 0 0
Acquisition of
businesses............ 0 0 0 0 0 0
Purchase of other
investments........... (16,083,055) 0 (16,083,055) 0 0 0
Net loss in market
value from investments
in trading
securities............ 0 0 0 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 0 0 0 0 212,821
Investment in mortgage
notes receivable...... (2,886,648) 0 (2,886,648) 0 0 0
Collections on mortgage
note receivable....... 291,990 0 291,990 0 0 0
Investment in equipment
notes receivable...... (7,837,750) 0 (7,837,750) 0 0 0
Collections on
equipment notes
receivable............ 1,263,633 0 1,263,633 1,783,240 0 0
Decrease in restricted
cash.................. 0 0 0 0 0 0
Increase in intangibles
and other assets...... (6,281,069) 0 (6,281,069) 0 0 0
Other.................. 0 0 0 200,000 0 0
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided
by(used in) investing
activities............ (277,338,756) (125,085,418) (402,424,174) 1,601,569 (236,372) 508,335
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 385,523,966 0 385,523,966 966,115 51,830 50,100
Contributions from
limited partners...... 0 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. (4,574,925) 0 (4,574,925) 0 0 0
Payment of stock
issuance costs........ (34,579,650) 0 (34,579,650) 0 0 0
Proceeds from borrowing
on line of
credit/notes payable.. 7,692,040 3,369,856 (e) 11,061,896 198,296 0 413,555,624
Payment on line of
credit/notes payable.. (8,039) 0 (8,039) 0 0 (411,805,787)
Retirement of shares of
common stock.......... (639,528) 0 (639,528) 0 0 0
Distributions to
holders of minority
interest.............. (34,073) 0 (34,073) 0 0 0
Distributions to
stockholders/limited
partners.............. (39,449,149) (11,555,317)(j) (51,004,466) (9,364,488) 0 0
Other.................. (95,101) 0 (95,101) 0 24 (2,500,011)
------------- ------------- ------------- ----------- ---------- -------------
Net cash provided by
(used in) financing
activities............ 313,835,541 (8,185,461) 305,650,080 (8,200,077) 51,854 (700,074)
Net increase(decrease)
in cash................ 75,613,060 (110,319,080) (34,706,020) 449,308 (335,688) 1,845,986
Cash at beginning of
year................... 47,586,777 0 47,586,777 264,000 1,298,261 680,092
------------- ------------- ------------- ----------- ---------- -------------
Cash at end of year..... $ 123,199,837 $(110,319,080) $ 12,880,757 $ 713,308 $ 962,573 2,526,078
============= ============= ============= =========== ========== =============
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS--(Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
Combining CNL Income
Pro Forma Combined Fund XV, Pro Forma Adjusted
Adjustments APF Ltd. Adjustments Pro Forma
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Income(loss)........ $(16,353,572)(a) $ 43,119,068 $ 2,642,497 $ (2,204)(a) $ 45,759,361
Adjustments to reconcile
net income(loss) to net
cash provided by(used
in) operating
activities:
Depreciation........... (340,898)(b) 10,147,496 279,051 64,927 (b) 10,491,474
Amortization expense... 2,146,330 (c) 4,460,414 2,837 0 4,463,251
Minority interest in
income of consolidated
joint venture......... 0 30,156 0 0 30,156
Equity in earnings of
joint ventures, net of
distributions......... 0 (15,440) 34,522 14,246 (d) 33,328
Loss(gain) on sale of
land, building, net
investment in direct
financing leases...... 0 0 0 0 0
Provision for loss on
land, buildings, and
direct financing
leases/provision for
deferred taxes........ 0 1,009,576 280,907 0 1,290,483
Gain on
securitization........ 0 (3,356,538) 0 0 (3,356,538)
Net cash proceeds from
securitization of
notes receivable...... 0 265,871,668 0 0 265,871,668
Decrease(increase) in
other receivables..... 0 (2,543,413) (33,427) 0 (2,576,840)
Increase in accrued
interest income
included in notes
receivable............ 0 (170,492) 0 0 (170,492)
Increase in accrued
interest on mortgage
note receivable....... 0 0 0 0 0
Investment in notes
receivable............ 0 (288,590,674) 0 0 (288,590,674)
Collections on notes
receivable............ 0 23,539,641 0 0 23,539,641
Decrease in restricted
cash.................. 0 2,504,091 0 0 2,504,091
Decrease(increase) in
due from related
party................. 0 (953,688) 0 0 (953,688)
Increase in prepaid
expenses.............. 0 7,246 (1,994) 0 5,252
Decrease in net
investment in direct
financing leases...... 0 1,971,634 85,884 0 2,057,518
Increase in accrued
rental income......... 0 (2,187,652) (142,233) 0 (2,329,885)
Increase in intangibles
and other assets...... 0 (154,351) 0 0 (154,351)
Increase(decrease) in
accounts payable,
accrued expenses and
other
liabilities........... 0 846,680 3,462 0 850,142
Increase in due to
related parties,
excluding
reimbursement of
acquisition, and stock
issuance costs paid on
behalf of the entity.. 0 (133,364) 16,876 0 (116,488)
Increase in accrued
interest.............. 0 (77,968) 0 0 (77,968)
Increase in rents paid
in advance and
deposits.............. 0 436,843 48,346 0 485,189
Decrease in deferred
rental income......... 0 693,372 0 0 693,372
------------ ------------- ----------- ----------- -------------
Total adjustments...... 1,805,432 13,335,237 574,231 79,173 13,988,641
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) operating
activities............ (14,548,140) 56,454,305 3,216,728 76,969 59,748,002
Cash Flows from
Investing Activities: 0
Proceeds from sale of
land, buildings,
direct financing
leases, and
equipment............. 0 2,385,941 0 0 2,385,941
Additions to land and
buildings on operating
leases................ 21,794,386 (h) (304,010,742) 0 0 (304,010,742)
Investment in direct
financing leases...... 0 (47,115,435) 0 0 (47,115,435)
Investment in joint
venture............... 0 (974,696) (216,992) 0 (1,191,688)
Acquisition of
businesses............ (9,122,645)(f) (9,122,645) 0 (2,769,355)(g) (12,304,000)
(412,000)(g)
Purchase of other
investments........... 0 (16,083,055) 0 0 (16,083,055)
Net loss in market
value from investments
in trading
securities............ 0 295,514 0 0 295,514
Proceeds from retained
interest and
securities, excluding
investment income..... 0 212,821 0 0 212,821
Investment in mortgage
notes receivable...... 0 (2,886,648) 0 0 (2,886,648)
Collections on mortgage
note receivable....... 0 291,990 0 0 291,990
Investment in equipment
notes receivable...... 0 (7,837,750) 0 0 (7,837,750)
Collections on
equipment notes
receivable............ 0 3,046,873 0 0 3,046,873
Decrease in restricted
cash.................. 0 0 0 0 0
Increase in intangibles
and other assets...... 0 (6,281,069) 0 0 (6,281,069)
Other.................. 0 200,000 0 0 200,000
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) investing
activities............ 12,671,741 (387,878,901) (216,992) (3,181,355) (391,277,248)
Cash Flows from
Financing Activities:
Subscriptions received
from stockholders..... 0 386,592,011 0 0 386,592,011
Contributions from
limited partners...... 0 0 0 0 0
Reimbursement of
acquisition and stock
issuance costs paid by
related parties on
behalf of the entity.. 0 (4,574,925) 0 0 (4,574,925)
Payment of stock
issuance costs........ 0 (34,579,650) 0 0 (34,579,650)
Proceeds from borrowing
on line of
credit/notes payable.. 0 424,815,816 0 0 424,815,816
Payment on line of
credit/notes payable.. 0 (411,813,826) 0 0 (411,813,826)
Retirement of shares of
common stock.......... 0 (639,528) 0 0 (639,528)
Distributions to
holders of minority
interest.............. 0 (34,073) 0 0 (34,073)
Distributions to
stockholders/limited
partners.............. (9,378,504)(j) (69,747,458) (3,400,000) 384,389 (j) (72,763,069)
Other.................. 0 (2,595,088) 0 0 (2,595,088)
------------ ------------- ----------- ----------- -------------
Net cash provided
by(used in) financing
activities............ (9,378,504) 287,423,279 (3,400,000) 384,389 284,407,668
Net increase(decrease)
in cash................ (11,254,903) (44,001,317) (400,264) (2,719,997) (47,121,578)
Cash at beginning of
year................... 0 49,829,130 1,614,708 0 51,443,838
------------ ------------- ----------- ----------- -------------
Cash at end of year..... $(11,254,903) $ 5,827,813 $ 1,214,444 $(2,719,997) $ 4,322,260
============ ============= =========== =========== =============
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of June 30, 1999 reflects the transactions of
the acquisition of the Advisor and CNL Restaurant Financial Services Group as
set forth in this consent solicitation. The Pro Forma Statements of Earnings
for the six months ended June 30, 1999, and for the year ended December 31,
1998, have been prepared to reflect (a) the issuance of additional shares and
the property acquisitions completed from January 1, 1998 through July 31, 1999
and (b) the acquisition of the Advisor and CNL Restaurant Financial Services
Group and the Acquisition of the Income Fund. This unaudited pro forma
financial information has been prepared utilizing the historical financial
statements of APF and the historical combined financial information of the
Advisor, CNL Restaurant Financial Services Group and the Income Fund and should
be read in conjunction with the selected historical financial data and
accompanying notes of APF, the Advisor the CNL Restaurant Financial Services
Group and the Income Fund. The Pro Forma Balance Sheet was prepared as if the
transactions described above occurred on June 30, 1999. The Pro Forma
Statements of Earnings were prepared as if the transactions described above
occurred as of January 1, 1998. The pro forma information is unaudited and is
not necessarily indicative of the consolidated operating results which would
have occurred if the transactions described above had been consummated at the
beginning of the period, nor does it purport to represent the future financial
position or results of operations for future periods. In management's opinion,
all material adjustments necessary to reflect the recurring effects of the
transactions described above have been made.
The Pro Forma Balance Sheet and Pro Forma Statement of Earnings assume that
no Limited Partner elected the note option. This assumption was chosen to show
the maximum shares that would need to be issued and outstanding for each pro
forma period presented.
The Pro Forma Balance Sheet and Pro Forma Statements of Earnings assume the
issuance of the APF Shares relating to the purchase of the Advisor and the CNL
Restaurant Financial Services Group without regard to a provision that provides
for 1,000,000 APF Shares to be placed in escrow pending achievement of certain
levels of property acquisition and/or mortgage loan origination. This
presentation was selected in order to present both the most dilutive results as
well as what management believes is the most likely result based on current
information.
2. Method of Accounting
The acquisition of the CNL Restaurant Financial Services Group and the
Income Fund will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the purchase price paid exceeds the
fair value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent that the purchase price exceeds the fair value of the
net tangible assets acquired. The excess purchase price will be recorded as an
expense on APF's consolidated statements of earnings.
All significant intercompany balances and transactions between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Income Fund have
been eliminated in the pro forma financial statements.
3. Reverse Stock Split
In May 1999, the stockholders of APF approved a proposal for a one-for-two
reverse stock split at the annual stockholder meeting. All information relating
to shares outstanding and per share information has been restated for all
periods presented.
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of June 30, 1999, as if the Acquisition was consummated on such date.
For purposes of the pro forma financial statements, it is assumed that at a
special meeting of stockholders for APF, the stockholders of APF approved a
proposal for an amendment to its Articles of Incorporation to increase the
number of authorized shares to an amount necessary to enable APF to issue the
shares for the Acquisition.
(A) Represents the use of $3,369,856 borrowed under APF's credit facility
at June 30, 1999 to pro forma properties acquired from July 1, 1999
through July 31, 1999 as if these properties had been acquired on June
30, 1999. Based on historical results through July 31, 1999, all
interest costs related to the borrowings under the credit facility were
eligible for capitalization, resulting in no pro forma adjustments to
interest expense.
(B) Represents the effect of recording the acquisitions of the Advisor, the
CNL Restaurant Financial Services Group and the Income Fund using the
purchase accounting method.
<TABLE>
<CAPTION>
CNL
Financial
Services
Advisor Group Income Fund Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fair Value of Consideration
Received.................. $81,636,756 $50,485,889 $36,726,951 $168,849,596
=========== =========== =========== ============
Share Consideration........ $76,000,000 $47,000,000 $33,545,596 $156,545,596
Cash Consideration......... -- -- 412,000 412,000
APF Transaction Costs...... 5,636,756 3,485,889 2,769,355 11,892,000
----------- ----------- ----------- ------------
Total Purchase Price... $81,636,756 $50,485,889 $36,726,951 $168,849,596
=========== =========== =========== ============
Allocation of Purchase
Price:
Net Assets--Historical..... $ 8,330,475 $10,135,087 $35,067,773 $ 53,533,335
Purchase Price Adjustments:
Land and buildings on
operating leases........ -- -- 2,387,773 2,387,773
Net investment in direct
financing leases........ -- -- 609,235 609,235
Investment in joint
ventures................ -- -- 422,228 422,228
Accrued rental income.... -- -- (1,740,806) (1,740,806)
Intangibles and other
assets.................. -- (2,575,792) (19,252) (2,595,044)
Goodwill*................ -- 42,926,594 -- 42,926,594
Excess purchase price.... 73,306,281 -- -- 73,306,281
----------- ----------- ----------- ------------
Total Allocation....... $81,636,756 $50,485,889 $36,726,951 $168,849,596
=========== =========== =========== ============
</TABLE>
- --------
* Goodwill represents the portion of the purchase price which is assumed to
relate to the ongoing value of the debt business.
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The APF Transaction costs of $11,892,000 are allocated pro rata to each
acquisition based on the total purchase price for the acquisition of the
Advisor, CNL Financial Services Group and the Income Fund. The excess
purchase price paid for the Advisor to a related party of $73,306,281 was
expensed at June 30, 1999 because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16,
"Business Combinations". Goodwill of $42,926,594 relating to the
acquisition of the CNL Financial Services Group is being amortized over 20
years. APF did not acquire any intangibles as part of any of the
acquisitions. The entries were as follows:
<TABLE>
<S> <C> <C>
1.Common Stock (CFA, CFS, CFC)--Class A........... 8,600
Common Stock (CFA, CFS, CFC)--Class B........... 4,825
Additional Paid-in Capital (CFA, CFS, CFC)...... 12,568,974
Retained Earnings............................... 5,883,163
Accumulated distributions in excess of earn-
ings........................................... 73,306,281
Goodwill for CFC/CFS (Intangibles and other as-
sets).......................................... 42,926,594
CFC/CFS Organizational Costs/Other Assets..... 2,575,792
Cash to pay APF transaction costs............. 9,122,645
APF Common Stock.............................. 61,500
APF Capital in Excess of Par Value............ 122,938,500
(To record acquisition of CFA, CFS and CFC)
2.Partners Capital................................ 35,067,773
Land and buildings on operating leases.......... 2,387,773
Net investment in direct financing leases....... 609,235
Investment in joint ventures.................... 422,228
Accrued rental income......................... 1,740,806
Intangibles and other assets.................. 19,252
Cash to pay APF Transaction costs............. 2,769,355
Cash consideration to Income Fund............. 412,000
APF Common Stock.............................. 18,464
APF Capital in Excess of Par Value............ 33,527,132
(To record acquisition of Income Fund)
</TABLE> 
